12-08-2008 : FCG Market Report 11th August 2008
GBP/EUR
The Pound made gains against the Euro throughout the course of last week off the back of poor growth data in the ECB and dovish accompanying statement.
The big news last week was in the interest rate decisions in both the UK and the Eurozone. As expected both were kept on hold however, overall the Pound emerged slightly stronger due to comments from the Eurozone discussing poor outlook.
During the press conference after the ECB meeting, President Jean-Claude Trichet continued to warn that inflation was still a significant threat and commented that growth had slowed dramatically during the middle of the year. ECB council member Nout Wellink said that he didn’t expect any good news from the GDP figures out on Thursday this week and said they would act if they needed to regarding inflation pressures.
Recent comments from the ECB have shown that it is not just the US and the UK who have been affected by the credit crisis and that the kinks in the armour of the Eurozone are beginning to show and take an effect on the currency. It would seem very unlikely that the Eurozone would raise rates this year and if anything we might possibly see them drop rates towards the end of the year to Stimulate Growth.
Despite the concerns in the Eurozone, the cross between the Pound and the Euro is by no means set as the UK economy is still struggling. Monday saw the Pound lose ground it had recently made against the Euro as concerns over the health of the UK economy undermined the confidence in the currency. Similarly to the Eurozone the backdrop of a slowing economy has added to the dilemma for the Bank of England which has been prevented from cutting interest rates as it battles rising inflation.
The prospect of stagflation will certainly weigh heavily on both economies and those people buying Euros should certainly be wary of the difficult times. The recent gains on the Sterling/Euro cross should not be mistaken for sustained sterling strength rather uncertain and volatile trading. The tools available through your FCG account manager, such as forward buying and limit orders offer real protection when buying foreign currency during this difficult period.
GBP/USD
Dollar strength! Now there’s something we haven’t said for a while. Last week was the strongest for the Greenback since early 2004 with EURUSD dropping from 1.5631 to 1.5050 this morning and lows of 1.4928, and Cable has dropped over 3% with a high last Monday of 1.9835, compared to a low early this morning of 1.9138.
The FED, BoE and ECB all kept rates on hold as expected last week, with many analysts expecting that the next moves in the UK and Europe will be cuts. The Dollar was well supported by oil dropping to below $115 a barrel, helping to reduce inflation concerns but with the current conflict in Georgia we could see this creep back up due to supply concerns. We also saw better than expected home sales data, consumer spending and new factory orders for June, all helping to boost the Greenback. The Pound also suffered due to consumer confidence falling to another record low and major UK banks reporting falls in profits, and even losses in the case of RBS, due to the credit crunch. HSBC reported a 28% fall for the first half of 2008, Barclays announced another £2billion write-down, and RBS reported a write-down of £5.9billion and a first half loss of £691million, its first ever!
With the outlooks for both the UK and Eurozone economies worsening the days of 2 dollars to the pound look to be over. The key release this week is US retail sales on Wednesday where markets expect to see a slight rise, helping to maintain a strong dollar but with a hawkish MPC inflation report expected from the UK the same day, we should see a less volatile week for Cable with the rate remaining range bound between 1.89 and 1.9435.
CAD
It was announced last week that the Canadian unemployment rate dropped to 6.1% for July. This was completely unexpected as there was a predicted gain of 5000 jobs instead of the 55200 loss.
More bad news as for the CAD as slowing demand for Canadian goods, brought to light by contracting growth in the second quarter, is damaging expansion.
Commodity prices, particularly oil, continued to fall this week and this weighed heavily on the loonie as Canada is considered a key exporter of oil.
The outlook in both Canada and the UK are looking difficult, but with the possibility of a rate cut in Canada before the end of the year, we are likely to see the Cad weaken of against GBP in the short term.
AUD
The Australian dollar has fallen to 6- month lows against the USD, and prices for the GBP/AUS cross are as good as they have been for some time. Much of this has been the result of speculation that the RBA are looking to cut interest rates, not great news for a currency that benefits from carry trading due to it’s high 7% base rate. The Aussie did received a brief lift after the Reserve Bank of Australia (RBA) raised its short-term inflation outlook, while its quarterly statement on monetary policy contained little to suggest it would cut rates aggressively in September.
Markets are still pricing in a very real chance of a 25 basis point cut in September, although this will seemingly depend on the inflationary outlook over the next month as the RBA’s quarterly statement did highlight to investors the upside risk to inflation. Stephen Halmarick, co-head of economics and market analysis at Citi said, “Rate cuts are certainly coming but more gradually than markets are now pricing”.
With rate cuts expected there may well be good news on the horizon for those with an Australian Dollar purchase to make in the future, with Limit orders an excellent idea to maximise the amount of dollars you can get for your Sterling.
NZD
The kiwi came under more pressure last week, reaching new lows against a basket of major currencies as expectations of further rate cuts and a deteriorating economic outlook weighed on the dollar. Finance Minister Michael Cullen also said the economy was under pressure from the problems in the rest of the world and against the US Dollar the NZD fell as an escalation in the armed conflict between Russia and Georgia encouraged ‘safe-haven’ movement into US assets.
Another factor which affected the beleaguered Kiwi Dollar last week was the liquidation of carry trades as investors attempted to protect themselves from riskier positions. This coupled with the fact that the NZ Treasury’s monthly report showed that the economy had fallen into recession in the second quarter, forced the NZD lower across the board.
This week’s economic calendar is unlikely to offer much support to the struggling Kiwi Dollar. Second-quarter PPI figures (Producer Price Index) will most probably jump higher as the data will not take into account July’s sharp downward correction in crude oil. The same considerations will most likely guide the Retail Sales figure.
The NZD remains under pressure from expectations for further easing in the country’s monetary policy, after a surprise rate cut by the RBNZ at the end of July which was the first time in five years. The Central Bank is expected to cut rates by a quarter point to 7.75% at its meeting on September 11th. Forecasts suggest that we will see gradual losses in the Kiwi against the pound as we approach next month. For those with Kiwi Dollars to sell, now is the time to think about getting it sorted.
ZAR
Since the last monetary policy decision there has been more and more evidence confirming a deeper slowdown which could starve off any further rate hikes, especially given the fall in oil and food prices and with the pending change to the consumer basket used to calculate CPI also likely to result in lower inflation.
As for the GBP/ ZAR Cross, in the short term any movements are likely to be on the back of next week’s interest rate decision.
However in the long term South Africa faces a very gloomy outlook, as interest rates continue to stifle growth, which is already at a six and a half year low amid rising inflation, the energy crisis, the political handover and general global economic uncertainty.
Therefore despite a bleak outlook for sterling, it is believed that the pound will strengthen against the rand in the long term, possibly seeing it as high as 16.6.