Morning Briefing – Sterling flees Carney

<p>The long tentacles of Brexit continue to stretch around the globe. Overnight they reached Oz, where the Reserve Bank of Australia noticed that “markets have been volatile recently as investors have repriced assets after the UK referendum”.</p>

Update: the Bank of England late on Monday morning made what is widely expected to be the first of many moves to ease policy


  • The BoE on Tuesday cut its counter-cyclical capital buffer (CCB) to zero. This reverses the decision made in March to hike the CCB to 0.5% from March next year. The move will in theory free up some £150bn for consumer lending, but the near-term impact is expected to be modest.
  • Banks will be prevented from reallocating capital from the buffer to dividends, the Prudential Regulatory Authority said. The cash will have to be lent or not redeployed at all.
  • In its Financial Stability Report, the BoE said some financial  risks had “begun to crystallize”.
  • However the BoE judges that credit demand will be a bigger problem than supply.
  • Banks have “substantial capital and liquidity buffers” and thus they should be able to continue the “provision of financial services to the real economy” , according to the BoE.


Originally published 10.30 AM BST

  • The long tentacles of Brexit continue to stretch around the globe. Overnight they reached Oz, where the Reserve Bank of Australia noticed that “markets have been volatile recently as investors have repriced assets after the UK referendum”. This led the RBA to leave rates at 1.75%, a record low, but like many key central bank rates around the world, one that is no longer particularly remarkable given that it is several hundred basis points above rates at other major central banks. And of course, because it’s been in place for so long. The Aussie dollar’s modest and short-lived 0.3% uptick following the announcement says most of what we need to know about expectations: markets en masse were not expecting a cut, though a minority of traders had suspected one might be forthcoming. Consensus forecasts continue to point to a month in the third quarter as to when a rate cut is likelier, perhaps as early as August.
  • That’s the main official news out of the way. The main action has of course now shifted to sterling and the euro. The latter has polished off an 11% price move against the pound over seven days with 1%-plus jump this morning. We had expected offers to emerge from around 0.8475. The rate was last at 0.8483, suggesting we should set our sights on 8490, the weekly high, instead.
  • Even with an absolutely dire set of UK economic data releases already seen morning (namely purchasing managers indices compiled by data provider Markit) a number of major risk events remain, and these are continuing to force sterling bulls to run for cover. The euro against the pound was already ebullient and sterling in retreat before the UK services PMI missed forecasts badly with a slide to 52.3 compared to 52.7 expected. This led sterling/dollar to extend its fall by as much as 20 pips. It was last at $1.3139 and really needs to retake 1.318 this morning or a return to those 30-year lows in the wake of the Brexit vote will be back on the table.
  • Then there’s the news that real estate funds are suspending withdrawals for fear of tanking net asset value from a property market freeze.
  • Then of course there’s Carney. He will comment on the Bank of England’s Financial Stability Report from 11.00 London time (the report was released at 10.30). His speech might in effect kick off the easing measures he has trailed over the last week and a half.
  • The main takeaway from the report itself is that the BoE has reversed its decision in March to increase the amount of capital banks must hold against cyclical upturns in the credit. It’s called the Counter Cyclical Capital Buffer. It will now be held at zero till at least June next year. In theory, that should mean banks will on average need to set aside £5.7bn-less capital, and they could—in theory, afford to lend out £150bn more. Will it happen? Perhaps Governor Carney will offer some details that make it more plausible. We will update this article with the main points of his speech.
  • As for the other long-standing currency trend, the yen has had its rest and is again powering ahead on the 101 handle. 101.71 stands to be broken though bear in mind it’s a monthly low against the dollar.
  • Remarkably, the euro is barely catching a bid against the dollar though, as traders concentrate firepower elsewhere. It is below Monday’s $1.1154 close by 9 points, and the disparity offers one ray of light for sterling’s chances of at least finding a base, as the euro tests the underside of the almost year-long trend it broke last week.
  • Stocks continue to drift lower as relief wears off and uncertainty sets in. Nikkei overnight gave up all gains made the day before, the FTSE is extending its 0.84% loss on Monday by another 0.6 of a percentage point, and the DAX, ‘Britain’s Brexit Index’ is pretty much pricing in the all of the potential pessimism on the table, with another 140 point drop so far this morning. In this atmosphere, US futures are naturally pointing to a sizeable opening fall when the cash markets re-open.

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