27-10-2008 : FCG Market Report 20th Oct. 2008
GBP/EUR
The past week was riddled with comments and data which suggests that Euro Zone growth and interest rates will deteriorate faster than market participants had initially expected. This balance will be the primary concern for traders over the coming week – barring any unforeseen bank collapses or broad seizures in overnight lending as we have already seen in the UK & US. As a result the Euro had a vulnerable week, losing ground against the Pound & Dollar, providing some short term rest bite for those moving away from Sterling.
This week, Rightmove reported a 4.9% decline in asking prices for October but there was a monthly increase in house prices and the UK currency strengthened against the majors. In spite of recent Sterling gains there will still be major fears over the economy and further pressure on the Bank of England to cut interest rates again. Sterling will still gain some support from optimism that the banking sector has been stabilised by the government’s £37bn. bailout but is this too little too late? Sterling will remain very volatile as the eagerly awaited BoE minutes are released this week, which may push the Pound back to the early 1.20’s if more cuts are on the agenda.
GBP/USD
Last week we witnessed another chaotic period in global financial markets, with a 20% decline in world stock indices a good measure of this. Sterling however, staged a comeback against the Greenback, with the most movements early in the week following the news that the Government will take stakes of up to £37bn in some of the UK’s largest banks. The mild whiff of stabilisation in world markets supported the Pound against the Dollar due to the US’s much lower interest yield and a brief respite in risk aversion.
We feel the GBP confidence is to be short-lived however, as fears of recession have intensified as bleak economic data continues to be released in the UK. Unemployment rose by 164K in the three months to August, the biggest rise since the recession of the early 90’s, and is set to tip 2m by Christmas. Indeed although current interest rates are peaking at 5.2%, the expectation of dwindling growth is sure to reduce price pressures and increase the likelihood of swift and large interest cuts from the Bank of England. In turn this will likely destabilise Sterling further from its current position. In fact Wednesdays BoE minutes will be read intently for any early indications of such a movement. Further ahead in the week are UK retail sales figures and an early indication of GDP figures. The latter on Friday are widely expected to demonstrate the first contraction of UK growth in 16 years and it would not be a solid bet to see Sterling up on the Dollar come the end of the week.
With a light week of US data ahead we expect Sterling to dominate the cross with a general opinion of weakness from the UK. This may well see the cross test the lower end of the 1.70’s. The only potentially dampener for the dollar is a possible further rate cut at the end of month, and with this still on long odds we would expect the early part of the week to be best for buying Dollars from Sterling.
CAD
The outlook for the Canadian dollar continues to look bleak this week, with Sterling already well above $2 on the mid-market. The Bank of Canada is widely expected to cut rates by at least 25bps, though a Bloomberg News survey shows that 10 of the 17 economists polled are betting they will slash rates by 50bps down to 2.00 percent. This, less than 2 weeks after Canada cut interest rates by 0.5% on OCT 8th in a co-ordinated effort to halt the global credit crunch, suggests that the Canadian economy is certainly feeling the pinch and is likely to see GBP continue to exert relative strength over its commonwealth counterpart.
However, if you are holding out for the Loonie to weaken further you may not get your wish, with Canadian employment figures out later this week. Expansion has proven to be rather resilient in the face of the US economic slowdown as domestic demand has yet to truly falter in Canada, as a result the data could be bullish for the Canadian dollar. Further to this, CPI looks likely to remain fairly stable between 3 and 4% and forecast to actually show a fall from last month’s figure of 3.6%.
All this information means that it is very difficult to be sure of which direction the CAD will take next, with it likely to remain fairly volatile in the near future it may be worth speaking with your account manager about the benefits of Limit and Stop Orders.
AUD
Last week we saw the GBP/AUD cross feeling the effects of gravity as the mid-market fell from 2.65 to 2.47. This slight recovery of the Aussie Dollar against the Pound was expected after the Aussie suffered massive devaluation against all major currencies during the previous week. The direction of the cross will continue to be dictated by risk appetite over the next week as investors balance the benefits of a high-yielding currency against the volatility and risk in the market.
Prime Minister Kevin Rudd’s decision to guarantee all bank deposits (an estimated AUD$700bn) has strengthened the currency in the current unstable times, however the massive unwinding of carry trades which we have seen in the past month has continued to undermine the Australian economy.
This week we will see Australian PPI Inflation data released, expected to show an increase to 4.8% annually, and 1.2% for the quarter. We also have a statement from RBA Governor Stevens and the minutes from their last board meeting are released. These are both likely to weigh on the currency as we learn more about their reasoning behind the incredible 1% cut in interest rates earlier in the month.
With this in mind, we expect the direction of the GBP/AUD cross to be dominated by risk appetite among investors this week, and in the highly volatile global economy we are unlikely to see a significant recovery in the Aussie Dollar for some time. For those selling their Aussie Dollars, it may be sensible to secure the transaction as soon as possible. Dollar buyers may want to make use of limit orders in order to capture any market highs in the week if the Aussie falls back towards the 2.60 mark. Speak to your account manager at FCG for more details.
NZD
Last week the New Zealand Dollar had its first positive week in a month as the efforts by central banks around the world restored enough confidence in the markets to end the Kiwi’s freefall. Like many other States, New Zealand’s Government has also guaranteed its bank deposits. The Kiwi gained ground against a basket of major currencies, benefiting from a slightly improved sentiment towards the NZD, but with volatility still at record highs. Despite stronger than expected retail sales setting the tone at the beginning of last week, the NZD failed to hold most of its gains, trading as low as the 2.9071 mark, with heavy sell off being fuelled by fears of weakening global growth due to the credit fall out and unwinding of carry trades.
We could see more volatility on the cross, but before credit markets settle and interbank rates come down significantly, we do not expect a recovery in the Kiwi against Sterling. The Reserve Bank of New Zealand is expected to slash interest rates by a full 1% at this week’s meeting, followed by an additional 2% in cuts over the next 12 months. The New Zealand Dollar could find some support if interest rates are cut, although levels of investor’s risk tolerances are also likely to remain an important factor.
ZAR
Last week the Rand hit its lowest levels since December 2001 against Sterling and also hit a six year low against the USD. This was due to fears of the looming global slowdown which kept investors wary of risky assets and encouraged large scale unwinding of carry trades. Domestically, the retail sales have once again reinforced expectations of a slowing economy, which is a reflection of declining consumer confidence.
There has been further political uncertainty in South Africa after the ANC party suspended defence minister Lakota for threatening to form a breakaway party.
Also, Africa’s finance minister Trevor Manuel has suggested he will cut Africa’s growth forecast this week, which could pave the way for a rate cut. The cross is expected to move on the back of external developments and we are likely to see quite volatile movements in the GBP/ZAR cross but should stay above the 16.00 mark in the short to medium term.