Tuesday, July 11, 2017

Currencies: Markets Looking for Next Cue

From Marc to Market:
Investors await fresh policy clues as the Bank of England's Broadbent is seen as a key vote on a closely balanced MPC, while the Fed's Brainard, is also seen as a bellwether, will speak shortly after midday in NY. Broadbent has not spoken since the election, and his current views are not known.

If he sides with the dissenting hawks, sterling could rally and rechallenge the $1.30 cap. On the other hand, if the Deputy Governor sides with Governor Carney, as we suspect, sterling could return to sub-$1.29 area. Note that there are two large option strikes that expire today. At $1.2933 there is a GBP400 bln that is on the bubble today, and GBP773 struck at $1.30.

BRC sales figures were stronger than expected, rising 1.2% in June after a 0.4% fall in May. This seemed to underpin sterling, which largely held support seen near $1.2860 yesterday. BRC cautioned that unseasonably warm weather boosted clothes sales and higher food prices flattered the report. Tomorrow, the UK's employment report will provide an update on wage pressures, which, at the headline rate, may have slowed.

The Fed's Brainard express caution recently in the face of the four-month slide in core prices (both CPI and PCE deflator). Little has been reported to make her less cautious. However, if she indicates that she is sympathetic to what seems like a majority view that the decline in price pressures are due to transitory factors it could neutralize her cautious stance. Still, we expect the Federal Reserve to announce the beginning of its balance sheet operations at the September FOMC meeting to start in October, leaving the possibility of a third rate hike this year to December.

Brainard is not the only Fed news. Late yesterday, reports indicate that the White House has indicated it will nominate Quarles, formerly in the G.W. Bush Treasury Department as the Vice Chairman of Supervision to the Federal Reserve. If Quarles is confirmed, and there is little doubt over this, he would have a four-year term as in that role as Vice Chair and 14 years as a Governor, (serving until 2032). Note that even though the Trump Administration has been critical of Dodd-Frank,the appointment fulfills one of the law's requirements.

The main economic news comes from Europe today, where Italy reported stronger than expected industrial production for May. The 0.7% increase on the month compares with the median forecast in the Bloomberg survey for a 0.5% rise. The April decline was revised to -0.5% from -0.4%. However, the year-over-year pace (work-day adjusted) was 2.8%. Germany, France, and Spain have reported their figures (all 1% of above), and the aggregate figure is due tomorrow. Industrial output in Q2 appears to be running at its best clip in a couple of years....MORE