24-11-2008 : FCG Market Report 24th Nov.2008
GBP/EUR
The final week of November starts with Alistair Darling being forced to admit that the credit crunch has now sent the UK into a severe recession. In the Budget six months ago, he pencilled in a strong recovery for 2009, that however, now seems unlikely and it appears that Darling will have to concede that the downturn will be harsh and is expected to last for a number of years. Rumours out over the weekend are that VAT may be cut by 2.5% as part of an emergency package aimed at helping the UK economy. PM Gordon Brown said ‘substantial’ measures would be proposed in the pre-Budget report this afternoon to pump money into the economy.
With plenty of data out this week, the markets promise to remain volatile, with UK GDP out figures on Wednesday, we could find ourselves in a technical recession, which would not bode well for a currency already struggling. Further data comes from Nationwide, in the form of housing prices, which is once again forecast to show a decline. Analysts are suggesting that the cross may well test fresh all-time lows this week and with speculation mounting that the BOE will once again cut rates aggressively in early December, it appears Sterling will struggle to regain any strength in the short-term. This is particularly because the ECB have stated that they do not see deflation as a threat, which means while they are likely to continue to decrease the cost of borrowing, it will be a gradual process.
Overall, despite the already low mid-market rate, it seems that things are going to get worse for the GBP/EUR cross before it makes any significant recovery.
GBP/USD
Last week saw poor economic data coming out of the U.S including a drop in inflation, Philadelphia fed Index, producer prices, leading indicators and jobless claims all pointing in the direction of a worsening contraction in the economy. The Dollar initially traded lower against major currencies amid a temporary rise in risk appetite with investors heading towards high yielding currencies, but as the U.S Federal Open Market Committee’s October minutes were announced revealing that the economic slowdown is expected to last a year or more, investors turned back into the relative safety of the Dollar.
There is a plethora of data out this week which should provide traders with a clearer picture into the economic situation within the U.S. Monday sees the release of the Existing Home Sales Data, but most notable is Tuesday’s release of U.S GDP, consumer confidence and personal consumption which serves as an excellent indicator for the future of the US economy. Also on Wednesday we have the University of Michigan Confidence survey results considered as one of the foremost indicators of U.S consumer sentiment. It remains to be seen whether this data will help or hinder the American economy.
As well as data from the economic calendar, the usual ebb and flow of risk sentiment still remains and grim economic data will be the driver behind the GBP/USD cross.
CAD
Last week the Canadian Dollar continued its dramatic descent against a basket of major currencies such as the US Dollar and Pound Sterling, as fast-falling oil prices sunk the Loonie, while the US Dollar benefited from similarly sharp losses in the Dow Jones Industrials Average. The Canadian currency is now trading near four-year lows, and there is seemingly little to protect the CAD from further losses.
Last Friday’s Canadian CPI index showed that it fell by the most since 1959 during the month of October, bringing the annual rate down to a 5-month low of 2.6 percent. This decline was led by gasoline prices, but even the Bank of Canada’s core measure of CPI slipped, though the annual rate held steady at 1.7 percent. Nevertheless, the data suggests that inflation in the country is likely to fall below their 2 percent target sooner rather than later, with interest rate futures now close to fully pricing in a full 50bps cut at the BOC’s next meeting in December.
Looking ahead at this week’s data, Tuesday’s release of Canadian retail sales is forecasted to have gained 0.3 percent in September, and excluding autos, retail sales are forecasted to have risen 0.2 percent. Furthermore, the September reading of Canadian wholesale sales surprisingly jumped 1.5 percent, and can sometimes serve as a good leading indicator for the headline retail sales report. As a result, this release has the potential to lead the Canadian Dollar higher, though a disappointing figure and continued falling oil prices could weigh heavily on the Loonie.
All things considered, it may be wise to speak to your dedicated account manager to discuss all options available and secure the best rate of exchange possible.
AUD
Last week saw the Pound finally beginning to regain some ground on the Aussie Dollar. Despite starting the week at 2.27, the cross gradually moved up throughout the week, hitting 2.40 on Friday. This was caused by increased risk aversion from hedge fund managers, and a slight stabilisation in Sterling, which held firm against most majors amid rumours of large cuts in the UK taxation system to provide relief to the British economy.
Over the next week, we see few significant data releases from Australia, meaning we will see a clean float for the AUD, and the direction of the cross will be dictated primarily by investor sentiment. If the UK government’s rescue plan is welcomed by the markets, we can expect to see another week of significant gains against the Aussie Dollar.
NZD
As credit conditions remain far from normal, fears of a sharp downturn in the $128B NZ economy has already raised bets that the Reserve Bank of New Zealand will once again lower borrowing costs at the December 3rd policy meeting. A Bloomberg News survey showed that 11 of the 14 economists polled expect the central bank to cut the benchmark interest rate by 100bp from 6.50% to 5.50%, while the remaining forecasts recognize a chance for a 150bp rate cut to bring the target rate down to 5.00%. Moreover, Credit Suisse figures are showing that market participants anticipate the RBNZ to cut at least 225bp over the next 12 months, which has risen from an initial estimate of 175bp from the previous week.
The downturn in the interest rate outlook suggests that investors remain bearish against the New Zealand Dollar, and may lead Governor Alan Bollard to lower borrowing costs well into the next year in order to stave-off further downturns in the economy.
The current uncertainty of the world economic climate continues to weigh heavily on the NZD as speculators continue to hold an anti-risk position, which is preventing the high yielding currency from benefiting through carry trades. In short, the Kiwi looks set to continue to operate within its current range but to lose ground rather than gain, although do be aware of the of the potential for the weak Sterling position to pull the cross down as we will also look for the UK base rate to move toward 2%.
ZAR
The Rand has suffered greatly in recent times due to elevated risk aversion and the price of gold, normally a safe haven to put your money in these poor economic times, has fallen substantially.
Given its extremely volatile nature, for those needing to buy South African Rand in the near future it would be wise to take advantage of any short term gains and speak with your account manager about the use of stops and limits.
In the last month the Rand has been trading between the high 18’s to the low 15’s although we expect it to stay nearer the low 15’s in the coming weeks.