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Cable Hits an 8 Month Low; FOMC in View

Last updated 9/21/2011 5:32 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• BoE Minutes reveal QE decision finely balanced
• Cable hits 8 month low on BoE Minutes and PSNB
• Nikkei up 0.23% Europe lower by -0.73%
• Oil at $86.36/bbl
• Gold above $1800 at $1808/oz.

Overnight Eco

• AUD Westpac Leading Index (MoM) (JUL) 0.5% vs .01%
• JPY Merchandise Trade Balance Total (Yen) (AUG) 294B
• JPY All Industry Activity Index (MoM) (JUL) 0.4% vs. 0.9%
• NZD Current Account Balance (2Q) -0.92B vs. -0.69B
• NZD Credit Card Spending (YoY) (AUG) 4.7% vs. 7.2%
• GBP Nationwide Consumer Confidence (AUG) 48 vs. 47

Event Risk on Tap

• CAD Consumer Price Index (YoY) (AUG) expected at 2.9%
• CAD Bank Canada Consumer Price Index Core (YoY) (AUG) expected at 1.6%
• CAD Consumer Price Index (MoM) (AUG) expected at 0.1%
• CAD Bank Canada Consumer Price Index Core (MoM) (AUG) expected at 0.2%
• USD Existing Home Sales (AUG) expected at 4.75M
• USD Existing Home Sales (MoM) (AUG)

Price Action

• USD/JPY tries to test 76.00 bids ahead of FOMC
• AUD/USD slips to 1.0240 on risk seloff
• GBP/USD 8 month low to 1.5625
• EUR/USD test 1.3650 before bouncing

Cable hit a fresh 8 month low against the greenback in morning London trade today after BoE minutes revealed that policymakers were inching closer towards implementing more QE measures to stimulate the lackluster UK economy. Although Adam Posen was the only MPC member to actually vote for more QE, the minutes noted that the decision was “finely balanced” suggesting that the majority view is becoming more dovish as the UK economy continues to struggle with recovery.

Adding to cable’s woes was the latest release of the Public Sector Net Borrowing figures which showed that UK government borrowed a record amount in August as revenue waned while spending increased. The PSNB rose to 15.9B  versus a surplus of -5.2B the month prior. The market was anticipating an increase of 13.2B. The data suggests that despite the vaunted efforts at austerity by Cameron government UK budget deficits are likely to widen if growth does not pick up in the last quarter of 2011.

Cable tumbled to a low of 1.5615 before recovering slightly to 1.5650, but the pair remains under pressure over the intermediate term horizon. Today’s focus on the FOMC meeting could skew trading during the North American hours and push the pair higher on broad anti-dollar flows if the Fed adopts an aggressive monetary easing policy. However, UK economic fundamentals remain bleak  and sterling could resume its downward trend later in the week testing the 1.5500 figure if risk aversion flows accelerate.

In North America the focus will be squarely on FOMC due to release its statement at 18:15 GMT. The market anticipates that the Fed will shift its balance sheet from the short end to the long end of the curve extending the maturity of its assets. Operation Twists, as it is known, is  intended to drive long term US rate lower in an effort to lower long term borrowing costs and stimulate business activity. The market however is looking for the Fed  to go beyond Twist by lowering  the rate on its deposits, all in an effort to stimulate lending. 

However, as we noted earlier, “we think that the Fed may be more cautious in its approach then the market believes announcing only a limited Twist operation as its additional easing measure.” US monetary authorities have come under increasingly strong political pressure to curb their activities. Yesterday’s salvo from GOP lawmakers was only the latest attempt to restrain Fed officials from engaging in further monetary easing.  Given the nascent price increases as evidenced in last week’s CPI data and the renewed efforts by Obama administration to jump start the economy, Fed policymakers may decide to step back and allow fiscal officials to take the lead role in stimulating the US economy. 

If the Fed were to contain its policy actions only to Twist, the dollar could strengthen markedly as the market gets caught off guard.   USD/JPY tumbled to a low of 76.16 in early morning Asian trade on the assumption that the Fed will make another dramatic announcement, but the pair could quickly verticalize to 77.00 or perhaps even 78.00 if Dr. Bernanke and company disappoint the market later today.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.