Morning Report: 20 March 2015

20th March 2015 By: Ranko Berich

GBP Sterling shed the majority of its recent gains against USD yesterday after the Bank of England’s Andy Haldane made some dovish statements regarding the future path of interest rates. No major UK data was released, but the BoE Chief Economist’s statements provided some extra impetus for sterling depreciation in the afternoon. Haldane said he could not see a strong case for interest moves in either direction, but then fired a salvo at sterling, stating that if rates were set by a computer “the optimal path for interest rates would involve them being cut in the short run towards zero for around a year”. Although this is not the same as directly stating that be believed rates should be cut, in his closing comments Haldane made it clear that he believed the BoE should “stand ready” to either hike or drop rates should downside inflation risks materialise.

EUR The euro rallied against sterling yesterday, but began to lose its recent gains against USD. Yesterday’s European Union economic summit was overshadowed by back-and-forth between Greece and its creditors, with the now customary exchange of Greek demands for war reparations from Germany and German insistence on Greek compliance to previous agreements. Yesterday’s outcome was a commitment from Greek Prime Minister Alexis Tsipras, made via a press conference, to accelerate the reforms that Greece’s creditors are insisting on as a condition of further financing for the cash-strapped eurozone member. The next pivot for negotiations will be the submission of another list of reforms that Greece will make in exchange for financing. Under February’s agreement, the deadline for this list to be agreed upon by both parties is the end of April, leaving considerable room for more hardball negotiating tactics from both sides.

USD The last 48 hours have been extraordinarily volatile for USD, which weakened dramatically in the wake of Wednesday’s FOMC meeting, but has since regained much of its former strength. Markets appear to have calmed down somewhat after fevered trading in the wake of the meeting, and the dollar’s fundamentals appear to be reasserting themselves as US treasury yields stabilise while those in the eurozone fall. To underline the point that the US economy remains strong, weekly unemployment claims were once again low at just 291,000. The Current Account fell further into deficit, with deficits on Goods and Services both widening. The Philly Fed Manufacturing Index missed expectations to fall slightly, reflecting a dip in reported business activity and optimism. Today at 14:20 GMT, voting Federal Open Market Committee member Dennis Lockhart will speak in Atlanta, followed by his colleague Charles Evans at 15:30.

CAD CAD also retreated against USD yesterday, backtracking the progress it made on Wednesday. Crucial Canadian data will be released today at 12:30 GMT, with the Consumer Price Index and Retail Sales both scheduled for release. Inflation is expected to pick up, driven by a weaker Canadian dollar, but retail sales are expected to fall further.

UK News

  • FT. UK rate cut may be needed, says BoE chief economist: The Bank of England’s chief economist has opened the door to a further cut in UK interest rates if low inflation persists, expressing a dovish view in contrast with the majority of the Monetary Policy Committee.
  • Reuters. UK think tank sees ‘remarkable’ change of tack by Osborne: Chancellor George Osborne has shown a “remarkable” change of approach on public finances, a leading think tank said on Thursday, a day after Osborne scaled back his austerity plans for the end of the decade.
  • Telegraph. Budget 2015: Help-to-buy ISA could ‘distort’ housing market: Institute for Fiscal Studies calls George Osborne’s ISA, which was announced in the Budget, a ‘dubious policy’.