By Gaurav Kashyap, ACM Middle East & Asia
We suspect that barring a significant dip in US data this week, the market has overpriced-in US QE2 and we should see a light unwind of short USD positioning this week. We are moving cautiously in front of US economic data, even though its mostly 2nd tier this week. A string of Fed speakers and the G20 meeting this upcoming weekend may cause a sharp reversal in risk appetite depending on the information that comes out.
UK awaits Spending Review, Bank of England minutes
The UK will take centre stage with several 1st tier economic releases, the official Spending Review and the critical BoE MPC minutes release. For the BoE minutes, we are leaning towards an 8-1 vote for no change in policy with Andrew Sentence once again being the lone dissenter. However, there is significant possibility that the vote will actually be split in 3 ways – Posen may vote for additional asset purchasing, Sentence will vote for a rate hike and the others for no change at all. The general wording within the statement will be analyzed by the market for any hints to the direction in policy.
This morning, sterling has lost a step as the CEBR postulated over the weekend that the UK will increase purchases by another £100bn in order to support the recovery as the government continues to cut spending. We are still in the camp that the BoE will not move ahead with further QE as inflationary pressure, despite the very recent moderation in such data, is still a major concern. As growth stabilizes (watch Thursday’s Retail Sales), the BoE will keep members in a holding pattern. Interestingly we heard BoE Member Fisher reiterate ideas heard last week from Member Miles that it is unclear whether the next policy step would be “to sell the assets back or to buy more.”
Market cautious on GBPUSD
The FX Market remains cautious on GBPUSD as fiscal austerity in the UK should restrain growth and encourage further easing in the UK. However, we suspect that easing is less probable than the market suspects and are anticipating a rally in Sterling. This thinking will become more prevalent in the market as data continues to come out of both the UK and US.
G20 meeting to fuel currency rhetoric
On a final note, we suspect that plenty of currency rhetoric will hit the wires ahead of the G20 meeting this weekend. As we had suspected, the US treasury had a late “cancellation” of their currency report which potentially may lay into China as a currency manipulator. The treasury instead ran to the hills in order to dodge the charged bullet. US Treasury Secretary Geithner asserted that China’s increased appreciation of the CNY was acknowledged but the course need to be continued for the global recovery to persist.
EU Commissioner Rehn commented that the CNY is still “very undervalued” and suggested that China allow the currency to strengthen “broadly.” In the current environment, no single blanket policy would address and resolve all the currency issues that are plaguing the global financial system nor is there enough cause for a sweeping mandate. We encourage heavy position-taking to fade and scale back throughout the week . Further, we aren’t holding our breath for any market-moving comments from the G20, most likely we’ll end up with more of the same – no solid resolutions, just empty statements.