10-11-2008 : FCG Market Report 10th Nov.2008
GBP/EUR
Last week’s financial news was dominated by Thursday’s shock announcement from the Bank of England of an unprecedented interest rate cut of 1.5% bringing the base rate down to 3%. With such a large rate cut, fears that the U.K economy is in dire straits were confirmed and investor confidence was further battered as the International Monetary Fund said that the U.K. would suffer the worst recession of all the major economies. After an initial brief resurgence in strength on Thursday as the market cheered the decisive rate cut by the BoE, the Pound then hovered just above record lows against the Euro. This Wednesday the central bank is scheduled to release its quarterly projections for growth and inflation and analysts expect that these will prove to be a grim reading for all, as the explanation behind the rate cuts are unveiled.
The ECB also cut rates by 0.5% down to 3.25%. U.K. rates are now lower than Euro rates for the first time since the introduction of the single currency, which has prompted investors to test the Euros highs against Sterling. Euro-zone industrial figures from Germany were weak showing a sharp slowdown in production and orders, this sharp decline will further reinforce expectations of recessionary conditions within the Euro-zone, as Germany make up 25% of the 15 nation economy. This will most likely be confirmed with GDP figures for the whole Euro-zone out this Friday.
GBP/EUR cross lows are expected this week, whether you are buying or selling it would be wise to take advantage of any spikes in the market. Speak to your account manager at FCG to ensure you purchase your currency at the optimal time.
GBP/USD
We have seen Cable fall from a high last week of 1.6181 down to a low of 1.58 as a cut of 50-100 basis points in UK interest rates was factored in before the decision on Thursday. When the announcement was released we were surprised with a huge 150 basis point cut (from 4.5% down to 3.0%) which initially supported Sterling back towards 1.6 due to the positive effects it should have on the UK economy, but on Friday we saw it start to weaken off back to levels around 1.57. There will be hopes that this cut will help to stabilise conditions in the UK economy, and most importantly the housing sector, especially after we saw UK house prices fall further at the end of last week, and they now show a 13.7% drop in the last 12 months.
On the other side of the Atlantic we saw a raft of negative data out last week including larger than expected falls in factory orders and manufacturing figures. Most importantly we had US employment data out on Friday which was significantly weaker than expected with a 240,000 decline in non-farm payrolls for October, and unemployment rising further to 6.5% from 6.1%, the highest levels since 1994. This data will reinforce fears over the US economy and markets will continue to price in a further interest rate cut before the end of 2008.
With expectations of UK unemployment hitting 980,000 on Wednesday and a dovish inflation report from the BoE being released at the same time, underlying Sterling weakness will remain. However, with FED Governor Lockhart stating last week that “the US was suffering a severe market crisis and that interest rates could be cut to zero”, we expect to see a “tug-of-war” between the Pound and the Greenback as to which currency is the weakest and should see GBP/USD trading between 1.55 and 1.63 over the next week.
CAD
The Loonie strengthened significantly against the Pound last week moving from 1.95 down to a low of 1.84 following Thursday’s rate announcement from the Bank of England. This is still a turbulent time for commodity based economies such as Canada, thus we are seeing significant risk aversion from hedge fund managers liquidating their vulnerable assets and currencies, such as the CAD, in favour of safe haven cash investments in US Dollars or Swiss Francs.
The only significant data from Canada this week is the Merchandise Trade balance, effectively the nation’s trade balance figure for manufactured goods, however as the report is for the month of September, its impact will be minimal due to the volatile conditions the Canadian economy has experienced since.
Over the next week, we expect the GBP/CAD cross to be dominated by Sterling weakness, meaning the CAD is likely to remain rangebound between 1.80 and 1.90.
AUD
In what promises to be another volatile week for the Aussie Dollar, the RBA is set to release its Quarterly Monetary Policy Statement, which is likely to offer familiar rhetoric justifying a further reduction of borrowing costs. Many analysts are now suggesting we may see a further 1 ½ points come off the base rate in Australia.
This looks likely to add pressure to the AUD, particularly in the wake of The RBA’s surprise decision to cut benchmark borrowing costs by a greater-than-expected 75 basis points to bring rates to 5.25%. RBA Governor Glenn Stevens sounded ominous in the statement accompanying the decision, saying that "it appears likely that spending and activity will be weaker than earlier expected." Stevens again reiterated that although consumer price inflation remained high in September, the RBA policy board continues to believe that inflation will moderate over time as slowing global and domestic demand takes its toll. These comments do little to suggest any diversion from the current policy and implies that the GBP/AUD cross will continue to be dominated by relative weakness.
In these uncertain and volatile times, it would be worthwhile speaking with your account manager about the benefits of Stop-Loss and Limit Orders.
NZD
Deteriorating fundamentals dragged on the New Zealand Dollar last week as the unemployment rate spiked to its highest level since 2003, and may face further headwinds over the coming week as further economic news continues to reflect a dour outlook for the NZ economy. In addition, interest rate expectations could also stoke increased selling pressures for the high-yielding currency as we expect the Reserve Bank of New Zealand to aggressively cut borrowing costs well into the next year.
Moreover, as New Zealand slipped into a recession during the first half of the year, the economic data scheduled for this week will certainly provide a clearer picture as to what to expect from the RBNZ, and is likely to spark volatility for the Kiwi. A recovery in producer prices paired with a decline in retail spending would only strengthen the argument for the central bank to increase their efforts and add weight for the push to lower interest rates.
Overall, the Kiwi will remain as volatile as ever with the usual push and pull factors added to by carry trade movements, thus creating opportunities for buyers & sellers alike. Speak to your FCG broker to assist you with more information.
ZAR
The Rand has had another fairly volatile week, mainly due to elevated risk aversion. Trading has remained between 15.3 and 15.9 on the GBP/ZAR cross.
Despite the larger than expected rate cut in the UK on Thursday, the Rand only briefly made any gains before dipping back down to around 15.4
Any movements in the week ahead are likely to come off the back of offshore events given the lack of data coming from South Africa.
Looking to the medium term, despite the poor data coming from the UK we don’t expect the GBP/ZAR cross to dip below 15.25, as the UK is expected to come out of the current economic slowdown before South Africa.
For anyone who is looking to move funds across in the near future, it may be wise to take advantage of any short term gains as it is unlikely to rise above 16.5 in the next few months.