22-09-2008 : FCG Market Report 22nd Sept.2008
A data heavy week in the UK only stood to further highlight the difficult situation that the Bank of England is currently facing. CPI (Consumer Price Index) pushed higher to 4.7%; well above the BoE’s 2% target, and unemployment rose by 32,500 to 904,900 total and a TUC spokesman said this could rise to 2million in 2009. This rise in jobless claims means the unemployment rate is now at 5.5%, the highest since early 1999. We also saw the minutes of September’s BoE interest rate decision which showed an 8-1 vote in favour of a hold. The one member who voted for a cut was David Blanchflower who voted for a 50 basis point reduction instead of the 25bps that he opted for last month. This split also shows a slight Dovish shift in attitudes as Tim Besley has now voted to hold after he was the only one of the nine member committee who voted for a hike in interest rates last time around.
News in the UK was mainly dominated by the merger between two of Britain’s largest banks where Lloyds TSB will take over HBOS in a £12.2billion deal. Even though this merger may mean thousands of job losses the shares in the two companies went up 17.7% and 17% respectively after the deal was announced on Thursday.
This week Nationwide house price figures released on Thursday will be watched after the lender said that the housing slump could mean a total 25% drop in house prices before the market starts to recover again. In Europe however we could see the ECB’s job of juggling high inflation with slowing growth getting slightly easier as German CPI, the headline inflation figure, is expected to drop below 3% but still remain above target. Also out this week is the German IFO on Tuesday which is a business sentiment survey and a good health indicator for the Eurozone as a whole as Germany makes up a quarter of the 15 member states’ total GDP. The survey is expected to show a negative sentiment towards the current situation but a rise in expectations for the next 6 months. With this in mind the ECB may be in a better situation to look at cutting interest rates than the BoE.
Even with the injection of $180billion by the world’s major central banks to help ease liquidity, we are still expecting to see a cut in both UK and European interest rates towards the end of the year or early in 2009 as both economies look equally bleak. We therefore expect the GBP/EUR cross to remain range bound between 1.2 and 1.2650 for the time being as these cuts are priced into the market, and don’t think we will see any sort of recovery until some time in 2009, if at all.
GBP/USD
Last week Cable moved above the 1.84 mark as the market spurned the dollar following talk of the $700B U.S. bailout. Only two of the “Big 5” investment banks now exist following the failure of Lehman and the sale of Merrill Lynch.
After a tempestuous week of trading, the US dollar ended the week lower as prospects of further intervention by the US government in the financial markets provided a boost to carry trades. With the fed rate sitting at 2.00 percent (kept on hold last Tuesday), the US dollar is now essentially a low-yielding currency like the Japanese Yen.
And how have the markets reacted? By buying all things associated with risk such as oil, stocks, and the Japanese Yen crosses, whilst selling “safe-haven” assets like US and European government bonds, the US dollar, and gold futures. This huge sell-off in Treasuries also led fed fund futures to change their stance and only price in a 28 percent chance of a 25bp cut by the Federal Reserve on October 29, compared to 82 percent on the Thursday before.
On Sunday, Treasury Secretary Henry Paulson said that the nation's still-frozen credit markets are very fragile and Congress must move quickly to pass a $700 billion bailout package for financial firms. ‘The nation's outdated regulatory system for financial markets must be overhauled, but the first job is to get in place the most sweeping rescue package since the Great Depression passed by Congress in coming days.’
This news will be beneficial for carry trades and negative for low-yielding currencies. With Mr. Paulson and Mr. Bernanke both scheduled to speak a number of times during the week, Cable volatility is likely to remain high. In the week coming, US Existing Home Sales and Durable Goods Orders are both expected to fall, while Q2 GDP is not likely to be revised from 3.3%.
CAD
Last week saw the Pound strengthen up against the Canadian Dollar, with the rate climbing back into the 1.90s up to 1.94 at Interbank level on Friday after the pound finally started to show signs of strength following a week of uncertainty in the UK. This week we see retail sales data out in Canada on Monday, which is expected to show around 0.3% growth, which is likely to strengthen the Loonie. CPI Inflation data comes out on Tuesday, which is predicted to be at a five year high of 3.5%, although the decline in commodity prices may reduce the figure slightly.
With its low inflation, a recent surge in carry trades and falling oil and gas prices, the Canadian economy seems in relatively good shape when compared with the other majors, which has led to the CAD showing strength against almost all other currencies. The release of house price data for the UK this week at midnight on Sunday with yet more negative trends may have signalled the start of another difficult week for Sterling, hence the CAD is looking the stronger of the cross currencies at this time.
AUD
The Aussie has fallen back slightly from recent highs, buoyed by better appetite for higher-yielding currencies after the U.S. government announced a rescue plan that could stabilise the battered financial system. The Aussie jumped against the Yen as investors returned to carry trading, where funds are borrowed in low yielding currencies such as the Yen and invested in higher yielding currencies such as the Australian dollar.
The Aussie has also taken strength from a recovery in commodities prices with Oil back up at over $104 per barrel and Gold around $868 per ounce. The AUD had recently been taking a battering with the chaos in credit markets causing a rapid unwinding of carry trades and a dimmed outlook for global growth and commodity prices forcing the GBP/AUD exchange rates to their best level for some time. To ensure that the resurgence of risk appetite doesn’t damage your exchange rate, speak with your account manager about buying forward, a particularly attractive option when purchasing Australian Dollars.
NZD
The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. In fact in the past few months data has shown that some growth in home values has cooled to its slowest pace on records going back two years and overall sales have dropped to a seven-year low. Medium-term inflation pressures are expected to ease, as the RBNZ lowered their interest rates by 50 basis points, and it is therefore appropriate for the RBNZ to move towards a less restrictive monetary policy. Although the interest rate reduction has been brought forward, the overall expected decline has remained unchanged. Looking ahead, the scale and timing of further interest rate reductions will depend on signs of declining inflation pressures and exchange rate adjustments.