23-07-2008 : FCG Market Report 14th July 2008
GBP/EUR
The euro appreciated a little against the pound last week, despite concerns over inflation and growth in the Eurozone. These gains have only really been the result of anti-dollar flows.
Trichet stated that the risks to growth were to the downside and the Euro is likely to be weak in Q2 and Q3, before staging a recovery. Trichet also said that the risk of permanent knock-on effects from high inflation must be taken seriously and prevented. Joaquin Alumina, the EU's monetary affairs commissioner, on Friday said Inflation in the euro zone may drop to close to 2% next year, but there is still a risk of stagflation.
There were further warnings over euro-zone economic growth last week, with poor data again reinforcing fears of stagflation. The widening trade deficit is of particular concern as it shows that the strong euro is making life hard for exporters. This is likely to add further pressure on the Eurozone economy. Furthermore, last week’s German ZEW index (which monitors investors' confidence in Germany) shows market participants are at unease over the Eurozone’s largest economy’s outlook.
The inflation data, although in line with expectations, is a concern as the longer inflation remains elevated, the longer it will take to recede and hence the greater chance of second round effects which the ECB are so desperate to avoid.
As for the cross, there remains a concern over economic growth and inflation in both the UK and Eurozone and we expect rates in both to remain on hold in the near term. It is theerfore expected that the cross may remain between 1.22 and 1.27 in the short term, but with a slight bias to the downside in the medium term due to the weaker outlook for the UK.
GBP/USD
Last week we saw a volatile USD with the currency weakening to 2.0148 against the pound caused by the Fannie Mae/Freddie Mac mortgage saga. However we did see some strength towards the latter part of the week due to crude oil prices falling more than 11% over the past few days, this strengthened the dollar to 1.9802 against the pound.
This is a big week for sterling with 3 key reports being published. The first being Rightmoves house price index which has shown a -2% decline YOY. Also out this week is the retail sales index which is predicted to show a negative MOM growth and a slow down by 50% on the YOY growth. As well as this the GDP YOY figures which are published on Friday are expected to announce a 1.6% growth, compared to last years growth of 2.6% .Minutes from the bank of England are also due midweek where they are expected to keep interest rates on hold. The USD has a quieter week ahead with the exception of several key publications including a consumer confidence report and new home sale figures being published towards the latter part of the week which may weaken the dollar.
This week it is expected that sterling will weaken slightly against the dollar but due to some negative data from the US it is expected that the pound will regain some ground by the weekend.
CAD
In an update to Aprils monetary policy report the BOC said,
• They see inflation peaking at 4.3% in the first quarter of 2009
• They see annual 2008 growth at 1% down from an earlier projection of 1.4%
• The BOC also mentioned that they were not poised to raise rates and that 3% interest rate remains appropriate.
This weeks Canadian housing survey is expected to show a slowdown, however the slowdown is forecasted to be mild compared to the problem the US housing market is going through, with house prices still expected to rise this year.
On Thursday 17th of July BOC governor Mark Carney said Canada’s financial system is strong and credit conditions have returned to somewhat normal levels, on inflation he said a $10 drop in oil will reduction Canada’s headline inflation by 0.2%
The Foremost Currency Group is expecting GBP/CAD to remain range bound between 1.97 & 2.03 as conditions in both the UK and Canada look bleak. Higher interest rates in the UK should support the pound, while the Loonie is currently supported by commodities and their robust housing market.
AUD
The Aussie was stronger against a basket of major currencies last week and tested high’s of 0.9850 against the US Dollar, with many investors eagerly anticipating parity against the flailing Greenback. Bullish minutes from the RBA’s interest rate meeting earlier in the month suggested that slowing demand could curb inflation in the long-run with Governor Glenn Stevens implying that rates in the country may have peaked.
The Aussie mainly benefited from events overseas and weakness in the USD. The Central Banks in the US and Japan, where interest rates are currently 2% and 0.5% respectively, look as though they will be keeping their rates where they are for now with the Bank of Japans decision made last week and investors scaling down the prospects for short-term interest rate hikes in the US. This helped keep interest in the high-yielding Aussie in the form of carry trades as rates in Oz are currently 7.25%.
On Wednesday we expect CPI to remain unchanged and we therefore think that rates in Australia have peaked but with the outlook for the UK economy remaining pretty grim, with weak retail sales and final Q2 GDP figures expected this week, we should see the GBP/AUD cross to sit just above the 2 Dollar mark for some time to come.
NZD
Early last week the Kiwi gained ground against a number of major currencies, in particular the USD against very poor US Dollar sentiment.
The USD’s disappointing week, principally due to problems with the mortgage providers, Fannie Mae and Freddie Mac facilitated the Kiwi gaining considerable ground within the Forex markets. However, observers should not be under the illusion that the New Zealand economy is performing well - it is more so that powerhouse economies such as the US are performing so poorly that it makes currencies like the Kiwi appear to be performing better than they are.
In fact the outlook for the New Zealand economy was set back by commodity prices falling over the course of last week. With raw materials accounting for around two-thirds of the economy's exports, the New Zealand Dollar tends to weaken as commodity prices fall.
Toward the end of last week and into the beginning of this week the Pound made gains against the Kiwi off the back of falling commodity prices as well as the financial markets beginning to price in a 50% chance of a rate cut at the next interest rate meeting on 25th July.The RBNZ has a tough decision to make and it is expected to be a very close call as it battles the contrast between high inflation and weaker growth prospects, however overall expectations are for a 0.25% cut.