Daily analysis 14.07.2016:
This may be a nervous afternoon for the pound. The diversity of signals that may appear after the Bank of England meeting, makes it difficult to construct a particular scenario. Political hand-outs within the new cabinet of Theresa May. The zloty is stable, but today's data about the current account balance may surprise negatively.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 13.00: Decision of the Bank of England regarding interest rates, along with minutes, as well as votes relation during the meeting (estimations: a decrease by 0.25 percentage points to 0.25%; the scale of assets purchase remains at the unchanged level of 375 billion pounds).
- 14.00: Poland's current account (estimations: positive 410 million euro; trading assets balance: positive 356 million euro).
- 14.30: New jobless claims in the USA (estimations: 265k).
Difficulties in constructing a scenario
The Bank of England will announce its decision today, in the early afternoon. Recently, we wrote that the economists consensus assumes a 25 base case point decrease in interest rates. The market estimates the same decrease, with a likelihood of approximately 80%. However, it is worth noting that most of these expectations are based on Mark Carney's comments. Shortly after the referendum, he stated that some form of the monetary easing will be necessary this summer.
Economists expectations are based on a different conviction as well. The claim is that we are dealing with an economic shock that may significantly decrease investments, as well as consumption. Thus, it is natural to ease the monetary policy so that it would be possible to prevent a larger slowdown by stimulating expenses of households, as well as of companies.
We may assume that interest rates are actually going to be decreased. However, this does not have to happen today. The next Bank of England meeting is in three weeks. Moreover, new macroeconomic forecasts will be published by then. The scenarios that they would present may be more effective in justifying this decision than today's information.
Will the lack of a decrease in interest rates at July's meeting extend a rebound on the pound? Not necessarily. A positive reaction on the British currency may be very temporary. This is because the BoE has been publishing minutes along with its announcement for some time now. If minutes contain a clear suggestion regarding a decrease in interest rates or a discussion about an increase in QE, the pound's increase may quickly turn into a decrease.
The Bank of England immediately publishes the relation of the monetary authorities votes as well. An unambiguous decision will of course increase the announcement's tone. However, a 5:4, as well as a 6:3 relation, may suggest strong differences within the BoE. Thus, the unchanged level of interest rates does not have to be interpreted as a supportive element for the British currency.
As a result, only unambiguous decisions in a particular direction may cause an unambiguous reaction. Therefore, if a decrease is higher than 25 base case points and it is backed-up with a suggestion of increased quantitative easing, the GBP/USD pair may even go to the area of 1.30. On the other hand, no reduction of interest rates at all, as well as no specific suggestions of further plans for August in the announcement nor minutes, would probably take the cable higher by 200 pbs.
Other indirect solutions cause a large risk of a significant rebound up or down, followed by a rapid correction of this move. We expect that the British currency will remain under fundamental pressure in the long-term. Especially taking under consideration that political nominations in Theresa May's new cabinet suggest that the negotiations with Brussels won’t be fast or simple.
Nominations in British government
In yesterday afternoon’s analysis, we have cited the unofficial ITV information, stating that Philip Hammond was appointed for the minister of finance. This information was rather positive for the British currency. However, the following information suggested that the negotiation with Brussels regarding Brexit may be very difficult.
The new foreign affairs minister is Boris Johnson. He is a former mayor of London, as well as a leader of the Brexit campaign. The minister of Brexit is the euro-skeptical David Davis. The secretary of foreign trade is Liam Fox, who recently was an opponent of Theresa May’s in the run for the post of the UK prime minister. He was against the EU, as well.
Assuming that the views of these people do not change, the government's personnel suggests long discussions with Brussels and Berlin. Thus, the risk that ideological matters will predominate the pragmatic attitude is larger. At a certain point, this may contribute to the United Kingdom losing access to the common market. This information would be fundamentally negative for the pound.
Weak data about foreign trade
The zloty has been remaining relatively stable for the past few hours. However, consequences of the weak foreign trade data that was published by the Polish Central Statistical Office (GUS) yesterday, may be a negative surprise. The pace of increase in export between January and May was at the 4.7% level. On the other hand, it was at the 6.7% level between January and April. Surplus on the trading assets balance decreased as well. It went down from 13.5 billion to 12.8 billion zloty.
Today, we will receive the NBP data about the current account. Its main component, the foreign trade, is not always perfectly consistent with the GUS readings. However, there is a large risk that instead of approximately 400 million euro surplus, we will see a value that is near zero, or even a deficit. This will probably not change the PLN evaluation in the short-term. However, a clear wear-off of the pace of an increase in export, as well as a reduction of surplus is not fundamentally positive for the zloty.
When it comes to the decision of the Bank of England, it will probably only impact behavior of the pound against the zloty. As we wrote in the above paragraph, it may be rather chaotic. This increases the risk that the moves will be within the range of approximately 0.10 PLN.
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