01-09-2008 : FCG Market Report 1st Sept. 2008
GBP/EUR
Last week the Euro strengthened against the Pound following hawkish ECB comments.
ECB Executive Board member and head of Germany’s Bundesbank Axel Weber said that talk of rate cuts by the ECB is premature amid inflation and that rates could even rise. These hawkish comments saw the Euro strengthen against most of the major currencies. ECB vice president Lucas Papademos echoed these thoughts and mentioned that further rate rises could be needed if high inflation sparked a wage spiral in the euro zone.
Although these comments were made, German Inflation in August slowed by more than expected and the German Business Climate Index (IFO) slipped from 97.5 in July to 94.8 in August, much worse than expected, confirming that the economy is teetering on the edge of a technical recession, defined as two consecutive quarters of negative growth. All of this data suggests that the ECB are likely to cut rates towards the end of this year and it is believed that the hawkish comments by ECB policymakers were purely to deter the market pricing in multiple rate cuts.
Last week the Euro’s movements were largely dominated by hawkish ECB comments. However, for the week ahead, mere data analysis will be replaced by the universal driver - interest rates. The ECB is scheduled to deliver its decision on Thursday and it will come as no surprise that the general market and economist consensus is calling for no change to the benchmark lending rate. However, considering the data that has been released last week, there is a good possibility that Trichet will have to use different terminology at the press conference following the official decision.
As for the cross, outlooks for both the UK and the Eurozone economies look bleak. Therefore, it is expected that the cross may remain between 1.23 and 1.26 in the short term.
GBP/USD
Sterling has fallen against the dollar to its lowest level in more than two years following comments by Britain's finance minister highlighting the UK economy's weakness. Chancellor of the Exchequer Alistair Darling told the Guardian newspaper on Saturday that Britain's economic downturn might turn out to be the worst for 60 years.
The dollar has risen to an eight-month high against a trade-weighted basket of currencies. While many investors had predicted that we would see some form of recovery against it, it is looking increasingly unlikely. "Certainly no one's rushing to buy cable at the moment," said Gerrard Katz, head of North Asia FX trading at Standard Chartered in Hong Kong. "There was a lot of weekend press about how bad the UK economy is at the moment, so that's weighing on the market.
The only ray of hope for those with a keen eye on Cable, though far from sentimental, is that with Hurricane Gustav forcing the evacuation of New Orleans and a number of off-shore oil rigs, it looks likely that in the short term oil prices will regain some of the ground lost recently. This could be negative for the USD and it is possible that the market will spike back in favour of Sterling. If this does occur it is likely that the gains will be short-lived so be sure to stay in regular contact with your account manger who will explain the benefits of Limit orders in this situation.
CAD
The Canadian Dollar continued to show strength throughout last week, with the rate moving to a low of 1.9208 after weak GDP figures on Friday and no further upward movement in commodity prices. Housing data releases have also shown signs of a mortgage crisis in Canada.
Disappointing growth figures will undoubtedly be a concern to the Bank of Canada who are expected to keep interest rates on hold this week, with the next change expected to be a cut. However, the BoC have much more flexibility with their economic policy than the Bank of England due to their low rate of inflation.
We anticipate the GBP/CAD cross will remain range bound over the short term, with the CAD losing some of its recent gains on the pound. In the medium term, both the UK and Canadian economies are expected to struggle, with neither being strong enough to exert any significant pressure over the other.
AUD
Like last week, a lack of major domestic data meant that the value of the Aussie was influenced by events worldwide including US Dollar movement, risk aversion and commodities prices. Swings in the US Dollar meant that as we saw strength in the Greenback early in the week. We also saw an unwinding of carry trades but as the USD gave up gains later in the week the Aussie started to climb again. The AUD managed to recover some of its losses due to a rebound in global stock markets and with the rise in prices of gold and base metals, gained nearly 2% against the flailing pound by the end of last week.
Market participants will be watching the rate decisions due from the RBA and BoE due on Tuesday and Thursday respectively. Markets are now pricing in an almost certain 0.25% cut from the RBA but with the Pound suffering heavy losses last week across the board, an already Bearish sentiment to Sterling looks like it could go further. We expect the BoE to hold rates again this month and for the next quarter at least before beginning another cycle of monetary easing and with more rate cuts to come from Australia we expect to see the Sterling-Aussie cross remaining range bound for the short term. We do however expect to see the Aussie making gains against the pound in the long run as we start to see rate cuts from the UK and markets look out for the looming recession.
NZD
The Kiwi dollar has benefited, along with most major world currencies, against a drastically weakened sterling. Last week saw an unexpected movement in the GBP NZD cross as although New Zealand is entering a period of apparent economic down turn and could be expected to weaken against the pound; the pending British recession is dominating the cross.
All eyes will be watching the central banks this month as possible rate cuts will have dramatic effects on the markets. Although we believe the Bank of England would like to be able to cut rates to help the flat growth in the UK, high inflation will probably still prevent them from doing so. The RBNZ however are highly expected to announce a 25 basis point rate cut on 11th September. We are therefore expecting a move back towards the low 2.6 dollars per pound from the current mid 2.5’s but still believe dampened UK sentiment will prevent moves towards the 2.7’s as some traders expected earlier in the year.
ZAR
Inflation is still a worry for South Africa however, this week the Rand has strengthened against the pound amid slightly stronger data.
The outlook for the UK economy has deteriorated further over the past few weeks, which could keep the pound on the back foot in the short term.
However looking at the long term, we continue to favour the Pound as we expect it to come out of the current slow down before South Africa. To add to this, when the Rand starts depreciating, it will not take long before foreign investors start bailing out of the currency, especially given the expectations that the country’s two year monetary tightening cycle may have come to an end.
In other news, on Friday last week a spokeswoman for the SARB, Governor Tito Mboweni said that she does not intend to renew her contract after her term in office, which ends in August 2009.