16-02-2009 : FCG Market Report 16th Febr.2009
GBP/EUR
Last week saw Sterling start to suffer the effects of gravity following a fortnight of strength against the Euro, which many analysts are now predicting will be the new “safe haven currency” where investors will hold their deposits during the troubled economic times. The main news of last week was the GDP results from the Eurozone, which showed a contraction of 1.5%, worse than the predicted -1.3%. This did little to undermine the Euro against the beleaguered British currency, which remains extremely vulnerable without any investor sentiment or positive data to support it.
We also saw Bank executives being grilled by a Treasury Select Committee, and admitting that their businesses were built on an unsustainable model which has now come crashing down. On Friday, Prime Minister Gordon Brown also had some answering to do. He faced a quarterly meeting with peers, who demanded answers on how the Government had handled the financial crisis so far, and how its future plans would ensure the return to growth for the UK economy.
Looking to the week ahead, we have January’s CPI and RPI inflation data from the UK which is likely to show a drop in the core rate again, adding more scope for a base rate cut at the next BoE meeting in March. The likelihood of a further cut will become much clearer following the release of the minutes from the February meeting on Wednesday. Friday sees the release of UK retail sales figures for January, which were surprisingly positive in December at +1.6%, though are expected to show a contraction for the month of January. This is likely to weigh on the under-fire pound, and could send the market under 1.10.
Euro traders should speak to their account manager at FCG to ensure that they get the best possible rate in a volatile market.
GBP/USD
American banks agreed last Wednesday not to foreclose on troubled mortgage-holders for at least a few weeks, whilst the government launches a $50 billion aid program for homeowners. This was part of a wider economic stimulus package, announced midweek and passed by Congress on Friday, which lent strength to the US Dollar. The Dollar was further supported by a surprise 1% monthly increase in retail sales on Tuesday. However there was a reduction in the level of both imports and exports. This caused the US Dollar to weaken against most major currencies, though not against Sterling, mostly because of broadly similar data from the UK. The reduction in trade was the primary focus of the G7 meeting at the weekend, where members worried about an increase in protectionism as seen during the Great Depression.
In the week ahead, the release of the minutes of January's Federal Reserve meeting is scheduled on Wednesday, along with a speech by Chairman Ben Bernanke about liquidity programmes. The Philadelphia Fed Manufacturing Survey on Thursday will also be closely watched, with an above-expectations reading likely to be positive for the Dollar.
All things considered, both the UK and the U.S are suffering significantly from the current economic slowdown, although at the moment it appears to be Sterling which is struggling the most. For those who remain optimistic of a GBP recovery it might be wise to speak with your account manager about the benefits of Stop/loss orders to protect yourself.
CAD
The commodity sensitive Canadian Dollar suffered last week with its first trade deficit in over 30 years. With an initial drop in oil prices at the start of the week adding pressure on the Loonie but a late surge on the price of oil on Friday eased this pressure and significant ground was made. Canada remains one of the most trade-dependent of the major currencies and deteriorating demand for the major exports will hurt the economy and ultimately the currency.
Turning our attention to the week ahead, Manufacturing Shipments data, Wholesale Sales and CPI figures are all predicted to fall. Investors rarely pin importance onto the manufacturing report but the state of the Canadian industry is a significant determinant of broader economic growth. The Consumer Prices Index remains the highlight of the data out this week which is seen as an important indicator of inflation in Canada.
The Bank of Canada is predicted to cut interest rates by at least 50 basis points at the March 3rd meeting but surprises in CPI data, out on Friday, away from the expected 2.2% may call for more aggressive cuts. Investors will keep a keen eye on the data and any deterioration in CAD yields (investors interest rate return) could weigh heavily on the currency.
AUD
We have an interesting array of data released this week from both the UK and Oz after we saw the GBP/AUD rate move down from a high of 2.215 last week to open this morning at 2.19. This move was mainly due to some surprising home and employment data from Australia where new home loans increased from 1.3% to 6.4% and employment change moved up 1.2k after it was expected to decrease by 18k. These releases outweighed the fact that consumer and business confidence fell twice as much as forecast and the consumer price index (CPI) moved down to 2.3%, showing that inflation is cooling even with hefty cuts in interest rates from the RBA.
As mentioned, this week is relatively heavy on the data front with the release of minutes from both central banks previous monetary policy meetings where we saw the RBA cut 100 basis points to 3.25% and the BoE cut by 50bps to leave the base lending rate at 1%. We also expect to see UK CPI cooling further towards the MPC’s 2% target with the release on Tuesday showing it dropping from 3.1% to 2.7%. We will also see further confirmation of the differences between the two economies with retail sales expected to grow in Australia whilst we should see a drop from 4% to 2% in the UK, showing how the recession is taking hold.
With this in mind we expect the Pound to have trouble moving up past 2.22 against the Aussie unless we see large scale unwinding of carry trades if investors look to dump riskier assets such as the AUD. Otherwise, we will most likely see the rate remain below 2.21 unless something unexpected happens