The currency blog

As with February’s MPC meeting, the committee voted 6-3 in favour of keeping rates unchanged at the historic lows of 0.5%. The 3 is made up of Dale and Weale calling for a 25bps hike while Sentence continues to argue for a 50bps rise. They also voted 8-1 to keep the quantitative easing programme at £200bn with Posen as usual wanting an additional £50bn added. The main comments from the extensive minutes were for inflation likely to rise further with “significant risk” it will exceed 5% in the near-term. This comes as little surprise following yesterdays higher than expected CPI and RPI figures showing producer prices rising 4.4% over the last year. Other comments assert that recent events have increased uncertainty about the medium term outlook for growth. Sterling has weakened on the back of these announcements as the growing uncertainty over whether the bank can increase interest rates to curb the surging inflation remains dominant and thus, brings the end of a positive start to the week for Sterling.
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‘FAIRY DUST’ BUDGET IS PURE DISNEY

Responding to the Budget, Mark O’Sullivan, Director of Dealing at international money transfer specialist Currencies Direct, said:

“Sterling remains unchanged in the currency markets - following the no show-stopper Budget.  It appears the world’s debt markets continue to support the Government’s austerity measures - so long as growth remains within the government targets.  However, the Chancellor could find that the world markets desert him and lose confidence in him.  The UK growth and public borrowing are not in line with the already over optimistic projections by the OBR.

“If inflation stays persistently high, the credibility of the Bank of England may start to come into question -and the UK may find itself in a position where both the Government & Bank of England’s credibility will come into question

“Inflation falling back to 2.5% is over-optimistic, given recent commodity price increases and the surge in oil prices - which are not taken into account in the current inflation rate as yet.   

“The 1p cut in fuel looks at first glance to be putting money into people’s pockets, but will quickly evaporate as the cost of living continues to rise.”

AS IT HAPPENED

12.38pm….Chancellor underlines fact UK still has the confidence of world’s debt markets - when it comes to Government borrowing

12.41…OBR inflation target for 2012 is far too optimistic!

12.50…At a time when Ireland is being punished by the Eurozone, the UK has the flexibility to reduce its corporation tax down to 23% - to encourage growth

12.57…NON DOMS to be given tax relief on UK investments

12.59…Money laundering regulations are to be made less of a burden

13.00…If interest rates rise, this provides a safety net for homeowners who may face unemployment

13.08..£2BLN FOR GREEN INVESTMENT BANK - could this be better allocated elsewhere?

13.13…45mins into Budget, we’re still waiting for the showstopper….!

13.29…Fuel duty cut by 1p a litre

Japan’s Nikkei index opened over 2% higher after a holiday closure yesterday despite the nuclear situation remaining on high alert. According to atomic officials, Fukushima Daiichi’s reactor 2 remains a danger as white smoke continues to drift into the sky from the plant. The surrounding areas are now experiencing levels of higher-than-normal radiation up to 200km away. Following last week’s intervention the JPY has been restored to relative normality against the USD and currently sits at 81.09.
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This could be an interesting week for the Pound. George Osborne is set to announce his first budget on Wednesday, on the same day we also see the latest Bank of England minutes and tomorrow last months CPI inflation figure is released. Starting with the Budget, there are not set to be any new tax hikes or spending cuts in the announcement, with the Chancellor set to focus on trying to stimulate growth. This should be broadly Sterling positive especially if he manages to persuade high profile businesses to move back to the UK. The BoE minutes should also be very interesting, a 5-4 split should indicate an interest rate rise sooner rather than later. Another 6-3 result would confirm the current market thinking that a rate rise before Q4 is looking increasing unlikely. Finally, the CPI figure will closely watched but it not as important as previous month. We expect the inflation rate to increases once more, but the credibility of the BoE will only come under further scrutiny if inflation fails to fall back towards target as the bank is currently predicting, and the current supply side shocks in oils and commodity prices turn out to be permanent rather than temporary in nature.
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The Group of Seven agreed to jointly intervene in the foreign exchange markets for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake. Japan began the effort, sending the currency down the most against the dollar in more than two years. Each of the G-7 members has sold yen as their markets opened, Japan’s Finance Minister Yoshihiko Noda told reporters. The G-7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan. Japan’s central bank repeated its pledge to pursue “powerful monetary easing” as policy makers sought to reduce the threat of the world’s third largest economy sinking into a recession. The Nikkei 225 Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.
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The deteriorating situation in Japan continues to drive market conditions and the markets are extremely volatile.  Investors continue to ponder the various pieces of news on the nuclear situation in Japan. Therefore, risk aversion remains highly on the agenda and the usual cocktail of safe haven assets such as US Treasuries, German bunds and the CHF are the main benefactors. On the other hand, risk assets including global equity markets and risk currencies have been subject to increasing pressure.
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