Rate cut next week?
"Proper preparation and planning prevents particularly poor performance." The Bank of England clearly had this axiom in mind ahead of the referendum and last Thursday the governor put into practise a plan that will be envied by central bankers around the world. He weakened the pound without doing anything.
Switzerland, Euroland, the United States and, notably, Japan would love their currencies to be more competitive, i.e. lower. Three of them have negative interest rates in one form or another and the fourth, America, hesitates to increase rates lest they lead to unwanted dollar strength. With the Brexit vote Mark Carney was handed a card that allowed him to trump the lot of them and he played it on Thursday, saying a rate cut was likely and that more asset purchases may need to be added to the quantitative easing programme.
Even without a vote to Leave the governor would have hankered after a softer pound: with it he has the perfect excuse to lean on sterling without fear of the accusation that he is manipulating his currency. At a practical level it is doubtful that the difference between a Bank Rate of 0.5% and one of 0% would be noticeable in the economy. As far as sentiment is concerned, however, the threat of a cut added to the downward pressure on a pound that was already looking to the south.
Two difficult days
On Thursday and again on Friday sterling bore the brunt of Dr Carney's comments, taking the wooden spoon on both days. Its losses since Thursday morning average -1.4% against the other dozen most actively-traded currencies. From pre-referendum levels it is down by -9.6%.
Despite a burst of risk-on optimism in the middle of last week it is the safe-haven Japanese yen that has taken top slot over the 11 days, strengthening by 11.8% against sterling and by 3.6% against the euro. Perhaps counter-intuitively, stock markets have mostly done well too, with investors encouraged by the prospect of persistently cheap money and more QE.
A political risk that has failed to bite this morning is Saturday's indecisive Australian general election. Although some votes remain to be counted it looks as though there will be a hung parliament and it is uncertain whether Prime Minister Turnbull will hang onto his job. Even so, the Australian dollar is higher today than on Friday night.
There are three ways sterling can go today. A profit-taking rally is possible, as is a further decline if the governor gives it another nudge. Easiest to imagine is that it will go nowhere, especially with New York on holiday.
There are no heavyweight ecostats in the day's agenda. Australian building permits, already out, fell by more than expected. Britain's purchasing managers' index for the construction sector should be very slightly positive. Further job losses are expected from Spain and Euroland investor confidence probably faded in July.
The sole North American ecostat is Canada's manufacturing PMI.