GDP, Policy Mixes and Sterling-Yen Trade Idea

The US and UK report their first estimates of Q1 11 GDP this week. While the US economic data, like ISM readings suggest the US economy is enjoying reasonably good momentum, the GDP components are distinctly softer and suggest a disappointing sub-2% reading. Headwinds caused by higher oil prices, which appears to have been a factor cutting into consumption, and the ever-difficult-to forecast-- inventory data, appear to be the main culprits.

The US report will be released on Thursday, April 28. The UK reports its Q1 GDP estimate the day before. Recall the UK economy contracted by 0.5% in Q4 10, a good part of which could be traced to the poor weather. The economic data released in recent weeks suggests the UK economy has not contracted in Q1. In fact, despite the fiscal austerity, the UK economy appears to have expanded around the same rate as the US and possibly even a little faster.

Outside of the FOMC meeting, these data reports are among the most important events of the week. The BOE meets next week. No change in policy is expected from either central bank. It may nonetheless be interesting to review the policy mixes. In the US, there is easy monetary and easy fiscal policy. In contrast, the euro zone is moving in the opposite direction. Tight monetary and tight fiscal policies. The UK stands out with its tighter fiscal policy and loose monetary policy. The ease of the BOE's monetary stance is evident from its reluctance not to raise interest rates despite the persistent high inflation readings, resulting into declines in real rates.

Sterling has benefitted from a weak US dollar environment. It reached almost $1.66 on April 21 and is consolidating those gains in the holiday-thin environment. The next layer of resistance is seen in the $1.69-$1.70 area.

The yen has been the strongest of the major currencies over the past two weeks, appreciating around 3.3% against the dollar and 2.3% against sterling. A combination of global recovery ideas, and rising global corp earnings, while Japan's economic woes deepen may offer an opportunity to sell yen and buy sterling.

The BOJ meets at the end of the week and, if anything, there is a risk of it taking additional steps to support the economy.

In recent days, sterling has established a bit of a shelf in the JPY134.60-80 area. Today it has found a bid just below JPY135. Assuming the shelf holds, there is initial potential toward JPY137.50 and then JPY140.
GDP, Policy Mixes and Sterling-Yen Trade Idea GDP, Policy Mixes and Sterling-Yen Trade Idea Reviewed by Marc Chandler on April 25, 2011 Rating: 5
Powered by Blogger.