|
|
 |
 |
|
Research Note: Bank of England MPC Meeting Likely Overshadowed by Risk Unwind
Brian Dolan, Chief Currency Strategist
Summary Outlook: The BOE MPC meeting tomorrow (0700EDT/1100GMT Thursday July 9) is likely to be a non-event, with interest rates expected to remain unchanged at 0.5% and no significant new initiatives likely to be announced. The main risk from the BOE is that they announce a further expansion to their Asset Purchase Plan (APP) from the current GBP 125 bio to the maximum GBP150 bio authorized thus far by the government. But even that may not materialize at this meeting, as the BOE indicated at its last meeting that it would take 2-3 months to complete the GBP 125 bio in purchases. However, should the BOE announce a further expansion to their quantitative easing efforts, including the highly unlikely step of asking the government to authorize a still larger APP, it would most likely lead to a sharp GBP decline. Our preferred scenario is that the BOE holds rates steady, observes tentative signs of stabilization in the UK economy, and indicates it will continue with the current APP and determine later whether additional asset purchases are needed. Should this scenario play out, GBP may see some strength, especially against EUR (i.e. lower EUR/GBP), but even that will depend on the larger unwinding of risk appetites currently hammering markets.
Trading Strategy: Global asset markets are currently unwinding 'risk-on' trades, as fears mount that any recovery in economic activity will occur later and be more subdued than previously expected. As a result, risky assets (stocks, commodities, carry trades (long JPY-crosses like AUD/JPY) and gold) are being dumped, and ostensibly more secure assets (USD and government bonds) are being bought. The unwinding began after last week's weaker than expected US NFP report unhinged investors and it has accelerated further this week. Much of the unwind appears to be heavily position- and technically-driven, which makes it extremely difficult to gauge how far this might run.
Of particular note, USD/JPY has collapsed to levels that are likely to trigger an official Japanese Ministry of Finance (MOF) reaction and we would expect some verbal intervention in the immediate future. Indeed, today saw rumors of semi-official Japanese buying interest in USD/JPY, purportedly below 92.50. Given the rapid rise in the JPY, we think the risks for MOF/BOJ intervention are increasing, so we would be reluctant to sell USD/JPY on the current weakness. From a longer-term perspective, we think there is an opportunity to buy USD/JPY on this weakness, though we would abandon the position on a drop below the key 90.00 level. Along these lines, we think USD/JPY may stabilize in the 90.00-92.50 area, and that any further unwinding of carry trades is likely to spill into non-JPY dollar pairs, especially EUR/USD, AUD/USD, and GBP/USD, generally manifesting in broader USD strength. (The US dollar index was essentially unchanged today, owing to outsized weakness against the JPY and strength against all others.)
Our preference is to sell EUR/USD while it remains below 1.3950, though we are mindful that the key range low at 1.3750 has yet to break, so more conservative traders might want to wait until that level succumbs before getting short. Another trading opportunity we like is to sell AUD/USD, which may close today inside its Ichimoku cloud if below 0.7820 at 5pm EDT; stop at 0.7930. Our Weekly Strategy is currently short NZD/USD and we would maintain that short, but lower the stop loss now to 0.6350 to lock in about 125 pips. A daily close in NZD/USD below 0.6215/25 would see Kiwi drop inside its Ichimoku cloud and potentially trigger further weakness toward the 0.6041 cloud bottom initially.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
|
|
 |
|
