23-03-2009 : FCG Market Report 23rd Mar.2009
We saw another difficult week last week for those buying Euros, as the cross moved down from 1.10 to 1.05 before staging a slight recovery in the early trading on Monday morning. The continued falls of the week were largely due to a continued lack of confidence in the UK economy and several announcements over the course of the week regarding the state of the British banking system. Analysts discovered that nationalised lender Northern Rock had continued to approve unsafe mortgages for a further 6 months after the government intervened to support the beleaguered bank. We also learned more from former RBS chiefs who again faced a Treasury Select Committee hearing in order to ensure that appropriate legislation is put in place to prevent a repeat case.
Sterling was further undermined in the currency exchange markets by weak data releases from the UK and the continent, with record unemployment figures released on Wednesday creating the biggest headlines, as the number of people out of work surged past the 2 million mark. We also saw Bank of England minutes which showed that the MPC voted unanimously to cut rates to 0.5% and begin quantitative easing measures with a £75bn cash injection into the economy. In the Eurozone, PPI inflation data and unemployment figures came out better than expected, easing some of the tension surrounding the single currency.
The GBP/EUR cross has moved over the past week, with Wednesday’s drop and this morning’s gains being the most notable spikes:
The week ahead looks to be a turbulent one as we see whether Sterling can sustain its early gains against the Euro. Speak to your FCG Account Manager to ensure that you receive the best possible rates of exchange.
USD
The US Federal Reserve held interest rates at a 0-0.25% range last week, as was widely expected. The big surprise though was their shift in position over 'quantitative easing', as they agreed to undertake a purchase of $300bn of longer-term government debt over the next six months as part of additional plans totaling $1.15 trillion. The US Dollar plunged after the announcement, raising concern about its status as a relative safe-haven, as foreign currency investors moved rapidly to shift their funds away from the struggling Greenback. The plans caused the biggest one-day loss for the Dollar against the Euro ever, with the single currency becoming a favorite for investors looking to ensure the safety of their funds, and there were further losses for the USD against all the major currencies, including Sterling.
Furthermore, indicators of the health of the US economy remained subdued with industrial production falling close to a seven year low, leading some analysts to suggest that there could be more Dollar weakness to come. In contrast others suggest that given the substantial movement seen towards the end of last week we may see some rebound early this week.
All things considered, the argument either way hinges on whether or not there has actually been a return of risk appetite amongst investors. Notably both the USD and JPY have weakened considerably recently, while there has been a recovery from traditionally higher yielding currencies such as the AUD and NZD. The difficulty at the moment is to calculate whether there has been a genuine increase in investors looking to increase their rate of return in more traditionally volatile currencies, or whether investors are simply running from the struggling U.S economy.
Those with an upcoming USD requirement should keep a close eye on the final estimate of US Gross Domestic Product for Q4 of 2008, which will be published on Thursday. If the U.S economy has declined further than expected then there could be a fantastic opportunity for those looking to make a $ purchase later this week.
For further details of what could affect commercial foreign exchange rates over the coming weeks please contact your FCG Account Manager who will also be able to explain the options available when securing your exchange rate.
AUD
The Reserve Bank of Australia's (RBA) minutes of this month's meeting (where interest rates were left unchanged for the first time since it began cutting in September 2008) suggested scope for further cuts in the months ahead. Policy makers chose to pause in order to be able to gauge the impact of their prior easing which saw them lower their target rate by 4.0 percent to 3.25 percent - a 45 year low. Whilst the RBA was encouraged by improved lending and housing market activity, it also assessed a reasonable case for a cut in light of global economic developments. However, a growing belief that Australia may be in better shape than most, as well as stronger commodity prices and investor sentiment, enabled the Australian Dollar to rise against Sterling for a third successive week. The printing of money by major central banks has raised concerns of re-inflation which has pushed commodities higher as traders look to hedge their exposure.
The GBP/AUD closed on Friday at 2.1043, down 1.08% from 2.1272 a week earlier, benefiting those converting Australian Dollars into Sterling.
There is little in the way of market-sensitive domestic data this week, with Australian Dollar direction therefore likely to be dominated by global financial and commodity market developments.
Key Data Releases This Week
Most economic data releases this week are from the UK, EU and US. Therefore this week’s summary will focus on Sterling, as the strength or weakness of the currency this week will affect Sterling exchange rates for every major currency. Therefore, if you have a requirement to buy any major currency such as CAD, NZD, AUD, ZAR, CHF, THB etc, then read on……
What next for Sterling?
After dismal figures last week showing a record surge in unemployment and a survey revealing that manufacturing orders fell at their fastest rate in 17 years, all eyes now turn to this weeks UK data releases (see below).
Inflation figures for February are due for release Tuesday, followed by key retail sales numbers on Thursday and the final estimate of Q4 Gross Domestic Product (GDP) on Friday, alongside the current account balance.
Keep a keen eye on these GDP figures as we’ll see them for the UK, New Zealand and US this week. GDP is a measure of a country's economic activity, namely of all the services and goods produced in a year and so is a very good reflection of how the economy is performing. It can therefore have a huge impact on exchange rates.
Recent figures show an alarming contraction in output, officially putting the UK in recession. Any further decline could weigh heavily on the Pound, and cause further drops in exchange rates.
Other data:
Monday
Bank of Japan Minutes
Tuesday
German Purchasing Managers Index (PMI)
EU PMI (Purchasing Managers Index)
UK CPI (Consumer Price index)
UK RPI (Retail Price Index)
Wednesday
US Home Sales
German IFO business Climate
Thursday
UK Nationwide House Prices
UK Retail Sales
US GDP
US Jobless Claims
JPN – Retail Trade and CPI
Friday
UK GDP
US Personal Expenditure