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Euro Pound Tumble Ahead of Rate Decisions – Global ZIPR In Store?

By:   GFT
  • 12-04-2008
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Top Stories

  • Riskbank cuts -175bp sending risk currencies into a tailspin
  • US and China meet to discuss financial crisis
  • US Treasury may use Fannie. Freddie to lower mortgage rates
  • US 10 year bonds at 2.58% continuing to drip lower
  • BOE ECB on tap as markets prepare for surprises
  • Oil trading with $45 handle
  • Gold at $766/oz slipping further

Overnight Eco

  • NZD Rate Decision 5.00% -150bp as expected
  • JPY Capital Spending -13.0% vs. -9.9% forecast
  • AUD Building Approvals -5.4% vs. 0.2% expected
  • AUD Trade Balance better at 2.95B vs. 1.45B eyed
  • CHF GDP 0.0% no surprise
  • EUR Revised GDP -.0.2%

Event Risk on Tap

  • GBP Rate Decision expected -100bp to 2%
  • EUR Rate Decision forecast at -76bp to 2.75%
  • CAD Building Permits markets looks at -6.0%
  • USD Unemployment Claims another 500K+ in store
  • CAD Ivey PMI market looks at 50
  • USD Factory Orders -4.0% eyed
  • GBP CB Leading Index

Price Action

  • USD/JPY probes below 9300 to 9260 in late Asia but bounces as European bourses recover
  • AUD/USD sells off to 6400 on back of weak equities in Asia but bounces as stocks stabilize
  • GBP/USD trades to 1.4500 handle as expectations grow for more than 100bp cut
  • EUR/USD pulledbelow 1.2600 ahead of ECB rate decision

Euro Pound Tumble Ahead of Rate Decisions – Global ZIPR In Store?

It is central bank night in FX as both the BoE and the ECB are expected to lower rates significantly later in the day.Ahead of the announcements by the two major central banks, the surprise -175bp rate cut by Sweden’s Riksbank sent risk currencies into a tailspin in early European trade as traders anticipated the possibility of even steeper rate cuts than already forecast. The market projects a -100bp rate cut for BoE and -75bp rate cut for ECB, but given Risksbank’s staggeringly large move, UK and European officials may opt for an even more dramatic policy gesture.

Certainly the economic background provides a strong argument for a more aggressive move as the data yesterday in all the G-4 countries indicated a near collapse of economic demand.Services PMI in UK and Europe and ISM Non-Manufacturing in US all hit record lows suggesting that economic activity has slowed to a crawl as the deflationary impact of the credit crisis spreads its way across the globe.

Many analysts now believe that G-4 rates may all ultimately converge at near zero levels as monetary authorities desperately try to reflate the system. Furthermore central bankers and fiscal officials may have to resort to highly unusual and unmarket-like behavior to prop up demand.Yesterday’s proposal by US Treasury to actively lower mortgage rates in order to stimulate borrowing may be the first of many efforts to galvanize demand more directly.Cleary capitalizing banks as a means of restoring credit facilities has failed miserably with banks preferring to hoard their capital investing it only into the long end of the curve of government bonds.The transmission mechanism of monetary policy is not working and is unlikely to work even if rates approach ZIRP as risk assumption has ceased to exist in the marketplace.

With euro and cable having sold off significantly in the European session, we doubt that they may see further declines in North America. For the time being 1.2500 in EUR/USD and 1.4500 in GBP/USD remains firm support and the units may even bounce s bit if the two central banks cut by more than expected in a classic sell the rumor buy the fact dynamic. Nevertheless, the longer term implications of lower rates continue to weigh on the two currencies. As their interest rate premium to the dollar disappears so will their tendency to trade on risk assumption/risk aversion flows. For the time being the greenback remains the king of the jungle for lack of any better alternative.

FX Upcoming

Currency GMT EST Release Expected Prior
GBP 12:00 7:00 GBP Bank of England Rate Decision 2.00% 3.0%
EUR 12:45 7:45 EUR European Central Bank Rate Decision 2.75% 3.25%
CAD 13:30 8:30 CAD Building Permits (MoM) (OCT) -6.0% 13.4%
USD 13:30 8:30 USD Unemployment Claims (NOV 29) 540K 529K
CAD 15:00 10:00 CAD Ivey Purchasing Managers Index (NOV) 50 52.2
USD 15:00 10:00 USD Factory Orders (OCT) -4.0% -2.5%
GBP 15:30 10:30 GBP CB Leading Index (MoM)   -1.1%

 


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