Beginning of the end for GBP weakness
- Drawing a line under sterling weakness on return of some political stability
- Some near-term downside still possible depending on BoE Thursday
- Unconvinced by arguments that we are in a "forever-low" rate environment
By Neil Staines
“We know what we are, but know not what we may be” — William Shakespeare
Last week we asked “If ever there were a time for UK politics to set aside the protocols and etiquette for the sake of fulfilling the role of leadership through extreme uncertainty, surely it is now”. Today marks the beginning of the end of that uncertainty, in many respects, as Theresa May assumes the role of leader of the Conservative Party and the UK.
For financial markets a lot of uncertainty remains, however, in terms of the progressions of monetary cycles and the global economic recovery. We feel that we are entering into a new period where economic and monetary differentiation return to the fore. What’s more, the leaders of this new era of growth may not be the countries you might expect at the current juncture.
“Time and tide wait for no man” — Geoffrey Chaucer
Bank of England Governor, Mark Carney, came under fire at the Treasury Committee hearing yesterday, where he was effectively asked to counter the allegations that he acted with political motivation, or under political pressure in the run up to the EU Referendum. The chair of the committee, Andrew Tyrie, proposed that there had been “a deliberate attempt to frighten the voting public by the Bank, with a political motive.”
Carney responded by stating that the statements were a result of “robust discussions” about the potential risks, and the belief that if the Bank of England views something as the biggest risk to the economy then it has an obligation to raise those concerns.
Perhaps the most important inference from the debate is that of the nature of the character of the Governor himself. The statements (however controversial from Tyrie’s perspective) highlight a clear proactive tendency. Indeed, acting early to prevent a deeper downturn was a key hallmark of his time as Bank of Canada governor, ahead of the Lehman / global financial crisis.
In the UK today, Carney may assess the “risks” that he ‘pre-emptively’ warned of as warranting ‘pre-emptive’ monetary activism, as the MPC vote (ahead of the announcement tomorrow at noon). While we could expect support for further easing at this stage from Messrs. Vlieghe and Haldane, it is of course possible that the majority of the MPC would prefer to await further data, at the very least until the Bank’s own Quarterly Inflation Report in August.
“My policy was nothing but activism” — Kiran Bedi
Financial markets have been very lively this week as global geopolitics and the prospect of (even) further monetary and fiscal stimuli play out. Following the clear upper house election victory for Shinzo Abe over the weekend, USDJPY has rallied almost 5%, amid expectations of further reinforcements to Arrows 1 and 2 (fiscal and monetary stimulus).
In global equity markets, the geopolitical uncertainties have given way to expectations of increased global monetary accommodation, and if you believe that the “lower-for-longer” mantra of monetary policy is morphing into a “lower-forever” scenario then, even at these levels, the case for buying equities is perhaps rational.
Our view however, is that rates are not lower forever, indeed (at least in some parts of the world), they are likely not lower for long. In the US, the renewed strength in the June employment report alongside rising wage and core inflation point to an economy that warrants a rate rise this year.
At the current juncture, our central forecast is for a US rate rise in December, but the risks are likely on the hawkish side going forwards. Even in the UK, where we feel there is a risk of a (pre-emptive?) near-term monetary boost, we would also expect interest rate markets to be looking in the opposite direction by the end of the year.
In this scenario, bond markets offer less value and even less sense. As Jeffrey Gundlach reportedly said last night, “call me old-fashioned, but I don’t like investments where if you are right, you don’t make any money”
This week is likely to be a very important week for GBP. A week in which our longer-term views of UK economic and GBP outperformance may be countered by pre-emptive monetary policy action by the Bank of England. Ultimately, however, we feel we are nearing the beginning of the end for GBP weakness.
— Edited by Martin O'Rourke
Neil Staines is head of trading at The ECU Group