Article / 18 July 2016 at 8:00 GMT

From the Floor: Has the pound hit bottom?

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From the Floor
By Michael McKenna

When the Bank of England released its surprise decision to hold interest rates steady last Thursday, the pound posted a near-immediate, 200-pip spike versus the US dollar before retracing to just shy of 1.33.

Friday saw sterling recapture and exceed the highs seen in the announcement's immediate wake, and volatility has remained high with today's Asian session seeing the GBP travel within a wide, 50-pip range.

The issue here is that there remain a lot of questions about central bank policy in the post-Brexit era. While BoE governor Mark Carney shocked markets by leaving rates as is, the bank's statement pointed to the likelihood of further stimulus measures to prop up the post-Brexit (but pre-Article 50) UK economy. 

So what'll it be?

Late Sunday, the Financial Times reported that BoE member Gertjan Vlieghe – the sole board member who voted for a rate cut last week – favoured "an immediate interest-rate cut, to be supplemented by a package of additional measures in August".

While Vlieghe's first suggestion did not echo the thoughts of his fellow voters, there remain broad-based expectations for further stimulus measures, and the BoE's August 4 meeting is expected to see some of these come to fruition.

"Today," says Saxo Bank head of forex strategy John J Hardy, "we have the BoE's Martin Weale out with a statement that could [provide an outline of the bank's plans for post-Brexit stimulus]".

According to Bloomberg, "economists at JPMorgan predict a package in August including a 50 basis point cut in the key rate, taking it to zero, a 75 billion-pound ($99 billion) increase in quantitative easing, and the announcement of some credit-easing measures."

While that remains speculation, markets are clearly eager for some new, central bank-led direction on the GBP and Weale's statement today just might move the needle.

"This may carry some weight," adds Hardy, noting that given the right conditions "sterling could bottom sooner rather than later."

Elsewhere, says Hardy, USDJPY continues to face solid resistance at the 106.00 handle with Saxo's head of FX strategy commenting that the yen seems unlikely to "just continue weakening" in light of stimulus hopes from the new Abe government.

"I don't see helicopter money as being very likely – fiscal stimulus covered by the Bank of Japan [seems more probable]".

Finally, Hardy notes that the weak NZD trend identified last week was given legs by a soft inflation print today and looks set to continue.


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Source: Saxo Bank 

In Asia, stocks were generally green as risk sentiment appears to have recovered somewhat on the failure of the Turkish coup. According to Singapore-based Saxo trader Tareck Horchani, the coup attempt saw USDTRY rocket past the 3.00 level in the late Friday session, but the panic has largely evaporated with the pair now headed back to the 2.94 level seen in the first week of July.

Horchani also reports that Japanese telecom giant Softbank is set to buy UK-based intellectual property firm ARM for £23.4 billion, or £17/share. According to Horchani, the significant capital movements inherent to this move – 3 trillion yen – are likely related to the JPY moves seen in recent days.

"ARM has an amazing business model," says Saxo Bank head of equities strategy Peter Garnry, "but Softbank's valuation of the firm is aggressive and extreme." According to Garnry, while ARM's royalty-driven business is growing by around 20% per annum, its growth trajectory is heading lower due to the saturation of the smartphone and tablet markets (among other things, ARM conceptualises and designs chips, then sells the IP to manufacturers).

Finally, bond markets saw core yields on the rise this morning with the 10-year German bund yield back in positive territory. In Saxo Bank fixed income trader Michael Boye's view, the weekend coup attempt in Turkey is a reminder of the risks inherent to investing in emerging markets where governments and institutions may not be as stable as those of developed markets.

"Turkish bonds are set to drop three to four points in price terms – longer-dated bonds will fall farther," says Boye.

European equity markets have opened in the green with shares in both London and Frankfurt rushing higher as risk sentiment returns.

Bank of England
Expect any surprises from BoE member Weale's statement to be reflected 
in both the pound and British equities. Photo: iStock 

Michael McKenna is an editor at

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