Morning Report: 25 September 2015

25th September 2015 By: Ranko Berich

GBP Barring a massive rally today, sterling will close the week significantly weaker than it started against both EUR and USD. No one data release contributed to this trend, but the prospects of imminent rate hikes from the Bank of England are fading fast as it becomes clear the Monetary Policy Committee is concerned that inflation prospects are being weighed down by a number of domestic and international developments.

EUR It’s been a rather restrained week for eurodollar, which saw a minor euro rally yesterday ultimately prove insufficient recoup the euro’s losses from earlier in the week. Yesterday’s two German releases both showed generally positive survey sentiment. GfK German Consumer Climate did fall to 9.6, but remained above the 0 level indicating overall optimism about the respondents financial positions and consumption intentions. IFO German Business Climate rose to 108.5, reflecting strong optimism among the ~7000 manufacturers, wholesalers and retailers surveyed. Overall, the results seemed to indicate the German economy is in rude health, despite concerns about international pressures and sluggish activity elsewhere in the eurozone.

USD The dollar experienced some volatility yesterday morning, weakening off the back of the afternoon’s data releases and the ensuing moves in government debt yields. Core Durable Goods orders changed 0.0% in August, well below the recent trend of strong monthly growth. Including automobiles, Goods Orders actually fell 2.0% month on month. Durable goods are a volatile monthly series and so it’s far too early to make inferences about the overall health of the consumer economy, but the results nonetheless weighed on USD. Weekly unemployment claims were once again low at 267,000, while New Home Sales rose to an annualised 552,000. Fed Chair Janet Yellen had a health scare during her scheduled speech yesterday evening, stopping her speech abruptly in a coughing fit after speaking for about an hour. Yellen reported being light headed at the time, but has since been reported to be in good health so the episode appears to be a case of exhaustion. Today at 13:30 BST, the final revision to Gross Domestic Product in the second quarter will be released, followed at 14:45 BST by Markit’s Services Purchasing Managers’ Index.

CAD CAD plummeted to fresh multi-year lows yesterday in the wake of the Norges Bank, Norway’s central Bank, cutting interest rates. The rate cuts underlined just how much pressure petroleum producing economies are under, and although natural resource output accounts for a far smaller part of Canada’s diversified economy, it has contributed the lion’s share of investment. CAD has found its legs somewhat since yesterday’s collapse, but further losses seen an inevitability unless crude begins to rally.

NOK Norwegian krone fell to a 13 year low after the Norges Bank surprised markets with a rate cut, to 0.75% from 1%. Weakness in the economy, as well as lower demand for goods and services from the petroleum sector were cited as reasons in the accompanying statement, which actually also went as far as explicitly stating that a weaker krone will help the profitability of exports. The message to traders is therefore fairly clear: the Norges Bank wants a weak krone.

UK News

  • FT. Fifth of UK companies in ‘survival mode’, survey finds: A fifth of Britain’s businesses are still stuck in “survival mode”, unable or unwilling to invest to improve their productivity, according to a survey.
  • Reuters. Half of UK firms struggle to invest to improve productivity: Half of Britain’s companies have had trouble investing in staff and new technology that are needed to improve the country’s weak productivity performance, an industry body said on Friday.
  • Reuters. Bank of England’s Broadbent not close to backing rate rise: Bank of England Deputy Governor Ben Broadbent said he has not been on the brink of voting for higher interest rates, unlike some of his colleagues, and labour costs in Britain need to grow quite a lot faster to get inflation back to the bank’s target.
  • Reuters. BoE says could end monthly rate meetings as soon as October 2016: The Bank of England said on Thursday it will stop holding monthly meetings of its Monetary Policy Committee from October next year, if parliament allows it to move to a schedule of eight meetings a year rather than 12.
  • Reuters. UK net mortgage lending hits 5-year high in August: British banks approved the highest number of mortgages in 18 months in August and net mortgage lending hit a five-year high as Britons made the most of record-low interest rates before an expected rise next year, data showed on Thursday.
  • Reuters. Bank of England to watch balance of payments risk from EU vote: The Bank of England will monitor the risk that Britain’s European Union membership referendum could make it harder for the country to finance its large current account deficit, a top official at the central bank said.