26-08-2008 : FCG Market Report 26th August 2008
GBP/EUR
Sterling continued to ease back from the previous week’s gains as figures revealed a lack of growth from the service industry, which has put the U.K. economy at the door step of a recession.
The decline in the manufacturing sector continues to worsen as July’s PMI reading was the third straight month that it contracted and lowest on record. As inflation stands at 4.4% and rising, combined with a labour market which has lost over 40,000 jobs in the past two months, this will weigh on consumer spending going forward. The dour growth story for the U.K. may force the BoE to put aside their concerns about inflation and take measures to foster growth.
Recent US Dollar strength combined with poor German growth have allowed the Euro to remain weak and therefore the GBP/EUR cross has remained range bound despite all the negative feeling in the UK. As a result, clients should be careful if waiting to buy Euros as we expect the not so mighty Dollar to move back which should strengthen the Euro in the short to medium term.
GBP/USD
Last week the Dollar faired turbulently with a selection of interesting data and reports on the currency.
Further disappointing news for the US came when ‘Barrons’, a financial news provider, said the Government may have no choice but to nationalise the two huge US mortgage companies, Fannie Mae and Freddie Mac. This would effectively wipe out share holder equity in the company resulting in massive losses for investors of the two companies. Following the news, Kenneth Rogoff, former Chief IMF economist said the worst of the credit crisis is yet to come predicting more US banks to fail within the next few months. This represents a huge blow for the US and world economy as recently there were murmurs that the US economy was starting to emerge the other side of the credit crisis.
However the US Dollar pushed back up against the Pound early on Monday off the back of surprisingly poor German economic data which swung the Bank of England's trade-weighted Sterling index (overall buying power of Sterling against all currencies) to its lowest level since 1996, which in turn followed a steep fall in 'cable' to a two-year low just above the 1.83 interbank level. This means that within just a 3 month period the pound have fallen over 9% against the Dollar.
Despite the immediate gains seen on Tuesday, the Dollar is still very unsettled which is evident through weak employment data and home building numbers. However, with a sharp deterioration in other key economies including the UK the Dollar is expected to remain strong on the GBP/USD cross and continue strengthening.
CAD
The CAD has been particularly strong over the last two weeks. Although with the world economy slowing down it is reasonable to think that the demand for commodities will also slow down. As a result of this, commodity sensitive currencies such as the Canadian Dollar are particularly vulnerable.
Inflation rose further above the BoC’s 1-3% target, but in line with expectations. This should concern the BoC, however they will take comfort from the fact the core inflation, which stripes away volatile items like gasoline and food, will remain unchanged.
Also recent data has shown, the once seemingly immune economy has recently joined the long list of economies that have been hit by the mortgage crisis.
With little significant data out in Canada until Friday with the Canadian Gross Domestic Product for June, any movements are likely to come off the back of offshore events.
In the medium term, we expect the CAD to be trading between1.925 and 1.98
AUD
With no domestic data of any significance released last week the Aussie was mainly driven by the sell off of the US Dollar and a surge in commodity prices, with the AUD especially benefitting from recoveries made in Copper and Gold.
We also saw the release of the minutes of the last RBA meeting further increasing the expectations that we will see interest rate cuts over the coming months but scaling down the chance of a 50 basis point cut with most analysts now predicting a cut of 25bp in September.
The Pound however did suffer from weak data releases while the Aussie was benefitting from the rise in commodities and even with the expected cuts from the RBA, we still expect the GBP/AUD cross to remain trading between 2.02 and 2.16 for the foreseeable future as we should start to see monetary easing from the Bank of England at some point in the next two quarters.
NZD
Last week saw some surprising strength from the Kiwi Dollar against the ailing pound, with the rates dropping from 2.65 to 2.61. This week we expect the situation to be reversed as the rate climbs back towards the 2.70 mark.
Monday’s trade balance figures saw a significant reduction which weighed heavily on the currency, with the inflation report on Tuesday showing a 0.1% increase in the inflation rate to 3.0% causing further weakness. Business confidence figures on Wednesday are likely to undermine the currency again.
Given the expected weakness in the Kiwi dollar, the informed investor may want to set up a limit order to obtain their currency at a higher rate than available in the current market.
ZAR
This week strong GDP data is likely to provide some relief to market participants. This was partly due to a rebound in the manufacturing and mining sectors, following the electricity crunch in the first quarter. However there has been a strong slow down in finance, real estate activity and retail sales, suggesting households are still struggling amid high interest rates.
In the long run, we continue to favour the Pound against the Rand as we expect it to come out of the current slowdown before South Africa.
Furthermore, once the Rand starts depreciating, it will not take long for foreign investors to start bailing out of the currency, especially given expectations that the country’s two year monetary tightening cycle may have come to an end.