27-04-2009 : FCG Market Report 27th Apr.2009
EUR
Alistair Darling’s budget, announced last Wednesday showed that the UK would run a budget deficit of 12.4% of GDP, forcing public borrowing up to £175bn this year, and we should also expect to see the economy shrink by 3.5% during 2009. This further reinforcement of how badly the global crisis is affecting Great Britain forced the Pound to fall on the currency exchange markets from a high of nearly 1.14 on Monday to open this morning at 1.1020. We also had Q1 GDP data for 2009 out on Friday which showed that the economy shrank by 1.9% for the quarter, the biggest since 1979 and below market expectations. On the upside, we saw figures from Hometrack this morning showing a slight improvement in the decline of house prices, falling 10.1% in April compared to a year ago, their slowest monthly decline in the last 12 months.
All in all Sterling cant help but get caught up in the disappointment of the GDP figures and budget report, but it will still find some strength based on the pickup in some of the leading indicators.
On the continent, the German IFO (business confidence) index was stronger than expected on Friday and came out at a 6 month high, although it is still at very weak levels. The improvement helped to boost demand for the Euro and could help to discourage more aggressive policy decisions from the ECB at their next meeting in May, as there will most likely be more opposition to quantitative easing measures like we have seen in the UK. There will also still be some uncertainty over the ECB’s position which will dampen support for the Euro, especially after council member Wellink’s comments that rates below 1.0% should be discussed.
We also saw a report from “Sue Deuttche Zeitung”, a German language paper that suggests German banks could potentially face another USD1trillion in write downs on bad loans to Eastern Europe.
This week there is a raft of Eurozone data out starting on Tuesday which will include German & French inflation, business and consumer sentiment surveys, German retail sales, unemployment from Germany and the EZ, and finally Eurozone CPI data. While some of these may surprise to the upside, we are expecting to see a recovery in the GBP/EUR rate and could even see it start to test levels near those that we saw last week. Either way, it looks as though we are in for another volatile week.
USD
Last week saw Sterling put up a stronger fight than expected as we saw a data-heavy calendar likely to see the Pound lose significant value against the US Dollar. In reality, it was not until Wednesday afternoon’s budget speech from Chancellor Alistair Darling that we saw the Pound fall significantly against the Greenback, losing almost 2% in an hour, as Darling unveiled his planned tax increases for high earners.
Looking to the week ahead, we’re expecting a quieter week from the UK, with US GDP and unemployment figures from Q1 2009 likely to dominate the headlines. These could cause some Dollar weakness, but Sterling remains under heavy selling pressure from a reduction in the risk appetite of investors, making it difficult to predict the short-term future of the GBP/USD cross.
To elaborate on the upcoming data releases – US GDP is expected to fall by 5% YoY, a smaller reduction than in Q4 of 2008, but confirmation that the recession is deeper and will likely last beyond analysts’ initial projections. Unemployment data is also likely to confirm that the unemployment rate continues to climb, reaching the highest levels since World War II. The only data of note to come from the UK this week is manufacturing PMI on Friday, likely to show an increase in factory orders for the first time in 2009, which may provide some support for Sterling.
To ensure that you get the best possible exchange rate when buying US Dollars, speak to your Account Manager at FCG to guide you through the process.
AUD
In deciding to lower interest rates by 0.25% to 3% earlier this month, the minutes of the Reserve Bank of Australia's (RBA) meeting revealed that it viewed the near-term outlook for demand as weaker than earlier expected. RBA Governor Stevens also officially declared that Australia had entered recession, undermining some support for the Australian Dollar. The Australian Dollar recovered late in the week as global stockmarkets rallied, with the latest inflation data also tempering expectations of further interest rate cuts.
The GBP/AUD closed on Friday at 2.027, down 1% from 2.047 a week earlier, benefiting those converting Australian Dollars into Sterling. The chart below tracks how the Aussie has moved over the last month:
The economic calendar for this coming week is generally uneventful, with most data releases reflecting themes that are likely to have been already priced into the exchange rate. New Home Sales and Business Confidence (both due on Thursday) will offer further evidence on the domestic economic outlook. If the data sets are worse than expected, and confidence in a global recovery becomes more fragile, the Australian Dollar may come under some selling pressure.
Key Data Releases This Week
This week’s Data - How do these economic data releases affect exchange rates?
Well, it's one of the most important factors. Analysts will already have predicted what the results of these releases will be, and investors and traders will already have moved their funds in anticipation of higher returns. If however the figures are any higher or lower than predicted (which is often the case!) then the markets, and thus exchange rates, will correct accordingly.
It's imperative then, if you have a currency requirement, that you know what releases are upcoming, and the likely effect on the markets so you are not unduly exposed. This is where contracts like Forward Contracts, Stop Loss and Limit Orders can protect you from the market fluctuations.
As you can see below, this week is an extremely busy one in terms of economic data releases. Whereas last week was all about UK data such as the budget, this week we have lots of releases for the Eurozone. The ECB president gives a press conference today as to how the ECB observes the current European economy and the value of EUR. His comments may determine a short-term positive or negative trend, so watch GBP/EUR rates today.
Wednesday is very important, as we see various measures of confidence from the EU also. After big drops in the Pound last week, all eyes are on the Eurozone. There may be an interest rate cut next month for the EU which could improve Sterling to Euro rates, and there is also talk that the ECB may start a foray into quantitative easing, much like the UK has already done.
So, rates may improve, but do be cautious - it's like a tug-of-war where the decline in UK economy is pulling one way, and possible measures in the EU are pulling on the other. Who will win? Nobody knows. Clients that have a requirement to purchase Euros are gambling the cost of their purchase on this tug-of-war, and if you don’t want to lose out, then talk to us about tools we have available to protect you whichever way markets move, and lock in commercial foreign exchange rates.
Monday
Germany - Consumer Confidence
UK - Mortgage Applications
EU - ECB President Speech
Jap - Retail Sales
Tuesday
Germany - Consumer Price Index
US - Consumer Confidence
US - Trade Balance
Wednesday
Jap - BoJ Monetary Policy Report
Interest Rate Decision
NZ - Business Confidence
Interest Rate Decision
EU - Consumer Confidence
Economic Confidence
Industrial Confidence
US - Mortgage Applications
Gross Domestic Product
Interest Rate Decision
Thursday
Aus - New Home Sales
Business Confidence
Ger - Unemployment
Retail Sales
UK - Nationwide House Prices
US - Jobs Data
Personal Income
Personal Consumption
Employment
Friday
UK - Money Supply
Mortgage Applications
Purchasing Managers Index
US - Factory Orders
ISM Manufacturing