Investors in the pound have waited more than six years for the Bank of England (BOE) to raise interest rates and bolster the UK currency. With money markets signaling no move next year, it looks like they might have to wait longer.
The central bank has held its key rate at a record-low 0.5 percent since March 2009 and forward contracts based on the sterling overnight index average (SONIA) are not fully pricing in a quarter-point rate increase until January 2017, data compiled by Bloomberg show.
Speculation that rates are to remain low as policymakers attempt to boost inflation is being underpinned by oil prices that dropped to an 11-year low this week, helping to push the pound to its lowest level against the US dollar since April.
That policy outlook contrasts with the US Federal Reserve, which earlier this month raised US interest rates for the first time in almost a decade.
“The Bank of England has recently created more of a divergence in policy expectations between itself and the Fed and that’s weighing down more on cable,” said Lee Hardman, a London-based currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd, referring to the pound-dollar exchange rate.
BOE officials “appear to be utilizing this drop in oil to buy them more time before raising rates. The fundamentals are quite similar to the US, but obviously a lot less decisive,” he said.
The pound rose 0.1 percent this week to US$1.4908 as of 1:02pm in London on Thursday. It dropped as low as US$1.4806 on Tuesday, the lowest since April 15. Sterling depreciated 0.7 percent to ￡0.7344 per euro, having touched ￡0.7416 on Tuesday, the weakest level since Oct. 15.
UK government bonds fell this week, sending the 10-year yield up nine basis points, or 0.09 of a percentage point, to 1.92 percent. The 2 percent gilt due in September 2025 dropped 0.8, or ￡8 per ￡1,000 face amount, to 100.70.
Still, gilts this year have outperformed German securities, the eurozone’s benchmark sovereign debt, returning 0.6 percent through Wednesday, according to Bloomberg World Bond Indexes. Germany’s bonds earned 0.4 percent, while US Treasuries gained 0.9 percent.
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
The New Taiwan dollar and Taiwanese stocks surged on signs that trade tensions between the world’s top two economies might start easing and as US tech earnings boosted the outlook of the nation’s semiconductor exports. The NT dollar strengthened as much as 3.8 percent versus the US dollar to 30.815, the biggest intraday gain since January 2011, closing at NT$31.064. The benchmark TAIEX jumped 2.73 percent to outperform the region’s equity gauges. Outlook for global trade improved after China said it is assessing possible trade talks with the US, providing a boost for the nation’s currency and shares. As the NT dollar
PRESSURE EXPECTED: The appreciation of the NT dollar reflected expectations that Washington would press Taiwan to boost its currency against the US dollar, dealers said Taiwan’s export-oriented semiconductor and auto part manufacturers are expecting their margins to be affected by large foreign exchange losses as the New Taiwan dollar continued to appreciate sharply against the US dollar yesterday. Among major semiconductor manufacturers, ASE Technology Holding Co (日月光), the world’s largest integrated circuit (IC) packaging and testing services provider, said that whenever the NT dollar rises NT$1 against the greenback, its gross margin is cut by about 1.5 percent. The NT dollar traded as strong as NT$29.59 per US dollar before trimming gains to close NT$0.919, or 2.96 percent, higher at NT$30.145 yesterday in Taipei trading
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