special reports

Another Solid Week for Cable

Signs that the housing sector continues to hold its own and further growth in industrial sector figures helped Cable break last week’s resistance at the 1.8900 figure to close out Friday at 1.9002. On Wednesday, BBA mortgage lending posted a record high of 6.2B, but the BOE minutes tempered major GBP/USD gains as the release revealed that the September vote to keep rates steady was a unanimous 8-0. As we said last week, “UK central bankers are still trying to asses the extent of inflationary pressures in the UK economy and as of now, odds of yet another 25bp hike before year end appear to be 50%-50%…With housing prices enjoying a rebound and wage growth steady the UK consumer appears to be in relatively good health ahead of the critical Christmas season. Nevertheless, high debt levels and slowdown in  US growth which may dampen both UK export demand and further growth in its booming finance sector, could all serve to contain any inflationary impulses and keep the BOE on the sidelines for the rest of the year.” Other economic news reiterated our claims, as CBI Industrial Trends, whose headline figure posted its best reading since 2004 at –5 from –8, also showed price expectations have moderated markedly since last month, dropping to 8 from 13.  The rapid decline in energy costs accelerated the fall and, should oil prices remain at these levels or fall lower, the need for additional rate hikes may decrease.

Next week’s economic data could give Pound bulls something to smile about as improvements in the housing sector, as well as consumer confidence, are expected to be released. Additionally, the third reading of Q2 GDP is not anticipated to show any revisions, but the posting of CBI Distributive Trends could make or break the GBP/USD rally, as a gain in the indicator of retail sales will be necessary to prove that the UK consumer is resilient.

M&A Saves the Swissie

 

The long suffering Swissie finally strengthened this week following months of stellar economic data. With interest rates still at a relatively low 1.50%, the currency has been a prime candidate as a carry trade vehicle. However, M&A news gave the Swiss franc a boost, as it was announced that European-based Merck would buy Swiss-based Serono for $13 billion. Word of the deal resulted in a 100 point gain against the greenback and a 60 point rise versus the euro. Meanwhile, SNB Vice Chairman Blattner commented hawkishly on Wednesday that rates had not yet reached normal levels, indicating the need for policy tightening. However, he also noted that the central bank did not need to accelerate its monetary policy, effectively negating the possibility of a 50bp hike in December and leaving traders to price in one more 25bp hike to 2.00% in December. Economic data released during the week highlights the 25bp hike bias, as the trade balance narrowed due to weaker export growth to the Euro-zone, along with slower retail sales growth of 2.1% from 4.8%.

 

Economic data in the week going forward could further Swissie gains, as the most import gauge on the agenda, the KOF Swiss Leading Indicator, is anticipated to hold at 2.42 in the month of September, well above average and near a 6 ½ year high. The economy has shown extremely solid growth throughout Q2 and into Q3, as GDP has posted a strong 3.2%, the labor market has tightened, and producers have seen accelerating prices. Meanwhile, the UBS Consumption Indicator is estimated to rise to 1.900 in August from 1.881, as household spending has been encouraged by low unemployment numbers and mounting consumer sentiment. Wrapping up the week will be the SECO September Economic Forecasts, in which USD/CHF shorts will be looking for higher revisions and an optimistic outlook.