01-12-2008 : FCG Market Report 1st Dec. 2008
GBP/EUR
Expectations of substantial rate cuts by the Bank of England and the ECB are one of main topics on the agenda at the start of this week. Backed by such expectations, Sterling fell sharply against the Euro and US Dollar, with weaker than expected UK mortgage approvals, continuing falling house prices and manufacturing data signalling that rate cuts could be quite aggressive. Also out this week, will be the PPI reading on Tuesday, retail sales on Wednesday and Q3 GDP reading on Thursday followed by ECB and BoE rate announcements. Last week’s GDP numbers have confirmed the Euro Zone’s largest economy is now in a recession, with lower retail sales and a weaker than expected final PMI reading.
Following last month’s substantial cut, the policy board is expected to cut rates by at least 50bps in order to recharge growth, stabilize the financial markets and prevent a possible deflation scenario. Over the coming months, the global recession is expected to intensify, which will keep interest rates trending lower. This means that speculation for the European monetary authority to lower its benchmark lending rate will hold. Whether the easing will be aggressive or steady will define the Euro’s strength. Looking ahead to the ECB’s decision, a smaller than expected cut (or no cut at all) could leverage the short-term rebound in GBP/EUR and help to turn the market on the belief that European assets will come out of the current global credit crisis and growth slump. On the other hand, a bigger than expected reduction, could be another sign that the Euro Zone is indeed sinking further into a recession.
All things considered, it seems that things are likely to get worse before getting better for the GBP/EUR cross, so getting in touch with your account manager to discuss all possible options and secure a competitive rate of exchange, is most definitely the way forward.
GBP/USD
Last week saw some relief for Sterling as risk appetite briefly returned to the market, causing investors to move away from the safe haven Dollar as the Pound fought back to a level of 1.55 on Friday. However, the revival was short lived. In the run up to Thursday’s interest-rate announcement from the Bank of England, rumours of a full 100 basis point cut devalued Sterling on Monday morning. The result was the worst day for the Pound against the Dollar in 16 years, since the UK dropped out of the ERM, as we saw over a 5 point drop in the GBP/USD Cross.
The main news affecting the cross this week is likely to be the interest rate decision from the Bank of England. If the central bank cuts its rates by the 1% expected, we could see a move into the 1.40s as investors move away from the low yield of Sterling. In contrast, Friday may also see the Dollar weaken as the non-farm payrolls and unemployment data for November are released, which are both predicted to show signs of a contracting economy and job losses.
Across the Atlantic, congress appears to be nearer to putting forward another rescue package for the automobile industry, and President-Elect Obama’s executive team is taking shape, with news that Timothy Geithner is set to become the new Secretary to the Treasury providing support and reassurance to the US economy.
Given the volatile nature of the cross, it is essential to speak to your account manager at FCG to ensure you purchase your currency at the best time.
CAD
Positive data released from Canada including increased motor vehicle and wholesale sales did not seem to persuade investors to pile into the Canadian Dollar. These rises in industrial figures are expected to be short lived as the Bank of Canada expects economic activity to decrease over the next year. Canada’s close relationship with the U.S and the significant drop in oil prices, one of Canada’s major exports, has also maintained pressure on the Loonie.
Despite positive economic figures, the outlook for the CAD remains bearish with an anticipated drop in demand for raw materials weighing heavy on the economy and continues to be a major driving factor behind the currency. Employment figures out this week are expected to fall by 15,000, evidence that economic conditions are worsening.
The Canadian economy is expected to have experienced 0.3% rise in Q3 which is better than the predicted growth and shows that the economy may be more resilient than initially thought, many expected it to follow its southern neighbour into recession. Finance Minister Jim Flaherty is now forecasting a recession in Canada and expects the economy to contract in Q4 and Q1 of next year and the recession, not the positive GDP results, will be the focus for the BoC December interest rate decision.
AUD
The key event out this week is the interest rate decision on Tuesday afternoon. It is not a question of whether they will cut rates but by how much. We are expecting rates to be slashed by at least 75 basis points although we could see a cut as high as 150 basis points. If they do, it will be the fourth consecutive cut from the RBA and it is thought that they will cut rates right down to 2.5% by mid 2009.
This is mainly due to inflation cooling to the lowest level in just over a year and demand for Australia’s Dollar weakening after a monthly gauge released by TD Securities and the Melbourne Institute in Sydney showed consumer prices rose 3% last month compared to a year earlier.
There was more bad news as the Bureau of Statistics announced in Sydney that Australia’s corporate profit growth slowed in Q3 as earnings at retailers, transport businesses and manufacturers fell dramatically.
Released this week, will be the current account balance for quarter 3 and retail sales for October. Plus on Thursday we expect a lot of volatility with the release of Gross Domestic Product which is expected to come out just above zero.
For anyone looking to buy AUD in the short term, it may be wise to do it sooner rather than later and take advantage of any short term gains.
Speak with your FCG account manager about Stops, Limits and Forward contracts to protect you from any further falls in the market.
NZD
The New Zealand Dollar remained very volatile last week, with the cross trading in a range between 2.75 and 2.85. The Reserve Bank of New Zealand's (RBNZ) latest survey of business managers reinforced expectations that interest rates could be cut this coming week, with inflation and employment conditions anticipated to decline over the next two years. The New Zealand Dollar was also undermined by further weak housing data, with building approvals plunging in October to their lowest level since at least 1982.
The Reserve Bank of New Zealand has cut rates during their past three meetings, each more aggressive than the last, and the same is expected for the next announcement on Wednesday. A Bloomberg News poll has shown that economists anticipate that the central bank will slash rates by a huge 150 basis points to a 5-year low of 5.00 percent. Following the bank’s last rate decision, RBNZ Governor Alan Bollard suggested that future rate cuts would depend on data confirmation of easing inflation pressures and “how the global financial developments play out.”
Thus far, economic data in New Zealand has showed slowing growth, as the RBNZ’s 2-year inflation expectation survey fell to 2.7 percent from 3.0 percent in Q4 and food prices fell negative for the first time in 14-months during October. Meanwhile, financial market conditions have deteriorated, coupled with the fact that the jobless rate has risen to a five year high, leaving the odds very much in favour of a sharp rate cut by the RBNZ that could trigger declines in the New Zealand Dollar on Wednesday.
ZAR
The Pound/Rand cross has remained relatively stable over the past week, the mid-market rate remaining range bound between 15.20 and 15.68.
As has been outlined in recent statements by finance minister Trevor Manuel (below) there is still great instability in the South African economy, which has prevented the Rand from gaining further ground over the under-fire British Pound.
The price of gold remains low, weighing on the currency, however we expect a difficult week for Sterling and coupled with some encouraging data expected from South Africa, we may see a return to the 14’s later on during the week.
Rand buyers may wish to secure their currency at the earliest opportunity, and we expect the cross to remain between 14.5 and 15.5.