DB FX Daily: GBP - Risk Appetite The Key Short-Term Driver

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FX Daily: GBP - Risk Appetite The Key Short-Term Driver

GBP Rate Support Solid But Risk Appetite The Key Short-Term Driver
The majority of economists and market participants are looking for the Bank of England to leave rates unchanged today though some concern over another "surprise" rate rise remains with the market pricing about 3 bps of tightening in our estimation. Looking further out the curve in money markets, market participants continue to look for a further rate rise as does our economist who forecasts a 25 bp increase in April as long as strong data continues. This continued tightening bias in the market has seen rate support for GBP remain strong against EUR, USD and JPY despite the recent moves in financial markets. But the weakness of GBP as long positions were cut back in line with the carry unwind has now opened up a gap between EUR/GBP and rate spreads (see chart at left below). While this gap appears supportive of GBP, it may simply reflect the recent decline of rates as a driver of FX moves during this bout of risk aversion. If one looks at the spread to other high yielders such as AUD, rate spreads have changed little over the past couple of weeks but the GBP/AUD cross has also remained quite stable. Thus the fate of GBP in the short-term may well lie with that of the other high yielders in being dependent on a recovery in risk appetite rather than domestic conditions absent any surprises from the Bank of England.
[email]trevor.dinmore@db.com[/email]

RBNZ Hikes Without Boosting NZD
As was widely expected, the RBNZ lifted the OCR by 25 basis points to 7.5%. The statement was not as hawkish as expected though, mostly due to a section that stated "We are continuing to assess alternative measures that might support the OCR, working with the relevant government agencies. These include a tightening of tax rules applying to housing investment and changes to bank capital requirements to help moderate the amplifying effect of credit on the housing cycle." This has been seen as signalling reluctance to lift the OCR further. While in the medium term this may actually be NZD supportive, as a reluctance to hike would likely see the NZ economy remain stronger for longer, nearer-term it likely leaves the market very cautious on pricing further hikes. This will also likely see NZD move in line with general FX carry developments (as has often been the case lately - see the chart below of AUD/NZD and USD/JPY). We are now neutral on the near-term NZD and AUD/NZD outlook.