News that the EU and the UK had agreed a 21-month Brexit transition deal propelled sterling higher yesterday but some gains were subsequently lost as doubts crept in. Sterling faces a difficult week between today's CPI, tomorrow's BoE meeting and the EU summit in Brussels on Thursday and Friday.
Article / 01 August 2016 at 9:00 GMT

Letter from Paris: Easing into August

Head of Editorial Content / Saxo Bank
  • Japan set to introduce fiscal stimulus Tuesday
  • Bank of England expected to cut rates
  • Dovish forecasts for August 23 Turkish central bank meeting

Arc de Triomphe, Paris
Saxo Bank's Paris office says August's central bank calendar 
looks set to produce no shortage of volatility. Photo: iStock

By Michael McKenna

August 2015 was one for the books as a sudden US equities selloff aguably moved the goalposts in terms of risk appetite for the remainder of the year. This year, summer's final month appears equally fraught as Japan, the United Kingdom and Turkey plot their next monetary and fiscal policy moves.

Last week, of course, saw the Bank of Japan's latest outing send the yen sharply upwards as the bank's relatively conservative statement flew directly in the face of a market expecting an unprecedented policy bonanza. As Saxo head of equity strategy John J Hardy wanred us last wekk, however, the story is far from over.

Tomorrow sees the government of Japanese prime minister Shinzo Abe out introducing the fiscal side of the stimulus equation. Markets expect a package worth some $273 billion, and USDJPY traders will note that this is very much the second half of the progression launched by Friday's damp central bank squib.

"The package is expected to boost wages as well as industrial production," says Banque Saxo from Paris.

Also in focus this week is the Bank of England, where a tough post-Brexit economic climate has central bankers wondering whether it's time to pull the rate cut lever. The BoE, of course, refrained from doing so last month, but a series of soft, post-Brexit macro readings may wind up forcing their hand.

"Markets are anticipating a 25 basis point cut in the key rate," says Banque Saxo, adding that while the BoE stuck with the status quo in July, the latest data point to the very real risk of a Q3 recession if no changes are made.

Finally, Ankara is in focus on a variety of fronts, from the military to the political to the economic. Obviously, reports Banque Saxo, the political risks that have long surrounded the Erdogan regime, and which have only grown more ominous in the wake of the failed July coup, are the biggest factor weighing on Turkish growth.

In Saxo Paris's view, the central bank has come under pressure from the government to ease policy at its August 23 meeting so as to avoid the worst consequences of the turmoil afoot in Turkey. The most immediate concern, adds Banque Saxo, is an increase in USD-funding rates for small-to medium-sized enterprises, which could well lead to an economic slowdown.

The Blue Mosque, Sultanahmet, Istanbul
Beautiful city, but troubling investment landscape. Photo: iStock 

Michael McKenna is an editor at
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