The «pounds day» in the series about interest rates

The decrease in the English rate from 0.5% to 0.25%

It has become true: the bank of England has omitted key interest rate to a historical minimum and has started the press, but doubts in usefulness of such ultrasoft monetary policy only increases. Last week RBA had also lowered the interest rate, the Reserve Bank of New Zealand will be the next candidate this Thursday. The plans for the other rates are still foggy: the European Central Bank waits, the FRS promises, Japan – counts.

The market has once again shown that the set of market means of response to the new world risks is very limited: rates, loans and policy. The decrease in the English rate from 0.5 to 0.25%, increase in amount of the program of the redemption of state bonds up to £435 billion and £10 billion for purchase of corporate debt obligations are urged to mitigate the Brexit consequences. Now the Central Bank is ready to buy up not only the state bonds, but also corporate ones. Besides, it is supposed to allocate up to £100 billion to commercial banks for increase in financing of business, provided that the banks shall attach preferential terms to such loans.

When the banks needed urgent liquidity, the redemption of the assets was the correct decision at the time of crisis, and today new injections will lead only to the growth of debts. The English business activity in July and the PMI index in service trade show the smallest value since 2009. The accompanying statement of the Bank of England precisely says that the Central Bank is ready to continue mitigation. The negative rates are not promised, but all other methods of stimulation will be allowed. Nevertheless, even though the high risk of acceleration of inflation and decrease in the growth of GDP rates are expected, it will not likely to lead to the strong recession. The bank also waits for the growth of unemployment to 5.4% in 2017 and expects fall of business investments by 3.75% this year that will hardly give support to the pound sterling in a near future. It is Theresa May's government which is to do the next step with regard to the situation.

The NFP is excellent again, but the attempts of the market manipulation taken by the Federal Reserve practically do not leave the room for trust. Today the American regulator continues to remain the hostage of the external factors and its actions depend on world dynamics rather than on the US macroeconomic conditions. The opportunity to use a window on the positive mood of the investors and to raise rates in the summer has been missed as it was in the last year. Regardless of what the FRS speakers have promised, the markets are ready for preserving the former rates at least until the end of the year that can be evidenced by low yields of treasury obligations and the markets of derivative tools, despite the rally of the risk assets.

There are no new reasons for postponement of increase of rates. Whether and irrespective of FRS will manage to carry out this procedure twice, the dollar will grow and will perform the current work on weakening of currencies of funding – euro and yen – that work which European Central Banks and Bank of Japan cannot make in any way.

Most likely, the European Central Bank at the next meeting will try to meet the expectations of the investors and will hint at additional incentives, but their launching will be postponed for the later term.

From other news we will note:

  1. The crisis stress tests have been passed: the European bank administration has published results on 51 banks of the European Union, except Greece and Portugal. The Italian Banca Monte dei Paschi di Siena and Irish Allied Irish Banks have shown the worst results. After the Cyprian crisis in 2014 the EU institutions has passed the law which limits a possibility of the state to help banks and requires that investors have to share burden of a debt load of the financial organisation. Such financial monsters Deutsche Bank, Lloyds Banking Group and the Austrian Erste Group are among the top 10 most problem banks. The basic indicator of CET1 of the majority of tested banks has appeared at the admissible level exceeding 4.5%, and the Italian banking sector shows the greatest risk as was assumed earlier.
  2. Despite the fact that stock quotations and bond yields in the US break records, and the Brexit turmoil has practically calmed down, the stock market is absolutely quiet that is very disturbing for the investors. Almost zero dynamics means that investors trust the Central Banks and are ready to follow their rate. But it is possible that the growth of the financial markets has reached the peak and this trap will slam soon. By estimates of the Barclays Investbank, the debt ratio to EBITDA for the American corporations of the S&P500 index has reached the historical record due to the increase in the debt obligations of the companies of non-financial sector and the general size of a debt has grown more than by $1 trillion since the beginning of 2010. It has already become a restraining factor for further increase in leverage of the companies, and also has led to a growth in volumes of the dividend payments and the return share repurchase. It is unlikely it can be considered as a positive factor on a general background of the American economy.

To the American data on retail sales, next week is planned quiet for capital assets and saturated for raw currencies. Monday has opened the publication of data of China (import export in minus, the trading balance has grown, but these data do not have trust), further we wait for data on industrial output and retail trade which will significantly affect AUD and NZD. Also it is worth paying attention to corporate economic statements of the USA.

EUR/USD: Intraday resistance: (1.1149/1.1161) (very strong) - 1.1175 - 1.1193 - (1.1217/1.1237) (strong). In case of overcoming of resistance 1.1260 will become actual levels 1.1350-1.1400, the following area of strong protection (1.1470/1.1500). Only market makers can set an impulse for such movement up. Intraday supports: (1.1124/1.1090) - 1.1069 (strong) - 1.0980 - 1.0890. Level 1.0900 is protected from breakdown down. While the dollar is in a positive, we trade only down.

USD/JPY: Intraday resistance: (102.64/102.69) - 103.14 - (103.54/103.63) (strong); basic support will lead 101.75 - breakdown of level to the purposes 101.00; 100.12; 98.73. Level 101.00 is protected by the range of strong support (101.34/101.10). Fundamentally correction is not finished down, but large prefer purchases so far.

Author: Alexander Ward,
ForexChief Currency strategist