World’s Fourth-Biggest Currency Trader Sees Euro Decline Ahead
October 19, 2016 — 6:52 PM EEST Updated on October 20, 2016 — 12:07 AM EEST 
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Currency drops to lowest in almost three months against dollar
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Traders await ECB meeting for signals on policy direction
Deutsche Bank AG is sticking with its weaker euro call.
The currency dropped to the lowest in almost three months and the world’s fourth-largest foreign-exchange trader says it’s got further to fall. The bank sees the shared currency declining to $1.05 by year-end, more bearish than the $1.10 median estimate of analysts surveyed by Bloomberg. Traders will be watching the European Central Bank’s policy-setting meeting Thursday for signals about its monetary stimulus efforts, which haven’t prevented the euro from climbing this year.
“We’re at $1.05, which in the scheme of such a narrow range feels aggressive,” Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank, said on Bloomberg Television. “But really it could be a two-day trading range if the Italian referendum voted ‘no’ for example, and the Fed soon thereafter hiked rates — you’d get to $1.05 fairly easily.” He was referring to a vote on constitutional changes in Italy and Federal Reserve monetary policy.
The euro has been stubbornly strong versus the dollar this year as traders speculated that the ECB was reaching the limits of its stimulus efforts. That diminished monetary-policy divergence with the Fed, which held off on raising interest rates and caused the dollar’s rally to fizzle against its biggest peers.
The shared currency was 0.1 percent lower at $1.0974 as of 5 p.m. in New York and fell 0.5 percent to 113.51 yen. The euro strengthened last month on speculation that the ECB will consider when to taper monthly bond purchases.
Euro weakness may gather momentum into year-end, wrote analysts at Toronto-Dominion Bank, including Ned Rumpeltin, the European head of currency strategy in London. But in the short term, there’s a risk that the currency “could surge higher if ECB tapering becomes more of a tangible threat.”
The ECB won’t start to phase out asset purchases before the second half of 2017, according to a Bloomberg poll of 50 economists conducted Oct. 7-14.
IMF Sees Saudi Break-Even Oil Price Drop Less Than Forecast
October 19, 2016 — 8:00 AM EEST Updated on October 19, 2016 — 1:41 PM EEST
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Price needed to balance budget to drop 14% this year: IMF
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Iran widens break-even gap from Saudi as forecast revised down
The average oil price that Saudi Arabia needs to balance its budget will fall this year by only half as much as forecast six months ago, according to the International Monetary Fund.
The country’s fiscal break-even price will drop to $79.70 a barrel this year from $92.90 in 2015, the IMF said in a report released on Wednesday, a fall of 14 percent. In April, the IMF projected that the Saudi break-even price would decrease by 30 percent this year, to $66.70 a barrel from $94.80.
The new numbers, released ahead of Saudi Arabia’s first-ever international bond sale, suggest that the government’s efforts to cut costs and diversify its economy away from petroleum are having less of an effect than the IMF forecast previously. Saudi Arabia generates more than 80 percent of its official revenue from oil, according to a World Bank report in July.
The IMF’s revised projection could also help to explain why Saudi Arabia supported an OPEC deal last month in Algiers that will effectively force it to cut production to support oil prices, even though its regional rival Iran will be exempt from capping its output. In April, Saudi Arabia vetoed a proposed production freeze after Iran refused to take part.
Iran’s break-even price for this year will be $55.30, the IMF said, down from $60.10 in 2015. That’s lower than the $61.50 the IMF forecast for Iran in April, and much less than the fund’s revised break-even price for Saudi Arabia, showing how Iran’s more diversified economy has given it an edge over the kingdom.
Both countries will be hard-pressed to balance their budgets this year. Benchmark Brent crude has averaged less than $45 a barrel in 2016 and was trading at about $52 in London on Wednesday. Prices will probably stay between $50 and $60 for the foreseeable future, according to executives, traders and officials gathered at the annual Oil and Money conference in London this week.
“With oil expected to remain at the $50 to $60 level next year, you will need to see further fiscal consolidation” in Saudi Arabia, Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said at the launch of the IMF report in Dubai. “This is going to continue to impact growth in the medium term.”
The only OPEC member in the Middle East and North Africa able to balance its budget with oil below $50 is Kuwait, with a break-even oil price for this year of $47.80 a barrel, the IMF said. Libya had the highest break-even among the region’s OPEC members, at $216.50 a barrel, the Washington-based fund said.
Pound Climbs as U.K. Inflation Accelerates to Two-Year High
Anchalee Worrachate worrachate
October 18, 2016 — 10:36 AM EEST Updated on October 18, 2016 — 6:53 PM EEST
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Sterling adds to gain after state attorney’s comment on Brexit
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Annual consumer-price growth quickened to 1% last month
The pound advanced the most since August versus the dollar as signs of quickening inflation suggested the Bank of England may have limited scope to keep easing monetary policy.
Sterling also strengthened against the euro as a report showed annual consumer prices rose last month at the fastest pace in almost two years. The U.K. currency extended gains after a British government lawyer said it’s “very likely” that any agreement with the European Union over Brexit would need to be ratified by Parliament. Any delay may cheer investors concerned that the prime minister is prioritizing immigration controls over safeguards for trade and banking.
The pound’s 17 percent drop versus the dollar since the Brexit vote in June is creating difficulty for importers and companies that earn much of their revenue outside the U.K. At the same time, it poses a dilemma for monetary policy makers as it fuels faster inflation that may become an obstacle for the BOE’s easing program.
More than 70 percent of economists in Bloomberg’s latest monthly survey said the central bank will cut the benchmark rate next month after BOE Governor Mark Carney said he will tolerate faster price gains to boost the economy.
While the statistics office said it’s not yet seeing explicit evidence of a currency effect in consumer-price changes, weaker sterling is slowly filtering through the economy, with factories seeing their costs surge.
BOE Outlook
“The rise in the U.K.’s inflationary pressures could interfere with the BOE’s unorthodox plan, prevent the bank from a further rate cut in the medium term and even bring the possibility of a premature rate rise on the table,” said Ipek Ozkardeskaya, a senior market analyst at London Capital Group Holdings Plc. “The likelihood of the pound depreciating below $1.20 level is declining.”
The pound rose 1.1 percent to $1.2314 as of 4:50 p.m. in London. The currency had dropped to $1.1841 on Oct. 7, the lowest since 1985, according to composite prices compiled by Bloomberg of contributions from dealers. Sterling appreciated 1.1 percent to 89.30 pence per euro.
The increases extended after James Eadie, a lawyer advising the government, said both houses of parliament would very likely get a vote on the treaty for leaving the bloc.
“The pound is extending gains on the back of the legal challenge against Brexit,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “There are suggestions that it would need to be ratified. The bottom line here is that if Brexit goes to the vote, it will likely lose, in its hard form at least.”
The currency weakened this month amid concern that the government will pursue an exit strategy that will see Britain give up its membership of Europe’s single market to secure greater control of immigration and lawmaking. Hedge funds and other large speculators increased bets on a weaker pound versus the dollar to a record earlier this month, according to data provided by the Commodity Futures Trading Commission going back to 1992.
U.K. government bonds rose, with the 10-year yield dropping five basis points, or 0.05 percentage point, to 1.08 percent. The yield increased to 1.22 percent Monday, the highest since Britain voted in June to leave the EU.
Britain’s 10-year break-even rate, a market gauge of inflation expectations derived from yield difference between gilts and index-linked bonds, rose for the first time in five days. It climbed three basis points to 2.96 percent.
“We are looking for U.K. inflation to begin rising, but this is not evidence of increasing domestic demand,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank in London. While the bank predicts a 20 basis-point rate cut in November, it is not “a slam-dunk decision and is certainly likely to be contentious,” he said.
Carney to Ignore Inflation Jump as November Rate Cut Seen
October 18, 2016 — 2:01 AM EEST Updated on October 18, 2016 — 12:02 PM EEST
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Pound drop no barrier to BOE November rate cut, economists say
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Benchmark will be cut to 0.1% according to 26 of 36 surveyed
Economists are taking Mark Carney at his word.
Days after the Bank of England governor said he’ll tolerate faster price gains in his efforts to support the economy, more than 70 percent of economists in Bloomberg’s monthly survey said the Monetary Policy Committee will cut the benchmark rate to a record-low 0.1 percent on Nov. 3. The panel, which will keep its quantitative-easing program running as planned, will present new economic projections the same day.
The pound’s 18 percent drop since the Brexit vote is creating a dilemma for policy makers because it’s fueling faster inflation. As BOE staff crunch numbers and prepare the crucial new quarterly forecasts, they’ll have to take into account the impact of the currency move and leave Carney to decide on the right time for more easing.
“It’s going to be a pretty close call,” said Victoria Clarke, an economist at Investec in London who currently predicts a cut but plans to review the forecast in the coming weeks. “It’s an incredibly difficult one this time around, particularly with sterling having moved that much further.”
The economists’ forecasts are increasingly at odds with the money markets, which show traders see just a 5 percent probability of a reduction next month, down from 17 percent after the BOE’s September policy meeting.
The pound’s depreciation took it to a three-decade low earlier this month, pushing up consumer prices. The inflation rate rose to an annual 1 percent in September, the fastest pace since 2014, data today showed. U.K. government bonds are also falling, pushing the 10-year yield to its highest level since the Brexit referendum result.
Adding to the complexity is a better-than-expected economic backdrop since June, which could prompt officials to raise their growth forecasts. Staff have already lifted their third-quarter GDP estimate, and policy makers Michael Saunders and Kristin Forbes have said that the outlook may not be as weak as the central bank predicted in August.
“Presentationally, it’s difficult to revise growth and inflation forecasts higher and ease policy,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “There is also the added complication that cutting rates while the market does not expect it risks further weakness in the currency.”
Deputy Governor Jon Cunliffe said this month that the November Inflation Report will be a “very important forecast round.”
Higher Prices
Shoppers are already seeing tangible effects of price gains, with Apple raising the cost its iPhone 7 by 11 percent in the U.K. and Unilever and Tesco having a public dispute over pricing.
Economists in the monthly survey see inflation at an average 1.2 percent this quarter, unchanged from last the previous survey. Forecasts for 2017 and 2018 are at 2.2 percent and 2.3 percent, the latter slightly raised from September.
Such a small overshoot of the BOE’s 2 percent target would make life easier for policy makers, who’ve had to defend the August stimulus package that included a rate cut and asset purchases because of the economy’s signs of strength.
“If we had wanted to ensure that we set policy — the level of interest rates — in such a way as to ensure there was no chance of it rising above target, then we would have had to have set tighter policy,” Broadbent said in a BBC interview on Monday. “That would have meant lower economic growth and that would have increased the chances of unemployment going up.”
