FX Daily: Wheale becomes the first hawk to come out of the woodwork

29th May 2014

  • The pension reforms proposed by Chancellor George Osborne in the March Budget could cost the Treasury as much as £24billion. However, the paper does not state if the “cost” is annual, over the course of a Parliament or an even longer period. (The Telegraph)
  • The head of Nationwide, a UK mutual mortgage lender, said private sector lending institutions could come under pressure to attract deposits from pensioners from 2015 as “very generous” saving products are introduced by the UK government. (The Times)
  • Deposits in Cypriot banks rose in April for the first time since late 2012, on the back of funds from outside the EU. (eKathimerini)
  • Ahead of the recent European elections, investors withdrew funds from Italian Bond funds in amounts not seen since 2012. The paper suggests that yields in the former PIGS nations may have fallen too far, particularly after the bond rally since the weekend vote. (The FT)
  • BoE Wheale says “If you want to have baby steps (rate hikes) you do have to start sooner” and indicates he could endorse a rate hike in the not-too distant future. (The FT)
  • The hunger for Emerging Markets from investors is increasing according with data from EPFR Global showing a net inflow of $13.2 billion throughout April and May into EM ETF’s and Mutual Funds. The increase comes after 10 consecutive months of net outflows and is the strongest net inflow into EM since February and March 2013. (WSJ)
  • China’s banking regulator has ordered lenders to step up risks controls, focusing on property, over-capacity industries and commodities trade financing to curb non-performing loan growth. (Shanghai Securities News)
  • Japan April Retail Sales fell -13.7% on the month, surpassing expectations for a -11.7% fall. The drop follows upgraded 6.4% retail sales growth in May ahead of the introduction of the sales tax hike.
  • Australia Private Capital Expenditure contracted -4.2% in Q1, disappointing estimates for a mere -1.5% fall. Q4 investment was upgraded to -4.5% from -5.2%, offsetting some of the negative tone.
  • Spanish GDP was confirmed as a 0.4% increase on the quarter, with the annual rate revised marginally lower to 0.5% from 0.6%.

It was only a matter of time before the hawks came crawling out of the woodwork in the UK. In an interview with the Financial Times, Martin Wheale metaphorically stood up and admitted he was among the members who saw the interest rate decision as “more finely balanced” at the May meeting. He also seems to have been behind the realisation in the minutes that “the more gradual the intended rise in the Bank rate, the earlier it might be necessary to start tightening.” The Bank of England has made a somewhat contradictory pledge that future rate rises will be “slow and gradual” even though they don’t know when that first rise will be and insist that UK interest rates are completely dependent on the amount of spare capacity in the economy. Weale verbalised the completely rational reality “if you want to have baby steps, you have to start sooner”. To questions over how long “sooner” actually meant, he responded “we can wait a bit longer”, though noting that the economy had sustained fairly rapid growth in demand. His comments also showed some clear difference in his take on the current economy and future monetary policy. He saw less than 0.9% of spare capacity in the economy compared to the BoE consensus view of 1 to 1.5% and his definition of “gradual” rate rises was “no more than 25 basis points a quarter”. The market is only pricing in 180 basis points of increases over the next three years. Martin Wheale is now front runner to be the first MPC member to vote for a rate rise and given his personal estimates of spare capacity, the degree of needed rate rises and this candid interview, we should get the first vote for rate hikes by September at the latest. However over positioned sterling longs are, they won’t be able to resist giving sterling-dollar a sustained push higher on a turn in the voting pattern. EURGBP at £0.80 looks highly likely after reading this speech.

Japan recorded a -13.7% drop in retail sales in April. Though the headline reading was worse than market estimates, there is a sense of complacency in the market. The drop was the biggest decline since 1997, when the first consumption tax increase depressed spending, a comparison which will worry some policymakers. The biggest declines were recorded for the bigger ticket items as consumers brought forward purchases of cars, machinery and equipment to avoid the tax increase. Spending on staple such as food and toiletries declined by less than 2% annually, showing that underlying spending remains intact. Wholesale spending recorded a much more moderate decline providing some reassurance that businesses are more resilient to the tax increase. Market’s generally overlooked the figure as forward looking indicators of manufacturing orders suggest businesses are already planning further spending this quarter. A measure of sentiment on Japan’s economic outlook among taxi drivers, restaurant staff and other workers also soared by a record in April. The long USDJPY play looks like another trade set to soar this year as further Bank of Japan easing looks increasingly less likely. A number of USDJPY longs are sure to be squeezed out and a narrowed US-JP yield spread will add to downward pressure on the exchange rate. USDJPY is likely to approach the JPY100 level if the market starts to get serious jitters about the BoJ’s commitment to further easing.