Markets Report — 06/11/2015
BoE maintained status quo voting on both rates (8–1) and asset purchases (9–0) with McCafferty again remaining the lone dissenter on rates. But what changed considerably is the projections, tone and the language. Carney’s “rate decision comes to a sharper relief by the end of the year” is history and a journalist in the press conference even took a dig at him for that! BOE lowered its 2015 and 2016 GDP forecasts — to 2.7% and 2.5% — and raised its 2017 projection to 2.7 percent. On inflation, it cut its outlook out to the third quarter of 2017. It sees price growth at 2.1 percent in the fourth quarter of 2017 and about 2.2 percent a year later, above the 2 percent target. It expressed concerns about Pound strength and emerging economies too. Carney has also reiterated that if needed they are ready to cut rates or expand QE, though he doesn’t foresee the need for that at the moment.
Long USD was already an overcrowded trade, though a good percentage one. It just got more attractive with another central bank coming out with a dovish guidance. Caveat is that it’s not going to be a linear move. There will be the intermittent shocks and surprises before the policy divergences and lags materialize in the price action fully. Patience is as important as conviction going into a potentially explosive close for the year.
Equities had a quiet day with and recovered after an early dip but largely flattish. DJIA (-0.02%), NASDAQ (-0.29%) and S&P 500 (-0.11%)
EURUSD (1.0876) slided down to a low of 1.0834 but bounced back close to test close to 1.09 handle and post BoE EURGBP started rallying keep the pair supported above 1.0850 through the day. As mentioned yesterday 1.0810–55 is a reasonably strong support zone on the weeklies. Unless we see a strong NFP, expect the 1.08 handle to hold through the Friday close.
GBPUSD (1.5190) fell 160 pips immediately after BoE released the minutes and QIR from 1.5390 to 1.5260. The press conference didn’t alter the picture much as Carney responded consistently with the statement. The pair eventually sailed through the 1.5240–50 support zone to close at 1.5208. This is a major shot in the arm for the bears. Given that other policy divergence bets are overcrowded, and any halt the in the pace of divergence can see sharp short covering, short Cable may just turn out to be the better percentage trade in the medium term. Technically, 1.5240–50 clearance is a healthy sign. Need a break below 1.5090 on daily close for the favoured deeper correction.
USDJPY (121.48) tested the 121.75–80 resistance with a spike to 122 handle, but eventually closed right around the resistance at 121.75. The pair is making another attempt to get past it today with probes to 121.90s so far. There is increasing directional bias in the price action, but still need a confirmation of a daily close above 121.80.
AUD (0.7145) was lacklustre in a 5 pips negative close for the day.
NZD (0.6595) hasn’t had much of a follow up move after breaking 0.6620 support. Little directional cues at the moment.
USDINR (65.81) along with other emerging pairs is feeling the pinch of FOMC remaining the lone (relative) hawk among the major central banks of the world
Commodities and Bonds
Gold (1109.60) is consolidating around here as USD index is consolidating around 98 handle
10 Y Treasury yield at 2.234%
Key Data Ahead (in GMT)
German Industrial Production at 07:00
UK Manufacturing/Industrial Production and Trade Balance at 09:30
US NFP/employment data at 13:30
UK NIESR GDP estimate at 15:00
Stay short EUR. Stay short GBP — A close below 1.5090 is a great sign. NFP is crucial and with the consensus of 184k being on the higher side, scope for a positive surprise is quite less going by this year’s NFP prints so far. But bear in mind that October FOMC turned out to be hawkish despite a disappointing September NFP. Anything less than a very disappointing number should keep USD bulls on the front foot. A slightly disappointing NFP may even offer a healthy bounce to add.