15-09-2008 : FCG Market Report 15th Sept. 2008
GBP/EUR
The Euro has depreciated against Sterling due to the European commission cutting their GDP growth target for 2008 from 1.7% to 1.3%. They have also raised the Euro zone inflation estimate for this year to 3.6% from 3.1%. Many believe the recent emphasis on inflation is purely to deter the market pricing in rate cuts. Although is now strongly believed that the euro zone will slip into a technical recession (negative growth for 2 consecutive quarters) in the third quarter, reinforcing the belief that the ECB will cut rates before the end of the year.
Last Thursday the BoE MPC member David Blanchflower told the UK treasury committee that a deeper than forecasted decline in the UK economy and a sharp rise in unemployment is very likely. Meanwhile, BoE governor Mervyn King acknowledged slowing growth, but played down the likelihood of an early rate cut.
The outlook for both the Euro zone and the UK is looking bleak and the GBP/EUR cross will be very hard to predict in the long term however in the short term the cross to remain between 1.21 and 1.27, although the Pound may be steering the cross more toward the downside.
GBP/USD
Last week saw the US Dollar continuing to strengthen against the pound at the start of the week, hitting the 1.74 mark, before returning back up towards the 1.80s by the end of the week.
Friday evening saw Hurricane Ike hit the gulf coast of Texas, paralysing one of America’s largest oil refineries, causing a slight rise in the price of oil, which weighed on the dollar. We also had news of further problems in the US banking industry over the weekend with investment bank Lehman Brothers filing for Chapter 11 Bankruptcy, and asking for a government bailout, similar to the ones we saw for mortgage underwriters Fannie Mae and Freddie Mac. Merrill Lynch also agreed to sell itself to Bank of America, suggesting its problems were more serious than investors had realised.
Given all the negative news coming out of the US, it is surprising that the dollar has not fallen further against the pound into the mid-1.80s. This emphasises the weakness of the pound, as the dollar has made more significant losses against other currencies, although we should not rule out the possibility of the pound making gains against the dollar over the next week.
This week sees inflation data from both the UK and US released on Tuesday, with Bank of England minutes and UK retail sales data out later in the week, which are likely to weigh on the pound, therefore it is possible that we may see the best rates at the start of the week.
CAD
Since the end of last year the GBP/CAD has been trading in a broad range, with a resistance at 2.06 and a support level at 1.93. Although at one stage there were predictions that the topside resistance would be breached and the market hit 2.09, it now seems that the support level is in more danger of being broken.
At the end of August the market touched its 10-month low at 1.90 and although it seems to have stabilised throughout September’s trading, it appears unlikely that GBP will make much of a recovery, especially with recent comments from the BOC seemingly ruling out the possibility of an interest rate cut in the near future. Although falling commodity prices would traditionally weaken the Loonie, with the UK economy in turmoil and the Canadian economy benefiting from stable inflation around 2%, leaving them open to cut rates as they see fit, the CAD is likely to remain relatively the stronger of the cross.
Analysts have revised their predictions and it is now expected that the market will remain range-bound between 1.88 and 1.93.
AUD
This week’s economic calendar is relatively bare. Governor Glenn Stevens and other policymakers at the Reserve Bank of Australia have been very candid about the direction of monetary policy, so it is unlikely that the release of the minutes from the last meeting will produce anything substantial to affect price action. The Westpac-Melbourne Institute Index Sentiment rose by 7% in September from 86.2 in August to 92.2 in September. This type of result comes as no surprise. It’s a direct response to the decision by the Reserve Bank to cut interest rates by 0.25% and the swift response by the banks to reduce their variable mortgage rates by a similar amount. The most convincing evidence is the increase in confidence of those households holding a mortgage which jumped by 10.8% compared to a more modest increase of only 2.4% for those who wholly own their home.
On balance, Australian dollar price action is likely to continue taking its cues from trends in risk sentiment, which has brought a positive GBP/AUD momentum driven by markedly lower petrol prices and the prospect of continuing rate cuts from the Reserve Bank of Australia.
NZD
The kiwi suffered from a surprise 50 basis point rate cut by the RBNZ last week. The RBNZ cut interest rates in the country by 0.5%, countering expectations for a 25 basis point rate reduction.
In addition, the kiwi declined in line with other high yielders on persistent risk aversion, triggering even heavier carry trades unwinding last week.
This week investors had another financial institution to worry about. This time it was Lehman Brothers that rattled financial markets and global equities. The US bank has gone bankrupt, struggling to find a potential suitor to rescue the firm from huge credit related losses.
The GBP/NZD cross is expected remain weak as the RBNZ look to focus on increasing growth through interest rate cuts in the sort term. However, Sterling will remain vulnerable against all of the major currencies, therefore investors should be careful on hanging on for a further increase in the rate as the Pound is expected to push down in the Medium term. Those buying NZD should take advantage of the recent spike and those selling should hold tight for some more poor UK data.
ZAR
The Rand has depreciated greatly against the pound this week, mainly due to falling precious metal prices such as platinum falling to its lowest levels since January 2007 and gold falling very near a one year low. South African gold output fell 16.4% in volume terms, while overall mineral production was down 12.6% in July. Recent data has shown that interest rates have peaked in south Africa as rate hikes over the last year have stifled growth.
In the long term we strongly favour Sterling over the Rand as it is likely to come out of the current slowdown before South Africa.