ECONOMETER

The Bank of England is unlikely to provide much influence for GBP unless there is a change in monetary policy settings. I think this is unlikely and if anything GBP is set to take a slightly weaker bias against both EUR and USD although I still look for GBP to make headway against CHF. GBP bulls appear to be taking profits in frustration at the inability of GBP to push higher over recent sessions although the large extent of short speculative market positioning suggests that downside risks are limited. The IMF’s annual health check of the UK economy beginning today will provoke some interest especially given the IMF’s recent criticism over the extent of UK austerity measures but I don’t expect it to provoke much GBP reaction.

FX intervention by New Zealand’s central bank shook up the kiwi. The threat of more intervention to weaken the NZD will result in some caution among bulls, but the RBNZ is smoothing the currency rather than attempting to halt its gains. Nonetheless, I would caution against playing long NZD/USD positions given the intervention risk prefer to go long AUD/NZD. Although the cross pulled back following the strong NZ jobs report overnight this was matched by a similarly strong Aussie jobs report.

EUR/CHF has risen over recent days and looks set to break above the 25 April high around 1.23495. The ongoing reversal in safe haven flows as Eurozone peripheral bonds continue to heal is helping to weaken the CHF. Additionally, the weaker than expected reading for April CPI highlights the persistent deflationary pressures inherent in the economy, something that may reverse if the CHF weakens. Additionally interest rate differentials continue to point to a higher EUR/CHF, with the differential widening in favour of the EUR over recent weeks.