18-08-2008 : FCG Market Report 18th August 2008
GBP/EUR
This week is a historic one for the Eurozone, as the economy contracted for the first time since records for the single currency began in 1995.
One of the European Central Bank’s executive board members, Lorenzo Bini Smaghi, has said growth in the European economy is slowing a lot faster than forecast.
Confidence in the Eurozone has also been affected by news from Spain, where inflation levels are the highest in the Eurozone and it’s having one if its biggest property price collapses ever.
Data such as the PMI and Sentiment surveys in recent weeks have pointed to weaker growth during the second half of the year. Indicating that the ECB are likely to cut rates before the end of the year or in Q1 of 2009.
The minutes from the MPC meeting in August are due to be released on Wednesday and will be an important indicator for future interest rate expectations, as underlying pressure for lower rates continues to increase in the UK.
As for the GBP/EUR cross, both the UK and Eurozone economy, are looking bleak and this will weigh heavily on both economies. It is expected that trading will remain between 1.235 and 1.28 in the short term, although all eyes will be watching for the interest rate decisions from both the Eurozone and the UK.
GBP/USD
Last week the dollar continued to strengthen against the pound, with the rate dropping from a high of 1.9255 down to a two-year low of 1.8620, clarifying that the days of 2 dollars to the pound are almost certain to be over.
We have now seen a swing in excess of 5% over the last few weeks, driven by both Sterling weakness and dollar strength. Bank of England governor Mervyn King warned against reduced growth and rising inflation in a statement last week, whilst the US economy has been buoyed by a reduction in oil prices, and encouraging employment and sales figures, which were significantly better than expected.
The outlook for the next week is somewhat uncertain, with some analysts predicting the pound will continue to weaken against the dollar, driving the rate down further, with others suggesting that the rate will return towards the 1.90 mark as city investors sell to take advantage of their short term gains.
Due to this uncertainty, investors may want to look to a Forward Contract if they anticipate buying dollars in the short to medium term future, as this allows you to insure against any further falls in the market.
CAD
The strength of the loonie last week was relatively surprising however data has been positive and should help the GDP figures which until this week were looking gloomy. The week before last there was genuine concern regarding growth (following employment figures), so last week’s data has helped to ease some of those worries. In fact, the currency’s strength has been so prominent that it has survived a sustained drop in the key correlation commodities – crude oil below $115/barrel and gold under $800/oz. Having said that, data that showed the housing market was slowing was the one grey cloud in the sky for the CAD.
Key data out this coming week include the Wholesale Trade report and Retail Sales figures for June on Tuesday and Wednesday respectively, and CPI for July on Thursday.
The medium term outlook for Canada still looks sombre given some of the other data we have seen over the past month. However, the BoC has the flexibility to ease their monetary policy if required. It should therefore not be ruled out that they may look to use this option before the end of the year. This week’s CPI data should provide us with more of an idea on how realistic this is. If expectations of a 3.4 percent headline pace of annual price growth is realised, it would mark the highest level of inflation in over five-and-a-half years.
As for the GBP/CAD cross, conditions in both Canada and the UK are looking difficult, so it is expected that the cross may continue to trade sideways. The possibility of a rate cut in Canada before the end of the year could weigh on the loonie in the short term.
AUD
Last week the Aussie Dollar lost a lot of ground against the Pound and reached a seven month low against the US Dollar. With fresh concerns over slowing global growth, risk aversions has been raised and therefore those who have been profiting from carry trades have pulled their investment from the currency, resulting in the Aussie Dollar losing ground.
The same concerns over global growth have pushed commodity prices down, putting further pressure on the currency as Australia is one of the world’s major exporters of natural resources. Reaction to the gloomy outlook came through the Deputy Governor ‘Ric Battellino’ who commented that the Reserve Bank of Australia were keen to act by cutting rates before inflation declines sharply.
The Aussie Dollar is expected to remain under pressure as the mass unwinding of carry trades continues. However, despite the poor Dollar outlook the GBP/AUD cross is expected to push back in the Aussie’s favour as the Pound struggles under pressure of an interest rate cut. Therefore for those with an immediate need for Aussie Dollars, it might be wise to take advantage of the short term gains in the market. Whilst for those who perhaps need Australian Dollars in the future, the dramatic favourable movement in the market means that one can now buy forward at better rates of exchange than you could have bought on a spot contract only a few weeks ago.
NZD
Last week saw volatile trading on the Sterling/Kiwi cross; a common story for many of the major sterling crosses in fact. Of course the news that Sterling hit its lowest point against these major currencies in the last twelve years was a major reason for the volatility. However there was a surprising amount of information from the Kiwi economy that moved the market as well. Indeed the first surprise came when the Kiwi strengthened on the back of better than expected retails sales that sparked the late revival of the Kiwi last week. Up until this point last Thursday, the story had been of large scale unwinding of carry trades. The effect this had was to completely negate the effects of sterling’s early weakness and move the cross up to the early 2.70’s, a position whereby many traders imagined further gains towards the mid 2.75’s. However, as is so common in the notoriously volatile world of currency trading, the sharp movement up was followed by an equally sharp movement down, with the Kiwi moving in value from 2.73 to under 2.60 per pound within one morning. To demonstrate the severity of this move of around 5% in around 3 hours; if you were moving £100,000 down to New Zealand to emigrate you would have lost £5,000 in a matter of hours.
With this cross looking as though it will remain equally volatile in the near and medium future, the savvy consumer looking to purchase Kiwi dollars will look towards Limit and Stop Loss orders to make the most of these peaks.
ZAR
As expected the South African Central Bank kept rates on hold at 12%, although with reasonable hawkish accompanying comments.
However, we strongly expect that interest rates may have peaked, given the slowing South African economy, fallback in oil and food prices and with the pending change of the consumer basket used to calculate CPI also likely to result in lower inflation.
In the long term the South African economy faces a grim outlook, as interest rate hikes over the last two years have stifled growth.
Therefore despite a very bleak outlook in the UK, it is still believed the pound will strengthen against the rand towards 16.0 in the long term.