Etikett: Macro

Finally, the market has it right for the Bank of England…but not for GBP…

Finally, the market has it right for the Bank of England…but not for GBP… ETF SecuritiesFinally, the market has it right for the Bank of England…but not for GBP…

Market expectations for the Bank of England (BOE) indicate that it is almost a forgone conclusion that a rate hike will be announced by the BOE this week. This wasn’t always the case. Until September, expectations for a rate hike this year had bounced between around 10% to 60%, and mostly toward the bottom end of that range. So why does the market have pricing wrong for GBP? Finally, the market has it right for the Bank of England…but not for GBP…

The turmoil surrounding Brexit negotiations and the uncertainty over the future economic arrangements have been a key reasons why investors have believed it unlikely that the BOE would raise interest rates. Indeed, the rebound in GBP stalled as European Chief Negotiator Michel Barnier and his UK counterpart David Davis traded uneasy statements back-and-forth about the status of the discussions. However, ongoing inflation pressure, a more hawkish tone from BOE Governor Carney and resilient economic numbers have been the reasons for our long held view that the BOE would hike rates in 2017. The knee jerk rate cut triggered by the EU referendum result in June 2016 has proven to have been unnecessary and the current aggressively accommodative stance of the central bank is now counter to its objective of price stability.

Downside risk för EUR/GBP

While GBP appears well valued against the US Dollar, real interest rate differentials between the Eurozone and the UK are supportive of further gains in GBP against the Euro. Indeed, we expect further downside for the Euro, which we feel remains overvalued, with the European Central Bank ECB) striking a much more cautious tone than the BOE. Although ECB President Draghi has announced a ‘downsize’ of its asset purchase program, he noted the need for ‘continued support from monetary policy’ as ‘domestic price pressures are still muted’. With no rate hikes on the horizon, investor positioning looks stretched, hovering near record highs, and EUR/GBP will move back into the 0.84-0.88 range it was trading in for the majority of 2017. Market consensus for EUR/GBP is for 0.90 by year-end. So while the market has it right for the BOE, it has it wrong for GBP.

Martin Arnold, Global FX & Commodity Strategist at ETF Securities

Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.

Walking the Tightrope Between Reform and Stimulus

Walking the Tightrope Between Reform and Stimulus

China Macro Monitor Walking the Tightrope Between Reform and Stimulus

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Walking the Tightrope Between Reform and Stimulus

This quarterly report focuses on macro developments in China relevant to investors across asset classes and markets.

•    The Chinese authorities are walking a tightrope between maintaining enough stimulus to avoid the equity market rout worsening and sticking to a reform agenda that demonstrates to the international community that China is liberalising and developing its markets. We believe that a clearly communicated path for removal of support measures could help offset taper tantrums.

•    Outside of the equity markets, China continues to pursue its reform programme. China has announced the widening of it currency trading band and has come clean about its official gold holdings after six years of silence on the issue. We believe both actions are motivated by its drive to gain reserve currency status, with its hopes of getting the Renminbi into the accolade of the IMF’s Special Drawing Rights basket this year.

•    The Chinese property markets are starting to show the beginnings of a recovery. First tier city prices are now rising as constrained new building and a pickup in sales has helped tighten the supply-demand balance.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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