15-12-2008 : FCG Market Report 15th Dec.2008
GBP/EUR
After a week of consecutive all time lows against the Euro we are hoping to see some sort of respite this week but if data from the UK is released as it is expected to be, this may not be the case. Firstly we saw Rightmove housing figures out this morning showing asking prices for properties in the UK have fallen by 6.3% in the last 12 months. There are also expectations that UK unemployment will increase by 0.2% to 6% while average earnings will fall and retail sales will show a -0.4% reading for November, bringing the yearly figure down to 1.2%. At the same time we will see public sector borrowing going up from 1.4bn to a whopping 13.3bn in November, as the government try to borrow our way out of recession. As if these releases were not gloomy enough, inflation and therefore interest rates will be the flavour of the week. On Tuesday we will most likely see UK consumer price index (CPI) falling from 4.5% to 3.9%, even after a huge 150 basis point cut in interest rates back in October, and this will most likely be followed by the Bank of England minutes showing a unanimous decision to cut 1% from our base rate when they met on 4th December. With inflation falling at the rate it is even while interest rates are being slashed, we will probably see further cuts for next year start to be priced in over the coming month as the Bank of England appear to be in a position to bring our interest rate closer to zero.
Meanwhile, in the Eurozone it looks as though it will be a similar story with French CPI (Tue) and German PPI (Fri) both expected to be much lower than last month, and the key release will be total Eurozone CPI on Wednesday which looks as though it will show a sharp drop of 1.1% down to 2.1% YoY. Normally this sort of reduction (almost back to ECB target) would suggest that the European Central Bank are in a position to continue cutting rates after their 0.75% reduction earlier this month. However, Jean Claude Trichet and his band of policy makers are not expected to do much more after ECB officials announced that interest rates in the EZ may not fall much further, even with the current European recession. This stance has helped to support the Euro further and keep the GBP/EUR cross below 1.12 so far today.
With more doom and gloom expected from the UK we don’t expect to see any sort of recovery during what’s left of 2008 and any clients with forthcoming Euro requirements (whether buying or selling) should speak to their FCG account executive to try and ensure they purchase their currency at the most beneficial rate available.
GBP/USD
Last week saw very little volatility in the Pound/Dollar cross, with just a four point range at interbank level. To the distant observer, it may appear that Sterling is finally fighting back against the march of the mighty dollar, however the truth may not be so simple. There was a great deal of negative news and data coming out from the US last week, culminating in the Automakers bailout plan being rejected by the Senate on Thursday night. We also had news over the weekend of the $50bn hedge fund fraud by Bernard Madoff, and the losses made by several major banks as a result. All of this has weighed on the once mighty Dollar, and Monday saw the cross make a steady climb past the 1.50 mark, although this is resulting from Dollar weakness rather than Sterling strength.
Looking to the week ahead, we have the interest rate decision from the Federal Open Market Committee. The market has begun to price in an interest cut of between 0.5% and 0.75%, with a handful of analysts predicting a 1% cut down to a base rate of 0%. Whilst this is having a strong negative impact on the confidence in the US currency, Sterling is far from safe after its recent losses against the Dollar and Euro, and still remains the weakest of the G7 currencies. Wednesday sees the release of the minutes from the Bank of England MPC meeting, which will provide some insight into the likelihood of further rate cuts at the start of the new year.
After Monday’s gains, expect a highly volatile week of trading on the cable, with the definite possibility of some records being broken once again for largest gain/loss in a single day. It is essential that you buy your currency at the right time, speak to your account manager for more details.
CAD
The Bank of Canada (BoC) reduced interest rates by a greater than expected 0.75% to 1.5%, acknowledging that the economy is “now entering a recession as a result of the weakness in global economic activity.” However, interest rates have been reduced from 4.5% in late 2007 and there were indications of some confidence that this may be sufficient to enable the economy to avoid a prolonged downturn, which offered some support to the Canadian Dollar. Dismal economic data out of the US economy however dimmed the Canadian economic outlook, and the Loonie continues to lose ground against major global counterparts on worsening fundamentals. Forecasts for further deterioration in Canadian economic conditions are likely to keep pressure on the Canadian Dollar through the foreseeable future.
Retail Sales data (Thursday) and Consumer Price Inflation (Friday) will be the key releases this week. Support for the Canadian Dollar may be undermined if the data is seen to raise the likelihood that the BoC will need to further cut interest rates in response to weaker inflation and domestic demand.
Potential purchasers should also watch out for any surprises surrounding the highly-anticipated US Federal Reserve interest rate decision as the two Currencies are closely linked. The US central bank is expected to cut interest rates to fresh record-lows on Tuesday with the key question being how low rates can and will go.
AUD
Following last week’s Australian Dollar positive note when consumer confidence unexpectedly rose by 7.5%, the AUD inched up, helped by an improvement on Wall Street. However, uncertainty about the U.S. auto makers kept investors wary of risky assets such as high yielding currencies.
Gains by the Aussie Dollar are likely to be muted amid mounting worries of a sharp global downturn. The slowdown has been hurting the demand for commodities of which Australia is a big exporter, and base metals and oil were heavily sold on Friday. This week’s data calendar in Australia is rather bare, with only the release of the minutes for the last RBA’s board meeting likely to be of any interest to investors.
The global downturn also had a negative effect on Sterling, chocking off the financial sector that has previously helped the country thrive for so long. UK chief secretary to the Treasury stated that the government is not planning to step in and help support the Pound, instead they are concentrating on trying to keep inflation under control. The RBA slashed their cash rates by 100 basis points to 4.25% in their last board meeting, and investors are pricing more aggressive cuts in coming months to cushion the economy from a possible recession. Likewise in the UK, economic data is likely to add to evidence suggesting that interest rates are bound to fall lower, but the best gauge for this will be the Bank of England’s minutes for their December policy meeting.
With all the doom and gloom in the currency markets, it may be wise to think about buying forward to secure a competitive rate, so having a word with your account manager to discuss all available options, is most definitely the way forward.
NZD
The New Zealand Dollar had a relatively quiet week except for a brief boost from positive data including stronger commodities, giving the Kiwi a slight push against most crosses. On Thursday RBNZ Governor Allan Bollard stated that the central bank is ready and willing to lower borrowing costs even further. Bollard also went on to announce that companies need to accept lower profit margins and prices before reductions are made to the official base rate, this was backed by John Key (New Zealand P.M) announcing, “If we take the pressure off prices, Allan Bollard can cut interest rates further”.
It is an extremely barren week on the data front this week with the only key pieces of information that may move the Kiwi being Performance of Service Index on Monday and Thursdays NBNZ Business confidence for December.
Risk sentiment is likely to control price action for the NZD and fading demands for carry trades have dragged on the Kiwi throughout the latter part of this year. Taking these factors into consideration it may be prudent to ask your FCG account manager about stops and limits to secure yourself against any losses.
ZAR
Last week’s trading was relatively stable for the GBP/ZAR cross with the rate sticking around the 15.2 mark. The reason for this, despite what seems like a never ending flow of bad data from the UK, is that the picture isn’t too good in South Africa either.
For instance, CPI has fallen, meaning companies are seeing declining revenue, where as PPI has risen dramatically in the last period. Rapidly escalating salaries have led to increasing costs of production and raw material expenses have also risen substantially.
This means between the two, the cost of production has risen to dangerous levels.
If they don’t find a way to reign in these costs and bring up revenues they may have to make some serious adjustments to their economy, with an even more lopsided production scheme.
We expect the GBP/ZAR Cross to remain trading around similar levels to November and anyone looking to buy Rand in the near future should take advantage of any short term gains and speak to their FCG account manager about the various contracts to protect themselves from any falls in the market.