26 Jul 2013
Flash: Crossing the threshold – TD Securities
FXstreet.com (London) - Research Teams at TD securities round up current events.
Key Quotes:
“FOMC tapering has ushered in renewed volatility and pushed more central banks to embrace the latest fad in using forward guidance to try and manage expectations. But beyond the obvious trigger, markets have missed the improvement in G10 data in the first half of the year, which passed the threshold where less accommodation was likely. Meanwhile, Chinese attempts at engineering a controlled credit crunch have only exacerbated concerns for EMs, where markets have increased their risk premiums here and valuations look cheap, but this is likely appropriate given the challenges”.
“UK GDP matched expectations for a +0.6% gain in Q2, but the details were even better. Inflation continues to come in above the 2% target, but has avoided breaching the 3% mark again. The August rate decision should see Bank Rate and QE left unchanged, but the risks of a surprise are a little higher. For the August Inflation Report, we expect the BoE to implement threshold-based forward guidance”.
“The hurdle is low for the MPC to massage gilt yields lower via forward guidance as forwards suggest a bias for 2s5s steeper and only limited effect of guidance in holding back 2y rates. Beyond the MPC’s policy guidance, other factors are lined up to reinforce a rally for gilts and flattening in the short end, with scope for GBP implied volatility to recede, steepening making carry on the gilt curve attractive once again, and valuations supporting that recent moves are overdone. Ultimately though, there is only so much the MPC guidance can do to restrain the impact of better data on yields”.
Key Quotes:
“FOMC tapering has ushered in renewed volatility and pushed more central banks to embrace the latest fad in using forward guidance to try and manage expectations. But beyond the obvious trigger, markets have missed the improvement in G10 data in the first half of the year, which passed the threshold where less accommodation was likely. Meanwhile, Chinese attempts at engineering a controlled credit crunch have only exacerbated concerns for EMs, where markets have increased their risk premiums here and valuations look cheap, but this is likely appropriate given the challenges”.
“UK GDP matched expectations for a +0.6% gain in Q2, but the details were even better. Inflation continues to come in above the 2% target, but has avoided breaching the 3% mark again. The August rate decision should see Bank Rate and QE left unchanged, but the risks of a surprise are a little higher. For the August Inflation Report, we expect the BoE to implement threshold-based forward guidance”.
“The hurdle is low for the MPC to massage gilt yields lower via forward guidance as forwards suggest a bias for 2s5s steeper and only limited effect of guidance in holding back 2y rates. Beyond the MPC’s policy guidance, other factors are lined up to reinforce a rally for gilts and flattening in the short end, with scope for GBP implied volatility to recede, steepening making carry on the gilt curve attractive once again, and valuations supporting that recent moves are overdone. Ultimately though, there is only so much the MPC guidance can do to restrain the impact of better data on yields”.