Forex Investment and Currency Trading

The main mover in the G10 space during the European morning was GBP, which initially sold-off when it was revealed that the MPC voted to request permission from the Chancellor for unsterilized purchases of privately held assets. However, GBP recovered partially when short-sterling yields rallied on the back of the discussion that a move of the bank rate towards zero might actually have an adverse impact on the economy due to a potential for a drop in bank profits. EUR/GBP faces trend-line support from the October 20 low at 0.8709, while resistance is created by the down-trend from January 26 high at 0.8928.

Europe highlights

UK: on the way to quantitative easing
The minutes from the MPC’s February meeting revealed a voting pattern of 8 to 1 in favor of a 50bp rate cut. Danny Blanchflower dissented in favor of a more aggressive move of 100bp. The Committee also voted unanimously to write to Chancellor Darling to seek permission to buy gilts and other securities through money creation (i.e. unsterilized purchases). However, initially short sterling yields rallied when it was revealed that the BoE discussed that additional rate cuts would potentially not be passed on by banks or could hurt profitability levels, suggesting a possibility of aggressively pursuing credit easing without cutting the Bank to zero. Nonetheless, traders continue to look for a move in the Bank Rate below the 0.50% trough priced in by the markets and therefore expect GBP to weaken as it faces a further loss of yield support.

Some short-term respite for emerging EMEA
EMEA FX opened on a better tone on Wednesday morning triggered by some profit-taking following the sharp correction over the past few days. The TRY had rebounded, along with the HUF and the PLN. The ZAR was now marginally stronger than its close on Tuesday. From a fundamental standpoint, market remains cautious about EMEA FX, nonetheless, and the retracement may provide opportunities to re-enter short positions at better levels.

Focus on official statements in Central Europe
We are going to see more official statements from Central Europe’s authorities faced with severe currency weakness. The statements will revolve around possible FX intervention (Poland, Hungary) or the use of interest rate as a tool to defend the FX (Czech Republic). In Hungary, the Prime Minister urged to explore non-conventional means to defend the forint. In a strong statement, the vice-governor of the Czech central bank stated on Wednesday morning that “Cutting rates is not at all a matter for a debate with the current levels of the exchange rate. The question is whether to raise and by how much”. The willingness to use the interest rate weapon may vary from one central bank to another, however. Given the region’s poor BOP outlook, the interest rate option would clearly be the most effective policy action to prevent further FX weakness. FX intervention may have a positive impact in the near term, but cannot be sustained for a long time, given the magnitude of external vulnerabilities.