British Pound May Fall if Bank of England Minutes Hint Further Easing

Key Overnight Developments

• Australian, NZ Dollars Sold as Asian Stocks Follow Wall St Lower
• NZ Current Account Deficit Smallest in 21 Years as Share of GDP

Critical Levels



The Euro fell as much as 0.2 percent against the US Dollar as stocks declined in Asian trade, boosting demand for the safe-haven currency (see below). The British Pound was little changed, oscillating in a narrow range above the 1.48 figure. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The Australian and New Zealand Dollars tracked lower against their US counterpart as well as the Japanese Yen as Asian stock exchanges followed Wall Street lower, boosting demand for safety-linked and funding currencies. The MSCI Asia Pacific regional benchmark index fell 1.1 percent after an unexpected drop in US home sales raised fears about the health of the world’s largest economy. Traders are increasingly viewing US performance as the bellwether of the global recovery at large with the EU hamstrung by a debt crisis, Japan still struggling with deflation, and China willfully pulling the brakes on its buoyant economy.

New Zealand’s Current Account balance posted the first quarterly surplus since the three months ending June 2009 in the first quarter. In annual terms, the balance deficit shrank to NZ$4.46 billion. This amounted to shaving off just 2.4 percent from economic growth, the least in over two decades. However, outcome is not as encouraging as the headline figure would suggest considering exports fell 2 percent from the previous year, with only a larger decline in imports (4.3 percent) allowing for the improvement in overall trading terms. Looking ahead, a survey of economists polled by Bloomberg suggests deterioration ahead, with the deficit trimming 5.65 percent from GDP this year and in 2011.

Euro Session: What to Expect



Minutes from the last Bank of England monetary policy meeting headline the economic calendar. Yesterday’s announcement of the government’s “emergency budget” was nothing short of ambitious, with the mix of tax hikes and spending cuts amounting to a whopping 6.3 percent on GDP by 2014-15. The growth rate of government spending has outpaced that of private demand over the past two years, so the sizable retrenchment on the fiscal side is likely to bring a sharp slowdown in economic activity. The question to be answered now is whether monetary policy will need to turn yet more accommodative to prevent a backslide into recession, with traders keen to pick apart policymakers’ comments for clues on what may be on the table. As is stands, a Credit Suisse gauge of one-year interest rate expectations shows traders are pricing in just 25.6 basis points in tightening over the next 12 months, the second-smallest increase in borrowing costs among the G10, with only deflation-plagued Japan set to maintain a looser posture.

Elsewhere on the docket, preliminary German Purchasing Manager Index (PMI) figures are expected to show that manufacturing and service sector expansion slowed for the second consecutive month in June. The same is on tap for the Euro Zone as a whole, with a composite region-wide PMI sliding to the lowest in four months. Elsewhere on the docket, market researcher GfK is expected to report that German Consumer Confidence fell to the lowest level since March. On balance, the figures promise to underscore the region’s increasingly bleak growth prospects and underscore the likelihood that the European Central Bank will maintain record-low interest rates for significantly longer than most of its top counterparts, amounting to acute downward pressure on the Euro exchange rate for the foreseeable future.

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