23-02-2009 : FCG Market Report 23rd Febr.2009
The pound has suffered massively against the Euro over the last 6 months, nearing parity at the start of this year. We have however seen a gradual recovery in rates this year, the question is, will this continue?
The main reason the rate has improved is not to do with Sterling gaining strength, rather the Euro becoming weaker as the outlook for the EU economy darkens, and the currency becoming cheaper to purchase. Many economists now believe however, that the UK economy is fundamentally weaker than the EU economy and is expected to remain so throughout this year.
With the Bank of England (BoE) having already slashing Interest rates to 1%, there seems precious little more room to try and stimulate the economy any further using this method. Many analysts now believe the BoE may resort to Quantitive Easing in an attempt to boost the economy - essentially pumping newly created money into the economy.
Treasury Secretary Stephen Timms has suggested that plans to inject more cash into the economy could happen "quite soon". In our view this measure is one of last resort as the traditional method of economic stimulus (interest rates), have almost reached the lowest they can go. For this reason, if implemented, the markets may well view this as a desperate measure of last resort, and GBPEUR rates could well drop back to parity or below as the year goes on.
If you have a requirement to purchase Euros, consider fixing your rate sooner rather than later, to protect you against a possible downturn in rates. A €150k purchase made today is a staggering £17k cheaper than at the beginning of January, a saving of 12%.
Data of note this week
UK GDP Data on Wednesday. This is the total value of all goods and services produced by the UK. GDP is considered as a broad measure of the UK economic activity and health. Recent declines in GDP have confirmed the UK is in a recession. Any further decline in this measure could cause further weakness for the pound and exchange rates dropping.
Consumer Price Index data for the UK, EU and Germany. This measures the average price change for goods and services purchased by households, and is seen as a good indicator of inflation, and therefore can give insight as to how central banks may move interest rates in the months to come. We also have UK House Price and Consumer Confidence data, both of which if negative could cause GBPEUR Exchange rates to fall. Consider fixing today’s Euro rates using a Forward Contract, and make sure your currency costs you no more than necessary.
USD
There was a flurry of economic data as well as news from president Obama last week. Building permits and house starts were down to their lowest levels falling 50% from a year earlier and thanks to a stronger U.S Dollar and lower commodity prices, import prices fell negative for the sixth straight month. Added to this, industrial production contracted after manufacturers slashed output on the back of falling demand. President Obama announced a $275 billion program that will cut mortgage payments with detailed guidelines out on March 3rd.
Looking into this week’s news, on Tuesday the Conference Boards consumer confidence index for the month of February is forecasted to reach a record low of 36.0 down from 37.7. This slump in sentiment means that the recession is becoming ever deeper. Although the consumer confidence is usually a major market mover, the focus of the day will be on Federal Reserve Chairman Ben Bernanke due to testify before the Senate on the economic and Fed policy at the same time. Investors will be listening intently for more detailed outlooks on unemployment, growth and inflation. On Thursday U.S Durable Goods Orders are expected to fall 2.3% which shows that domestic demand is showing absolutely no sign of recovery with the figure failing to rise for the sixth successive month. Finally on Friday is the Q4 GDP for the U.S which is now forecasted to be lower than the initial estimate of 3.5% to a sharp 5.4% contraction the worst since Q1 1982. If a lower than expected result is shown than this will only suggest that growth will continue its depressingly downward spiral.
Data for the U.K is relatively lightweight except for Friday’s release of GDP figures but unlike the U.S the U.K forecasted figures are usually well anticipated as data on Gross Domestic Product components are available beforehand. With reserved news for Sterling and a basket of worse than expected data for the Greenback it may mean that Sterling could make some significant ground over this coming week.
CAD
The Canadian Dollar came under some selling pressure throughout last week, with fears over the global economic outlook and lower commodity prices (particularly oil prices, which fell by about 5%) weighing on the currency. The Loonie is heavily affected by movements in the prices of commodities, especially oil, of which it is one of the largest exporters in the world. As such any continuation of this slide in oil prices could have, at least for the short-term, a positive impact on the value of Sterling against the CAD.
Further to this, inflation in Canada is well below target, which has triggered speculation that The Bank of Canada will look to cut rates even further, damaging news given that the base rate currently sits at just 1%. Regular readers will be aware that this, in theory, will weaken a currency as investors shift funds elsewhere in order to increase their yield. The only notable domestic data release this week from Canada is Monday's retail sales report, with further declines in consumer spending widely anticipated.
Considering the rare possibility that we may see some sterling strength, it may be wise to speak with your FCG account manager about the benefits of Limit Orders in order to ensure you make the most of your FX requirement.
AUD
Last week saw the pound regain some strength against the Australian Dollar, moving back above the 2.20 mark at mid-market level. This was primarily due to UK data releases turning out to be much better than expected. CPI data showed just a small drop in the core rate of inflation to 3.0%. Minutes from the Bank of England suggested that MPC support the implementation of quantitive easing measures to restabilise the British Economy, and in a surprise on Friday, retail sales figures showed a 0.7% increase, much greater than the 0.1% decrease expected. On the opposite side of the globe, minutes from the RBA showed that further rate cuts were likely as the Australian Economy continues to struggle.
Looking to the week ahead, we have a wide array of data released from Australia, the most significant of which will be the Leading Index from the Conference Board of Australia which will show medium term growth forecasts for the economy. We also have the monthly imports balance and data from the construction industry on Tuesday, followed later in the week by private credit figures and a carry-trade report from the RBA. In the run-up to the next RBA interest meeting, we may also see a dovish statement released by Governor Glenn Stevens.
Early trading on Monday morning saw Sterling continue to strengthen against the majors, including the Aussie Dollar, however with UK GDP figures released on Wednesday, analysts are unsure as to whether this trend will continue. Speak to your account manager to keep up to date with the fast moving GBP/AUD cross.
NZD
There was no data of any real significance on release from New Zealand last week so the fact that we had some better than expected data from the UK meant we saw the GBP/NZD cross move from a low on Tuesday of 2.7450 to a high this morning of 2.85. The data mentioned was a mix of house prices and inflation; with house price figures from Rightmove and HBOS showing a slight improvement for the month and UK inflation also showed that it is cooling much slower than expected with a YOY figure 3.0% down from only 3.1%. We also had a surprise 0.7% rise in retail sales released on Friday which again helped to strengthen the Pound over some of the more volatile currencies such as the Kiwi.
This week looks like more of the same with very little out in New Zealand so we will most likely see the Sterling – Kiwi cross driven by goings on in the UK. The key data release this week is the final UK GDP Q4 figure which is likely to be revised downwards YOY from -1.8% to -1.9%. We are still undecided about how damaging this will be for the Pound and could also see a worse than expected reading so those looking to purchase NZD over the next month or so may want to take advantage of the higher than expected exchange rate that we are currently seeing.
ZAR
The South African economy is expected to grow at a rate of 1.2% in 2009 as the slowdown in the global economy takes effect.
Unlike many other countries, the South African banking system is in good condition and continues to function well without any assistance from the government. Therefore South Africa’s challenges are not the financial system but a backlash from the global credit crunch.
Helping the Rand, the price of gold has pushed near the $1000oz last week and is forecast to remain bullish in the long term and if the equity market does not pick up the will continue to rise.
The data to watch this week will be the growth figures for the last quarter of 2008 due out on Tuesday. If the figures are worse than expected The Governor of the South African Reserve Bank (Mr Mboweni) has suggested they may cut rates further ahead of the meeting in April. With all this in mind, we expect the GBP/ ZAR cross to remain just below 15.0 in the short term. Anyone looking to buy rand in the near future may be wise to do it sooner rather than later due to the extremely volatile market.