DB FX Daily: London BoE and GBP; RBNZ and NZD

[RTFX-Trading]

FX Daily: London
BoE and GBP; RBNZ and NZD
Today's Key Data and Events
EUR German factory orders for April, -0.2% m/m expected (10:00 GMT)
EUR ECB rate decision, 25 bp rate hike to 4.00% expected (11:45 GMT)
USD US revised Q1 productivity/ULC, 1.1/0.8% q/q expected (12:30 GMT)
CAD Canada building permits for April, -5.0% m/m expected (12:30 GMT)
CAD Canada Ivey PMI for May, 65.0 expected (14:00 GMT)
NZD RBNZ rate decision, DB expects no change in OCR (21:00 GMT)

Upcoming Event Risks
June 7: BoE rate decision, RBNZ rate decision
June 6-8: G8 Summit
June 14: SNB rate decision
June 20: Riksbank rate decision

GBP into the MPC Decision: The consensus for the Bank of England to leave rates unchanged this Thursday remains in place with just 4 of 62 economists looking for a 25 bp rate hike and the money markets pricing in just a few bps of tightening. Chart 1 may offer some guidance on the potential market reactions in EUR/GBP as we can see the MPC decisions to leave rates unchanged in March and April saw EUR/GBP trade sideways for much of the following period. The surprise rate hikes in August 2006 and January 2007, however, saw EUR/GBP drop 1-2% quickly but the cross only recovered slightly after a week. Overall the short-term environment for the pound is favourable with the prospect for further rate rises over the coming months, G10 high yielding currencies showing strength after a period of range trading, central bank reserves still growing quickly with larger shares allocated to sterling in recent years and a recent recovery in M&A inflows after a shift to outflows early in 2007. Though GBP/USD remains 20% above PPP, we believe it may need to spend more time at these lofty levels for the currency to consistently weigh on capital flows into the UK and for net exports to soften - two developments which could help to bring about a turn in the longer-term GBP/USD trend. We have also noted earlier the close relationship between GBP/USD and 2Y GBP swap rates over recent years which may indicate we need to see more clear signs of a potential peak in the rate cycle and slowdown in the domestic economy (including housing) before GBP/USD comes under more severe pressure.

RBNZ Impact on NZD Likely to be Ambiguous
We expect the RBNZ to leave rates unchanged at their upcoming meeting, however we see the downside risk for NZD from this no move by the RBNZ as limited. While a greater than 1/3 chance of a tightening is priced in, it will likely be accompanied by a statement that is clearly hawkish. Moreover, a decision to leave rates unchanged may ultimately be positive for NZD as it reduces the risk of weak data going forward (the converse being the case for a tightening). We do not advocate chasing the recent strength though as there is a significant risk that the recent increases in domestic interest rates and appreciation of the exchange rate results in weaker NZ data in coming months. Indeed we think that tactical short NZD positions into key NZ and housing data may be worthwhile as when the data does clearly turn the NZD is likely to fall very quickly.