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BoE Introduces Stimulus to Fend off Brexit Fallout

Published August 4, 2016
  • Mark Carney, Governor of the Bank of England, delivered a package of measures aimed at helping the UK economy through what is expected to be a period of contracted growth due to the UK's exit from the EU 
  • Interest rates were cut 25bps and a QE program of GBP 10 billion in corporate bonds and GBP 60 billion in government bonds was launched
  • All of these measures are aimed at lowering borrowing rates and preparing the economy for what the BoE expects is going to be a very difficult period – they slashed GDP forecasts for 2017 to +0.8% growth from 2.3% prior to the Brexit vote
  • The weaker outlook is blamed on a large drop in near-term investment with the most immediate global implication being lower levels of UK imports from the rest of the world
  • The BoE now joins the ECB and BoJ as major central banks that have recommitted to quantitative easing in order to spur growth and stave off recession and disinflation
  • Certainly this move hurts the British Pound and we have seen another 1.7% drop against the USD to 1.3115 following the announcement – there are calls for the possibility of 1.2000 GBPUSD before the year is out and even parity over the next few years as the UK economy adjusts to what could be a much smaller profile
  • The prospect of cheap money has fueled a nice pop in equities with Asian indices all enjoying gains overnight and European stocks following suit
  • USDCAD is flat to yesterday's close in the mid 1.3000's and oil is at $40.70 having regained the $40 handle yesterday following EIA data which showed a large drop in gasoline inventories and a small build in crude stockpiles 
  • USD weakness in late July has limited some of the drop in oil prices but the fundamentals still indicate a vastly oversupplied market and thus bearish sentiment is likely to prevail over the coming months

– JP Dore

Charts:  USDCAD consolidating once again as uptrend intact. Gasoline inventories much higher than the 5 year average.  WTI Oil hovering around its 200 DMA.