25 January 2012 at 11:46 GMT
“it’s the economy, stupid” – Bill Clinton
Today is a very big day for GBP. The Bank of England released the minutes from the January MPC meeting which suggested that although the vote for further QE at the January meeting was 9-0 in favour of unchanged, “some MPC members said further asset purchases (were) ‘likely’. The fact that the BoE see no change to their view of “broadly flat GDP Q4 / Q1 was particularly pertinent as the release concided with the release of the Q4 2011 GDP figure. That figure suggested that the UK economy contracted by 0.2 percentage points in the final quarter of last year. A number of factors suggest that the situation has improved of late and even arch dove Adam Posen said in the week that “things are looking a little better than in October”.
The recent sharp decline in inflation, which has boosted the Bank’s credibility as inflation fighters (and has vindicated its conviction not to try and tighten policy to reign in inflation due to ‘one-off’ external events) will likely give the BoE the ability to embark on further QE, however, as I have stated on previous occasions I do not subscribe to the classical economic view that monetary expansion equals debasement equals a weaker currency. At the current juncture the BoE asset purchases are not increasing the money supply, they are merely preventing the money supply from contracting and in that environment, particularly with inflation falling, QE should be good for demand and good for GBP.
Australian CPI data
Australian CPI data overnight came in slightly above expectations (on a trimmed mean basis) and as such cast some further doubt on the market expectations of a rate cut from the Reserve Bank of Australia (RBA) in its February 7th meeting. This boosted the AUD and other risk assets, which were aided further by the strong Apple Q4 earnings release after the US close. I feel risk sentiment, however, has extended the reality of the situation in the current environment and I am becoming increasingly wary of a sharp correction.
After a long period of contracting daily ranges and what appeared to be falling levels of activity, the JPY has had a resurgence of interest over the last couple of days. A large number of commentators and analysts have suggested that this could be the start of the declining trend of the JPY. The fact that USDJPY has only moved around 50 pips above the range highs for 2012 is perhaps indicative of the desire of the market to be ‘on’ the JPY declining trade when it eventually does happen. Indeed there have been significantly bigger moves in the JPY vs. other ‘risk positive currencies' including AUD and GBP over recent sessions. However, I for one do not subscribe to the fact that all the worlds problems have been solved and that ‘risk on’ trades will generate uninterrupted returns. The JPY is undoubtedly overvalued at its current level and indeed Japan’s debt situation is no less serious than many of the eurozones threatened nations. But we may have to wait a while longer before the longer term trend of JPY decline can emerge.
In fact the current risk rally is, I feel, the start of a move that has been a long time in coming and that is the beginning of the markets focus on economic differentiation. There has already been some evidence of this in emerging market currencies (and to a certain extent the sharp rise in demand and price of UK, and indeed multinational blue chip corporate bonds – highlighting the selective or relative value in credit) and the sharp rise in Apple shares overnight in response to better than expected Q4 earnings also highlights how this can become more ingrained in the current equity market dynamic.
Headlines about the Greek PSI negotiations will continue to aid the ebb and flow of risk sentiment on the day, however, it may be the turn of the US to play a bigger part in the global economic deliberations and the FOMC decision this evening may provide the perfect platform.