Yen Turns; Pound Hammered on Negative Retail Data - No More Hikes in Sight?

[B]- Japanese Yen: PBOC widens yuan band

  • Euro: IT Industrial data surprisingly spry
  • Pound: UK Retail flops badly
  • US Dollar: U if M on tap


Yen Turns; Pound Hammered on Negative Retail Data - No More Hikes in Sight?
UK retail sales unexpectedly fell -0.1% vs. 0.6% anticipated and dragged the pound down to 1.9710 in early London trade as traders started to adjust to the notion that BoE may remain stationary on the interest rate front for far longer than most market analysts originally thought. The UK rate curve continues to price in at least 2 more rate hikes before the year end, which would take sterling short term rates to 6.0%. However, the impact of BoE?s restrictive monetary policy is clearly being felt by the UK consumer and those hawkish rate assumptions are now in jeopardy.
The recent increase in rates to 5.5% along with astronomical cost of UK gasoline prices which now stand above $5.50/gallon have combined to weigh heavily on the UK consumer. Despite the strong UK employment figures reported yesterday, the latest data from the PPI and the CPI indexes suggests that both producers and retailers are having a difficult time raising prices. This dynamic should provide the BoE with more time to contemplate additional increases tempering some of the more optimistic scenarios vis a vis UK rates. Therefore, unless the market continues to see unbridled increases in UK housing data next week further pound strength may be hard to come by.
As we were about to go to print, news hit the wires that PBOC will widen the yuan/dollar trading band from 0.3% to 0.5% and yen immediately fell through the 121.00 barrier but bounced back within seconds. The move while not dramatic is a clear a gesture by the Chinese authorities signaling their willingness to move the yuan exchange rates closer to a free-floating model. The Chinese authorities now find themselves combating the growing asset bubbles in the Shanghai equity market and have become quite concerned about the possible fallout should it collapse. This policy change is just the latest attempt by Chinese authorities to reign in speculative sentiment in the country by slowing inflationary pressures. In the meantime the announcement should provide a short term boost for the yen and serves as just the kind of exogenous news event that we warned about earlier this week when the currency was being sold relentlessly by the carry traders. While it may be too soon to call a near term peak in USDJPY, tonight?s news certainly provides yen bears with reason for pause as the unit may now find a bid despite the woeful Japanese fundamentals.