BOE’s Su­per Thurs­day, Ring­git flat­tened in off­shore mar­kets

Financial Mirror (Cyprus) - - FRONT PAGE -

The story defin­ing the painful de­pre­ci­a­tion of the Bri­tish Ster­ling in re­cent weeks has been rapidly fad­ing ex­pec­ta­tions over the Bank of Eng­land rais­ing UK in­ter­est rates.

Only a month ago, the mar­kets were pre­dict­ing a more than 90% prob­a­bil­ity of a UK in­ter­est rate in­crease this month. By Thurs­day, this prob­a­bil­ity had evap­o­rated to less than 15%. A crip­pling com­bi­na­tion of neg­a­tive eco­nomic data, dis­ap­point­ing growth fig­ures and an­other re­ver­sal in tone from BoE Gov­er­nor Mark Car­ney has been the driver be­hind these min­i­mal ex­pec­ta­tions of a UK in­ter­est rate rise.

With it al­ready be­ing a fore­gone con­clu­sion that UK in­ter­est rates were to be left un­changed as ex­pected, at­ten­tion was di­rected to­wards the lan­guage of the pol­icy state­ment and whether there was a split in the MPC vote.

Ster­ling still ap­pears over­sold and could be thrown a life­line, if the BoE de­liv­ers a “hawk­ish hold” that leaves the door open for fu­ture rate hikes. Ex­pec­ta­tions over the cen­tral bank pos­si­bly tak­ing ac­tion in Au­gust are likely to heighten, if more than two MPC mem­bers vote, or at least sig­nal a de­sire for higher UK in­ter­est rates.

What would be seen as a ma­jor threat to the Ster­ling re­sum­ing its hor­rific down­ward spi­ral is if the BoE is­sues a down­beat pol­icy state­ment, sug­gest­ing a down­grade in UK eco­nomic growth, and a po­ten­tial change in in­fla­tion fore­casts lim­its the need to raise UK in­ter­est rates. This would likely spell more pain for the Pound.

Tak­ing a look at the tech­ni­cal pic­ture, the GPUSD is firmly bear­ish on the daily charts. Pre­vi­ous sup­port around 1.3750 could trans­form into a dy­namic re­sis­tance that en­cour­ages a de­cline to­wards 1.3500 and 1.3440, re­spec­tively.

Malaysian bonds tum­bled while the Ring­git re­ceived pun­ish­ment, af­ter the op­po­si­tion claimed a shock­ing vic­tory in the na­tion’s gen­eral elec­tion. Ma­hathir Mo­hamad, who will be­come the world’s old­est elected leader at 92 years old, pulled off an un­ex­pected vic­tory on Wed­nes­day, over­throw­ing Prime Min­is­ter Na­jib Razak’s rul­ing coali­tion, Barisan Na­sional.

In­ter­na­tional in­vestors are cer­tainly go­ing to be sur­prised at the elec­tion out­come, es­pe­cially con­sid­er­ing that it was not priced in that Na­jib’s rul­ing coali­tion would see such a stun­ning de­feat.

There is likely to be a pe­riod of height­ened un­cer­tainty in Malaysia fol­low­ing the sur­pris­ing elec­tion re­sults. The Ring­git is go­ing to be at threat to do­mes­tic po­lit­i­cal un­cer­tainty, and the on­shore mar­ket could find it­self vul­ner­a­ble to down­side losses when the mar­ket re­opens as ex­pected at the begin­ning of next week.

It will also be in­ter­est­ing to mon­i­tor how both in­ter­na­tional in­vestors and rat­ings agen­cies re­act to the de­vel­op­ments in Malaysia. The new leader has promised to abol­ish a con­tro­ver­sial GST tax in Malaysia, and al­though this would im­prove sen­ti­ment do­mes­ti­cally as a re­sult of no more GST be­ing added to items, it does present a risk to re­duced gov­ern­ment rev­enues.

It is shap­ing up to be a mis­er­able trad­ing week for emerg­ing mar­ket cur­ren­cies, which have fallen vic­tim to an ap­pre­ci­at­ing Dol­lar and height­ened geopo­lit­i­cal risk. With the Dol­lar poised to ap­pre­ci­ate fur­ther amid US rate hike ex­pec­ta­tions and un­cer­tainty dent­ing ap­petite for risk, most EM cur­ren­cies could be ex­posed to fur­ther down­side risks.

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