Sterling Pounded on Dovish MPC

Sterling is has eclipsed the yen as the main focus in the foreign exchange market. The surprising news that has kicked it to fresh multi-month low was that the BOE is closer to easing policy than has been suspected. While it was a unanimous decision to leave rates on hold as expected, it was a tighter 6-3 vote on new asset purchases. The market had expected a 8-1 vote. 

Of particular interest, it is the fourth time Governor King has been outvoted. This a peculiar feature of King's tenure--a governor being outvoted. Would Carney accept that? That said, it may have taken a little while, but the majority more often comes over to King's view than the other way around. While UK rates are a touch softer, the focus is more on renewing gilt purchases rather than cutting rates. The MPC did discuss a range of options and the take away is that inflation is not a formidable obstacle to additional easing. New gilt purchases are the most likely channel and it can be announced as early as next month, but most observers will likely focus on the April-May period.

Separately, the UK reported Jan employment figures.  While the labor market is soft, it is not a key source of pressure.  Unemployment claims fell 12.5k, more than twice the consensus and the Dec decline was revised to 15.8k from 12.1k.  The claimant count rate was unchanged 4.7%, while the ILO measure ticked up to 7.8% from 7.7%. 

Sterling has tested the $1.53 technical objective of the  double top pattern.  Barriers struck at $1.53 have been triggered and it bounced back, though the $1.5335-50 area is now likely to offer resistance.  On the downside, the next support is seen in the $1.5235-70 area, ahead of $1.52 itself.  

With today's losses sterling has lost 5.8% against the dollar, second only to the 7.2% decline in the yen.  For its parts the yen is largely steady.  The dollar remains within the ranges that dominated since the G7 statement.  Indeed, the range-trading environment has seen yen volatility tumble.  Three-month implied vol is near 11.55%, which it turns out is the weakest relative to its 20-day moving average since mid-December.  It peaked on Feb 6 near 12.8%. and is now at three-week lows.   

Japan reported a record trade deficit.in January.  Even though the yen has fallen, recall J-curve effect, which illustrates how and why depreciation of a currency may worsen a trade balance before improving it.  The take away is not so much on the deficit, but the fact that exports rose for the first time in 8 months and the 6.4% year-over-year increase, was more than twice what the consensus expected.  Exports to China rose 3.0%, the first increase since last May.  

Overall exports to Asia rose 8.4% and 10.9% to the US.  Exports to the EU fell 4.5%.  We note that auto exports fell 8%, but iron and steel exports (some of which perhaps will made into cars by some one else) rose by almost 24.5%.   The increased exports will help boost domestic output (e.g. Toyota is considering boosting domestic output) and by underpin capex.  The BOJ has upgraded its assessment of the economy and the government may likely as well. 

The local press has downplayed Muto as the next BOJ Governor.  As he was perceived as the least dovish of the top contenders, his reduced chances initially weighed on the yen, from which it quickly recovered, perhaps helped by cross rate developments.  The New Zealand dollar may be leading the charge.  The central bank has threatened intervention to protest the currency's strength.  It hit a market in which the short-term speculative market appeared long.  

The kiwi has pushed past sterling as the weakest of the majors with a 1.25% loss. The liquidation of long New Zealand dollar positions may be lending the Australian dollar a modicum of support.  At the end of last week, that cross was trading near 2-year lows. 

Minutes from central bank meeting have proved market movers this week and increasingly so.  First it was the BOJ.  Few surprises.  Then it was the RBA.  It was more neutral than expected.  The BOE was considerably more dovish.  The FOMC minutes from the Jan meeting.  The market is keenly interested in the conditions that would halt or slow the long-term asset purchases.  Broadly speaking the issue is evolution of the Fed's thinking about exit strategies. 

We suspect that the market may be disappointed.  The previous minutes raised the possibility that long-term asset purchases wind down by the end of the year.  Although the full brunt of the fiscal cliff was averted, but the way in which it was done, pushes the cliff to March 1 sequester.  The Fed's thinking (and revelation of same) can still be in quite broad terms.  We see the minutes as another channel of the Fed's communication, rather than a transcript of a meeting) and do not expect the Fed to signal that an exit of any kind is near.  While the economic contraction in Q4 may be revised to a small gain, the US economy is still looking at sub-2% growth in H1 and this risks renewed softening of the labor market including possible increase in the unemployment rate.