Archived IMT (2008.10.07)

The bigger than expected 100-bps rate cut from the Reserve Bank of Australia had a temporary effect in stemming risk aversion and shoring up carry trades in favor of high yielding currencies at the expense of the USD and JPY. But reports on RBS, Barclays and Lloyds each had sought about 15 in capital, brought back sterling from a session high of $1.7650 to a fresh 2 1/2 year low of $1.7418. As stocks in these banks plummeted by over 30%, risk aversion bounced back, dragging USDJPY, AUDJPY, AUDUSD and EURUSD. The fundamental data also weighted on sterling after UK industrial production fell 2.3% y/y in August from a 1.9% decline the prior month, bolstering chances of a negative Q3 GDP reading and confirming chances of at least a 25-bp rate cut from the Bank of England this week. Despite the existing dissent from the hawks at the BoEs Monetary Policy Committee, we expect a 50-bp rate cut to 4.50% mainly due to the expected contraction in Q3 GDP following a flat reading in Q2.