CAPITALDIGEST, MARKET REVIEW, 04/10/2022

POUND DROPS MORE THAN 1% AS BANK OF ENGLAND STEPS INTO BOND MARKET Sterling fell more than 1% against the dollar and euro on Wednesday after the Bank of England said it would step in to calm the UK’s frenzied bond markets. The pound was on track for its biggest monthly fall since October 2008, just after Lehman Brothers collapsed. The Bank said it will carry out temporary purchases of bonds and postpone the planned start of its gilt sale programme. It will snap up long-dated UK government bonds from Wednesday, it said, and buy as many as necessary to calm the market. Sterling was last down 1.41% to $1.0586, after hitting a session low of $1.0539. The euro was up 1.25% against the pound at 90.53 pence. The Bank’s dramatic move came after a morning of disorder in the gilt market. The BOE said it could not allow the dysfunction to continue, or UK financial stability would be at risk. UK financial markets have cratered in recent days after new Finance Minister Kwasi Kwarteng announced plans to slash taxes and ramp up borrowing. The fiscal statement – and Kwarteng’s vow that there was more to come – shocked investors and sent the pound crashing on Monday to a record low of $1.0327. But UK government bonds have come under the heaviest pressure, with prices tumbling and yields soaring. STERLING RALLIES FOR 3RD DAY AFTER BOE BOND BUYS; U.S. DOLLAR DOWN Sterling rose sharply in volatile trading on Thursday, rallying from record lows hit on Monday, after the Bank of England conducted a second day of bond buying to stabilize financial markets. The pound posted its largest one-day percentage gain since March 2020 and last traded at $1.1076, up 1.8%. After hitting an all-time trough of $1.0327 three days ago, sterling has rallied more than 7% against the dollar. The recovery in the British currency was due in part to the BoE’s action. On Thursday, the BoE bought 1.415 billion pounds ($1.55 billion) of British government bonds with maturities of more than 20 years, the second day of a multi-billion pound program designed to stabilize the market. “The BoE is showing creativity and willingness to respond to crazy markets,” said Greg Anderson, global head of foreign exchange strategy, at BMO Capital Markets in New York. But he noted that sterling gains as a result of the BoE’s moves are not sustainable. DOLLAR UP ON EURO AS QUARTER ENDS, COMMODITY LED CURRENCIES SINK The dollar rose against the euro on Friday but pared gains late in a session that was muddied by quarter-end trading while riskier commodity-led currencies fell sharply after European inflation hit a record high and U.S. consumer spending increased faster than expected. But while the dollar index was showing its biggest quarterly gain since the first quarter 2015 it was set for its first weekly decline in three weeks. Sterling rose against the dollar after falling earlier in the day. The pound last showed four straight sessions of gains followed by wild declines on concerns about Britain’s plan to slash taxes and pay for it with more borrowing. After hitting a record low on Monday, the British currency was on track for a weekly gain after the Bank of England bought British government bonds, known as gilts, on Wednesday, Thursday and Friday. [GBP/] Data on Friday showed euro zone inflation zoomed past forecasts to hit 10.0% in September, reinforcing expectations for another jumbo European Central Bank rate hike next month. The U.S. Commerce Department said the personal consumption expenditures price index (PCE), which the Federal Reserve targets at 2%, rose 6.2% year-on-year in August. This gave the Fed less reason to slow down its rate hiking cycle after raising U.S. borrowing costs faster in 2022 than any time since the 1980s. DOLLAR GAINS ON EURO AFTER INFLATION DATA, STERLING FALLS The dollar gained against the euro on Friday after European inflation hit a record high and U.S. consumer spending increased faster than expected. But while the dollar was on track for its biggest quarterly gain since 2015 it was headed for its first weekly decline in three weeks. Sterling fell against the dollar after three sessions of gains followed wild declines on concerns about Britain’s plan to slash taxes and pay for it with more borrowing. After hitting a record low on Monday, the pound was on track for a weekly gain after the Bank of England bought British government bonds, known as gilts, on Wednesday, Thursday and Friday. Data on Friday showed euro zone inflation zoomed past forecasts to hit 10.0% in September, reinforcing expectations for another jumbo European Central Bank rate hike next month. The pound, after touching $1.1235, was last down 0.06% on the day at $1.1112. The euro was down 0.3% at $0.9782. The greenback was up 0.13% against a basket of major currencies and on track for its biggest quarterly gain since the first quarter of 2015, recently showing a 7.3% gain. FOREX-STERLING CLIMBS AFTER TAX PLAN REVERSAL, DOLLAR ALSO WEAKER AGAINST OTHER MAJOR CURRENCIES Sterling jumped against the dollar on Monday after Britain reversed a plan to cut the highest rate of income tax, and the dollar was also down against other major currencies. The pound rose against the dollar after media reports of the u-turn to its highest level since Sept. 22, the day before British Finance Minister Kwasi Kwarteng roiled markets with a new “growth plan” to cut taxes and regulation, funded by vast government borrowing. Sterling was last up 1.4% at $1.1320. “Sterling is getting a boost as the UK tries to reverse some of its tax cuts,” Amo Sahota, director at Klarity FX in San Francisco, said. British finance minister Kwasi Kwarteng said he would publish details “shortly” on how he planned to bring down public debt as a share of economic output over the medium term. The dollar, which is up sharply for the year, weakened also against other major currencies. But, “the big macroeconomic themes have not changed, so take this for what it is, it’s a new quarter and a opportunity for a bounce in equities and a little unwinding of the U.S. dollar,” Sahota said. Elsewhere, the Japanese yen weakened past the 145 mark for the first time since Sept. 22, when authorities intervened to prop up the currency.