NEWS / Foreign Exchange

Pound Skyrockets on Repatriation Talk

Talking Points

??? Japanese Yen: Remains weak as Machinery orders slide
??? Euro: treads water ahead of ECB, French Trade deficit sees no improvement
??? British Pound: Skyrockets on string BRX data, possible change in the tax code
??? US Dollar: FOMC minutes on tap

Pound Skyrockets on Repatriation Talk

Another night of grinding consolidation for all the majors with the exception of the British pound which received an unexpected boost from news that UK Treasury is drawing up a plan to allow British multi-nationals to repatriate billions of foreign profits tax free. The UK Treasury??™s proposal which was highlighted in today??™s Financial Times, seeks to level the playing field with the rest of the Euro-zone which does not tax foreign dividends. Taken in conjunction with strong BRC retail sales number which registered its best reading in 11 months, cable was bid all night long rallying above the 1.9800 figure before some light profit taking kicked in.

The news on the UK consumption front suggests that despite the recent slowdown in the manufacturing sector, the BOE is likely to tighten once again in May. With UK housing rising 10% on year over year basis, UK consumer demand shows no signs of abating as steady wage growth and mortgage equity withdrawals continue to finance spending. In short it appears that as long a global equity markets remain buoyant, the UK housing market will continue to appreciate supporting the consumer and forcing the BoE to maintain its hawkish monetary policy. With London now the center of global finance, UK has become the ultimate hedge fund economy, and until that dynamic changes the likely trend in both UK rates and the direction of the pound is up.

In Japan, the economic news was not nearly as positive. Although the Current Account surplus, beat forecasts rising to 2417 Billion yen from 2305 Billion projected as lower yen helped fuel export growth, Machine Orders slipped a rather disturbing ??“5.2% from ??“0.4% expected. The three month average for Machine Orders now stands at ??“0.6% indicating that global demand may be starting to slow. With Japan??™s economic growth inextricably tied to its export sector any deceleration in that arena will keep Japans monetary policymakers on the sidelines for much longer than the market currently expects. Little wonder then, that yen continues to set record lows against the euro as carry traders sell the unit with abandon.

In the Euro-zone tonight, the EUR/USD spent most of the session contained to a very tight 30 point range of 1.3415-1.3445 as traders awaited both the release of FOMC minutes later today and the ECB rate announcement tomorrow. French Trade Balance deficit showed no improvement printing at ??“2.7 Billion euros. Although exports rebounded for the second month in a row, imports also rose on the back of higher energy costs. With France facing a rancorous election for President, that has focused on the problems of the ever strengthening euro, along with the fact that the EURJPY rate now rests above 160.00, it will be interesting to see if the Mr. Trichet tempers his hawkish rhetoric at tomorrow??™s press conference as the political pressure on the European monetary authorities builds with every uptick in the exchange rate of the currency.