13-10-2008 : FCG Market Report 13th Oct,2008
GBP/EUR
Last week saw a turbulent week of trading for the Euro, with the GBP/EUR cross sliding from 1.2980 at the start of the week to 1.2380 at the end. Billions of pounds of value was wiped from stock markets around the world as fear of a global recession gripped the markets in the middle of the week, strengthening the Euro as investors moved their assets towards the safe haven. Despite the ECB’s decision to leave rates on hold only one week earlier, ECB President Trichet defended Wednesday’s surprise half-percent cut, saying that inflation concerns were no longer sufficiently significant to outweigh the ECB’s desire to calm the financial markets and restore investors’ confidence.
Over the weekend, EU leaders met to discuss the financial challenges facing the Eurozone, emerging with many plans but no firm commitments. This uncertainty is likely to weigh on the Euro over the coming week as the single currency faces its first real test of different member countries requiring vastly different economic policy to avoid recession. Following the British government’s decision to sure up the major British banks with £50bn of loans and investments, the pound strengthened back against the Euro in early trading this week, and a return to the 1.30 level is not unforeseeable.
The volatility of the markets makes it essential to use all options available whether buying or selling Euros to ensure you secure your currency at the optimal rate. It may also be prudent to place a stop-loss order nearer to the 1.20 level to insure against a meltdown in the British financial industry and protect your investments.
GBP/USD
Last week we saw investors liquidating assets across all markets and investing into the relative safety of the U.S dollar, increasing the strength of the dollar. On Friday the $700 billion bailout plan was passed by congress but the fear of a global recession meant that the bailout seemed too late to save other markets around the world.
Sterling was lifted early against the dollar amid efforts by the British Treasury to revive the ailing economy and injected much needed capital into the country’s largest banks. Royal Bank of Scotland said in a statement it will boost its capital by 20 billion pounds, including the UK government taking 5 billion pounds in preference shares and 15 billion pounds underwritten by the government.
The dollar is benefiting from the turmoil experienced in other markets, this trend may continue if the G7 or G20 cannot devise a solid plan to deal with the current financial mess, thus Cable could continue to fall in the short term.
In conjunction with other major central banks, the BoE cut interest rates to 4.5% on Wednesday continuing the plan to cut rates gradually. We should see more Sterling weakness in the short term. For those looking to sell their U.S dollars and buy Sterling we remain on the same stance that it may be advisable to do so while the market remains in the low 1.70’s. For those looking to buy dollars you may want to consider speaking to your currency trader at FCG regarding our stop-loss and limit options.
CAD
Last week the BoC joined the Federal Reserve, the European Central Bank and other global counterparts in reducing interest rates to ease the financial crisis. The Canadian target lending rate was cut from 3 to 2.5%.
The Canadian currency has fallen 7.7% against its US counterpart since October 3rd, the biggest loss since January 1971 as investors take refuge in the US dollar. Concerns over a global recession have seen commodities such as oil, natural gas and base metals tumble, weighing heavily on the Loonie, given Canada’s status as a major exporter of these commodities.
The Loonie is now looking more vulnerable to the slowdown is the US economy as most of Canada’s exports are bound for the US. With Canada’s status as an exporting country to the US and a major exporter of natural resources, the currencies movement is expected to continue to be dictated by the level of risk aversion.
This week there is limited event risk out of Canada as only Manufacturing Shipments for the month of August will be released on Thursday. Nevertheless, risk trends will likely be a better gauge of where CAD goes next as a recovery in oil prices, along with dollar selling could easily allow the Loonie to recoup some of its losses.
AUD
The Aussie suffered unprecedented losses against a basket of currencies amid a massive sell off of carry trades to safer assets last week.
The RBA surprised the markets by cutting their interest rates by a full percent to 6% in order to provide fiscal stimulus to the flailing banking system. The expectation was for just 50 basis points, but the cut went to prove that the global credit crunch is a phenomenon that requires global solutions and that the Australian Banks are also struggling with liquidity problems.
In line with other world banks’ coordinated efforts to pump more money in to the financial system, the RBA has also been injecting more liquidity into the system as Prime Minister ‘Kevin Rudd’ announced AUD$10.4 Billion of cash into the system.
Despite this, financial, commodity and equity markets continued to tumble last week, with the commodity prices painting a gloomy picture for the economy. Australia has substantial foreign debt and its resource based economy relies heavily on commodity exports which support its large trade surplus. Widespread panic in the markets elevated interbank prices and virtually froze the money markets for a time.
Last week, the Aussie Dollar was victim to a cross asset sell off a fear grasped the world market and panic selling dominated most equity markets. Being a high yield currency, the Australian Dollar tumbled as investors in the currency pulled their money to less riskier destinations. With the world market still in turmoil, it is likely that we will see further unwinding of carry trades in the coming weeks. However, even when the markets start to cool off, due to the recent huge movements, it now seems unlikely that the Australian Dollar will recover to the strong levels from which it came from.
NZD
The Kiwi suffered further losses during another significant week for global markets as risk aversion surged to previously unseen levels and stock suffered its worst sell off since the 1930s. Economic data did not seem to have much of an impact, despite some better looking housing figures, as Investor sentiment remained very negative and the flight for safety dominated most markets.
Last week central banks around the world were injecting more liquidity in to the global financial system and were encouraging banks to start lending to each other. Sweden, Switzerland, the ECB, China, the Fed, the BoC and the BoE all cut rates in an unprecedented coordinated move, but it failed to support equity markets or ease interbank rates. The downturn in the global financial market, paired with mounting growth concerns for the entire world, has certainly taken a toll on the New Zealand Dollar as investors move away from high-yielding assets. Heightened credit concerns paired with fading demands for carry-trades will continue to drag on the currency as lenders carry on hoarding cash.
Meanwhile, the Reuters/Jefferies CRB Index showed that commodity prices had fallen 11.8% in September, the steepest monthly decline since record keeping began in 1956, signaling that lower prices will continue to limit the appeal of the New Zealand dollar. The knock on effect of this is that analysts are now anticipating that the RBNZ may lower the benchmark interest rate by at least 200bp points over the next 12 months. This is significantly higher than the 150bp previously expected. Interest rate forecasts have clearly deteriorated over the past week, and will continue to weigh heavily on the New Zealand Dollar going forward.
More volatility is expected from the cross, but before credit markets settle it is not likely that we will see a recovery in the Kiwi against the Pound. The Kiwi suffers more because of it high yield and heavier exposure to carry trades, especially against the Japanese Yen.
ZAR
The global financial markets took a huge hit last week over concerns of a global recession, with panic selling wiping trillions of Dollars from the global financial markets and there is no indication of buyers coming into the markets anytime soon. Large scale risk aversion has been the main reason for the Rand weakening amid heavy unwinding of carry trades. There has been added political risk in South Africa, as it is looking more and more likely that the ruling ANC party will split. The markets are likely to be almost exclusively focused on risk appetite this week resulting in volatile movements in the cross. Despite the South African banks not facing as severe a scenario as other countries, they are still very much exposed to a slowdown in global economies. We expect the GBP/ZAR cross to be trading between quite a wide range of 15.5 and 16.3.