Forex Investment and Currency Trading

BOE’S LIQUIDITY PLAN…
 
…pretty much as leaked (despite GBP’s response) - GBP 50bn total of collateral for loans pre ‘08; “high quality assets” only which means AAA, but including credit cards, and also covers G10 sovereign debt rated Aa3 or higher; but, not accepting securities backed by US mortgages; no derivatives; for an initial 1-year period, renewable for up to 3 years; and swap fee re-assessed every 3 months. With BoE stating plan won’t “interfere” with monetary policy, perhaps GBP disliking the inference that plan doesn’t preclude further rate cuts? Details still emerging; finance minister, Darling to speak at 15.30 UKT.
 
The antipodeans recouped some of Friday’s losses overnight as the majority of the G10 currencies outperformed USD with the exception of GBP and CAD. This week’s US economic calendar is relatively light with few key data releases and little in the way of Fed rhetoric running up to the next FOMC meeting. The main releases of note will be March durable goods (Thu), which market expects at 1.0%m/m, existing and new home sales for March (Tues and Thurs respectively), and weekly jobless claims data, while the Only Fed speakers this week are Evans and Kroszner later today. The earnings season continues with Bank of America, Nestle, AT&T, XL, Yahoo, RBS, UBS, Apple, BASF, Credit Suisse and Barclays amongst those reporting in the following five days.
USD/CAD traded with little direction before spiking 0.5% to 1.0094 despite a 0.9% surge in oil prices up to a record high of USD117.12/bl. Given that both the all-items and core inflation rates moved to the lower part of the Bank’s 1% to 3% target band in March, the BoC has clear leeway to further front-end load rate cuts. Market looks for the BoC to cut the overnight rate by 50 bps to 3.00% tomorrow and for the accompanying statement to reinforce policymakers’ concerns about Canada’s economic prospects given the sustained rising cost of capital and growing downside risks to the US economy.

GBP/USD: After initially rallying through the 2.000 barrier, GBP/USD was driven 100pips lower as the BoE announced their new liquidity scheme which allows banks to swap ABS with the BoE, affording a temporary alleviation of current acute balance sheet constraints but retaining contingent liabilities in the form of de facto margin calls. Market sees this more an opportunity for Banks to recapitalise rather than free up the current logjam in the mortgage market and view it as a compliment to policy rather than a substitute. The dire state of the UK housing market was highlighted once again by April Rightmove house prices falling 0.1%m/m, to take the y/y rate from 5.0% to 1.3%, the lowest reading since 2005. In terms of UK data, the week is relatively busy with BoE’s minutes (Wed), retail sales (Thu), CBI Industrial Trends Survey (Thu) and GDP (Fr).

EUR/USD rallied ½% overnight following hawkish comments from ECB’s Liebscher. Inflationary fears were highlighted - noting the worryingly high 3.6%y/y March CPI print, as was the lack of room for rate cuts, whilst the IMF’s growth forecasts were said to be too pessimistic. Data wise, the flash manufacturing and service sector PMI’s (Wed) and IFO business survey (Thurs) will be the main focus of the week.

NZD/USD was moderately higher overnight, though the Kiwi Dollar underperformed its Antipodean counterpart as AUD/NZD rallied up to, but failed to break, the 1.1900 barrier. The RBNZ announce rates on Wednesday when the market expect rates to be left on hold at 8.25%. The main focus of the week will likely be the accompanying statement and any signs that the RBNZ may relinquish its stance of leaving rates on hold until H2 2009.

AUD/USD was bid overnight, rallying from 0.9335 up to 0.9422 on the back of firm domestic data. Q1 PPI was stronger than expected, registering 1.9%q/q (cons. 1.0%q/q), the largest quarterly increase since the series began in Q3 1998, while the yearly rate rose to an eight year high of 4.8%y/y (cons. 3.9%y/y). The main issue for the RBA, given weak consumer spending data over Q1, is how much price pressures facing producers are being passed through to consumers. Wednesday’s CPI report will shed some further light on this issue.