16-03-2009 : FCG Market Report 16th Mar.2009
EUR
The Pound had an awful ride last week falling from a high of 1.1143 on Monday to lows today below 1.08 mainly due to fears over the UK banking sector. Confidence in the British economy dropped further with another fall in retail sales, industrial output contracting at its fastest pace in 27 years, and UK exports declined at a record rate which all point towards a deepening recession. This was confirmed further by the National Institute of Economic Research’s estimate that the UK economy shrank by 1.8% in the three months to February. The Pound stabilised towards the end of the week as the Bank of England successfully purchased £2billion of UK gilts – their first effort at quantitative easing which is aimed at stimulating the economy.
The Euro exchange rate was mainly steered by UK releases and the only releases from Europe were comments from ECB officials suggesting that Eurozone interest rates could be cut further from their current level of 1.5%; however there is still some scepticism over whether or not they will go for a near-zero policy on interest rates.
This week data is pretty light for the early part and then it will begin with BoE minutes and unemployment data from the UK on Wednesday with forecasts of a further increase in the jobless rate. From the minutes we could also get more of an idea about the BoE’s plans for further economic stimulus, as there is not much room for another interest rate cut after they reduced the UK base lending rate to 0.5% earlier this month. From the Eurozone the main focus will be on the German ZEW survey of the current situation and predictions for the future direction of the Germany economy (which makes up 25% of the 15 member states’ GDP) which is expected to be detrimental to the single currency.
Overall we are expecting most releases from both the UK and Europe to be poor but with the current overall weakness in the Pound do not expect the exchange rate to improve much in the short term with further losses expected if the BoE announce further and greater measures of quantitative easing. With this in mind, those buying Euros as well as those selling the single currency should speak to their Account Manager to discuss the best time to secure their rates of exchange.
USD
US Dollar weakness looks set to continue this week. This is due largely to an increase in investment in higher risk markets, as investors move away from buying US Dollars in search for greater yields. This involves moving capital out of safe haven assets such as the USD, therefore weakening the demand for the Greenback.
The Pound is showing strength against the dollar at the week’s opening, and rebounded from a 1.3888 intra-day low in Asian trading to test resistance over the 1.42 level.
The UK housing market is also showing early signs of recovery. According to the Right Move house price Index data released today, the average price for a house in the UK was up 0.9% to £218,081. Behind the headline “Encouraging spring impetus as buyers look for bargains” was some more encouraging news that agents have reported an increase in investors looking at property, driven by the improved yields of rental income against lower interest rates.
Although the economic calendar packs plenty of high-profile releases, traders are unlikely to see anything that has not already been priced into the exchange rate however the weekend’s G20 summit presents a wildcard. Yesterday, Chinese premier Wen Jiabao bluntly questioned the security of US assets, suggesting that American lawmakers need to “ensure” their safety, pointing out that that “We have lent a huge amount of money to the United States… of course we are concerned about the safety of our assets. Noting the Chinese’ confidence in USD investment, which has historically played a significant role in the strength of the Dollar, we will watch this space.
The above graph indicates the USD/GBP exchange rate over the last month. To make the most from your currency exchange, speak to your Foremost Currency Account Manager.
AUD
The Australian Dollar advanced against Sterling, with the GBP/AUD rate trading at its lowest level in more than six weeks below 2.12. Australian Dollar strength was closely related to investor risk appetite trends, benefiting from higher global stockmarkets and some relief over the US banking sector outlook. Recent Australian economic data suggests that domestic conditions remain surprisingly resilient - boosting overall outlook for the domestic currency. Australian officials reported that the domestic economy added a net 1,800 jobs in the month of February; however a jump in the labour Participation Rate meant that joblessness actually increased.
The GBP/AUD closed on Friday at 2.1272, down 3.27% from 2.1991 a week earlier, benefiting those converting Australian Dollars into Sterling.
As we are lacking any major data announcements this week, investor risk sentiment trends are likely to remain important for Australian Dollar performance. The Reserve Bank of Australia's policy meeting minutes (released on Tuesday) will be scrutinised for the central bank's view on the economy's prospects and thus interest rate policy.
Key Data Releases This Week
16/03/09
• EU – Q4 Unemployment figures
• EU – Consumer Price Index Inflation (February)
17/03/09
• US – Producer Price Index Inflation (February)
18/03/09
• JP – Interest Rate Decision & Central Bank report
• UK – Bank of England Minutes
• UK – ILO Unemployment Claims (January)
• US – Consumer Price Index Inflation (February)
• US – Interest Rate Decision
19/03/09
• CA – Consumer Price Index Inflation (February)
20/03/09
• CA – Retail Sales Figures (Jan)
• US – Statement from Fed Chairman Bernanke
This week is comparatively heavy in terms of data releases, with Wednesday likely to be the most volatile day seeing significant figures coming from the UK, USA and Japan. Sterling has had a strong start to the week following the G20 summit over the weekend, with several world leaders suggesting that the current recession may end by late 2009.
Although we see interest rate decisions from the USA and Japan, these are both currently below 0.25%, and in the current recession are unlikely to rise, yet cannot realistically drop any further. CPI and RPI Inflation data is likely to show a drop in the core rate, giving the central banks more power to tackle the current crisis. Bank of England minutes are likely to reveal more about the central bank’s Quantitative Easing plans for the future, after injecting £2bn into the UK economy at the start of the month.