BoE, BoJ, Greek election, G20, FOMC and all that

The market has only pricked up its ears at the important BoE announcement that was sneaked in yesterday as the market obsesses over the Greek election. The BoE/BoJ contrast sees GBPJPY lower.

Greek election
I’ll pass up on excessive further commentary on the Greek election for now – I’m sure everyone has read more than enough on this subject for now already. For the masochists who would like to read even more, however, please see my more extensive comments from earlier today here on possible scenarios and the how the market may react. My very general impression is that the market has very significantly lightened up on its positions ahead of this weekend. This could mean one of two things: it could mean that there is less need to fear for huge market swings in the wake of the election if the “favoured” New Democracy-led government appears to be the eventual outcome, but it could also mean that significant positions are ready to be put on once the election results are known, regardless of the outcome. Staying careful remains the name of the game.

New BoE easing measure
The BoE late yesterday announced a new liquidity facility aimed at easing bank access to funds. The so-called ECTR facility (let’s not bother with what that stands for…) for this purpose was established last December but has yet to see an operation. Now, ECTR operations will start next Wednesday and see GBP 5 billion at least once a month. The interest rates for the facility are extremely attractive at 0.25% on top of the existing BoE policy rate versus the original +1.25% envisioned. As well, another facility will be on offer that will allow banks to swap all manner of (probably “not so high quality”) collateral for funds at very favourable rates, as long as those funds are lent in turn to the non-financial private sector (to prevent the banks from merely hoarding funds as they lick their balance sheet wounds from the previous cycle.)

The signal from the BoE and UK government was clear enough to trigger a large shift in expectations for an actual rate cut. The June ’13 Short Sterling STIR, for example, has jumped almost 30 ticks from the beginning of this week – a monumental move relative to its previous advances and retreats.

Chart: GBPJPY
Considering what has happened to the short end of the UK government yield curve, the only GBP/major currency pair out there at the moment that makes any sense is GBPJPY, which has moved lower with the contrast of new BoE easing with BoJ standing pat for now. The GBPUSD move is a head-scratcher that suggests the market is too distracted with EURUSD and the Greek election this weekend. Bear in mind the interest rate spread has moved very sharply in favour of GBPUSD downside, but be also aware that we have an FOMC meeting up next Wednesday.

Italy trying to raise funds
Italy is in a bit of a rush to raise money to fend off the debt wolves as today an Italian newspaper reported that a new law may be passed to speed the sale of assets owned by local governments worth as much as EUR 500 billion (Italy’s gross debt is close to EUR 2 trillion for perspective.) Italian bond yields were sharply lower on the day, with the 10-year declining to around 6.0% as of this writing after hitting 6.34% yesterday.

Looking ahead
The very weak US Empire manufacturing number today has the market once again upping its odds for a QE/More Operation Twist hint from the Fed next Wednesday, though the EU question is going to dominate this weekend and in the wake of the Greek election. The G20 is likely to be of far less interest than the EU summit up on Wednesday after next, as by that time, a Greek government coalition should have coalesced.

Stay careful this weekend.

Economic Calendar Highlights

• New Zealand May Business NZ PMI out at 55.7 vs. 48.2 in Apr.
• New Zealand Jun. ANZ Consumer Confidence fell to 105.8 vs. 113.9 in May
• Japan BoJ Target rate steady at 0.10 % as expected
• Norway May Trade Balance out at +35.5B vs. +38.4B in Apr.
• UK Apr. Visible Trade Balance out at -£10,103M vs. -£8,500M expected and £8734M in Mar.
• Euro Zone Apr. Trade Balance out at +6.2B vs. +4.2B expected and +3.7B in Mar.
• UK May Nationwide Consumer Confidence out at 41 vs. 45 expected and 44 in Apr.
• Canada Apr. Manufacturing Sales out at -0.8% vs. +0.2% expected
• US Jun. Empire Manufacturing Survey out at 2.29 vs. 12.5 expected and 17.09 in May

Upcoming Economic Calendar Highlights (all times GMT)

• US May Industrial Production/Capacity Utilization (1415)
• US Jun. Preliminary University of Michigan Confidence (1355)
• Greece – Election Voting Polls Close (Sun 1600 GMT)
• New Zealand May Performance of Services Index (Sun 2230)
• UK Jun. Rightmove House Prices (Sun 2301)
• Japan BoJ Monthly Economic Report (Mon 0500)