27-10-2008 : FCG Market Report 27th Oct. 2008
GBP/EUR
Last week saw the announcement from Bank of England chief Mervyn King that Britain was about to enter a recession. This, coupled with Prime Minister Gordon Brown hinting of another rate cut, has meant that the Pound has taken a battering, falling to record lows against the Euro despite poor economic data from the Eurozone. After interest rate cuts on October 8th, many now expect another aggressive rate cut in order to ward off the looming, prolonged recession. With mounting pressure being put on the U.K for rate cuts, similar moves are now being considered by the E.C.B.
The housing market looks bleak with asking prices for U.K homes falling by 4.9% in October from a year ago. The quarterly poll from the Confederation of British Industry showed that conditions in the manufacturing sector are at their worse in 30 years. U.K GDP growth contracted by 0.5% from last quarter, much more than was expected, further highlighting the severity of the economic situation in the U.K.
Considering poor data in Europe as well as the U.K it was surprising to see the Pound sell off so heavily against the Euro, suggesting that Sterling may have been oversold a little. The immediate effect of this could be appreciation for GBP. With both economies looking equally dismal the GBP/EUR cross is likely to remain range bound from the low to high 1.20’s, in the medium term. Although in the short term this is most likely to remain a tighter range, therefore for those buying or selling Euros it may be wise to take advantage of any jumps in the market.
GBP/USD
Last week risk aversion dominated all markets, and the demand for liquidity and security has sent panicked investors to the US dollar.
However, with the world’s largest economy wading slowly into a recession and interest rate speculation pointing to the lowest returns from US assets in history, how long can the greenback’s rally last?
Meanwhile GBP dipped below the 1.53 level against USD, and we may yet see Sterling looking to test Friday’s low of 1.5257 as U.K. Prime Minister Gordon Brown hinted at further easing with these comments “Inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the BoE, round the world to make a decision about interest rates. Speculation has increased that world leaders will use the Federal Reserve meeting this week as an opportunity to launch another coordinated rate cut.
Economists in the US are expecting a 25bps cut to 1.25%, but many market participants have already priced in a 100% probability of a 50bps cut and even a 46% chance that the MPC will take the benchmark rate all the way down to 0.75%.
Central bankers will, however, need to consider whether such a move will help (as previous easing hasn’t yielded the intended effects with banks not passing on the savings), and if it will instead just invite more problems when the global economy actually recovers.
Other key data out this week following the Federal Rate Decision meeting on Wednesday, will be the advanced reading of the 3Q GDP.
In simple terms there is very little doubt that the US is already one foot into a recession, but despite all of its horrendous fundamentals, the U.S. economy is still viewed as the best positioned to emerge from the crisis first, which may continue to be a supportive factor for the US Dollar.
CAD
Fears of a global recession and weaker commodity prices once again weighed heavily on the Loonie last week. The Bank of Canada cut rates by 25 basis points, in an effort to encourage spending and stimulate the markets. The cut however, was less than the 50 basis points expected by the market although analysts have already commented that they expect further cuts.
Despite the poor Canadian market data, the Canadian Dollar actually gained ground against the Pound, although this was arguably due to weak data coming out of the UK rather than a progressive Canadian Dollar performance.
Falling commodity prices continue to put pressure on the Canadian Dollar as metal and oil prices drop. This weighs heavily on Canada’s status as a major exporter of these commodities and leaves them vulnerable to the slowdown in the US, as the US is their major trading partner. As a result, the outlook for the Canadian economy remains bleak, however, the expectation for the GBP/CAD cross is for the pair to remain relatively stable as weakness in the Pound counteracts weakness in the Canadian Dollar.
AUD
The Australian Dollar appears to have resumed its downward trend following a couple of days of consolidation. Higher than expected inflation data from the third quarter has provided some support as it lowered expectations of a further cut in interest rates. However, despite the elevated price pressure, RBA Governor Stevens fully expects inflation to ease as growth slows which he reinforced when he stated “Forces seem now to be building that will start to dampen pressures on prices -- even though we won't have evidence of that for a good six months”. Therefore, expectations are that the central bank will continue to cut rates which will be a weighing factor on future price action.
On top of the poor domestic data the Aussie also suffered from the continued unwinding of carry trades as investors pursued their flight for safety, with the beleaguered currency hitting a 7 year low against the Yen and 5 year low against the USD.
Overall the GBP/AUD cross looks set to be governed by weakness, with exchange rates likely to depend on which economy is weaker at any given time. Analysts are pointing to interest rate futures to try and determine the outlook, with both central banks looking to ease the cost of lending over the next quarter. Those buying the AUD might want to make use of Limit orders to take advantage of the current highs and volatile market and Stop Loss orders to prevent any sudden market movement in the opposite direction. If you do not need your currency just yet but like the rates you are seeing make sure you speak to your account manager about the option of buying forward.
NZD
As expected the RBNZ cut the benchmark interest rate by 1 point to 6.5% in order to stimulate growth. They have also indicated that there is likely to be a further cut of 0.5% before the end of December 2008.
The Kiwi reached fresh lows against a basket of major currencies including a six year low against Yen. This was mainly due to renewed risk aversion and the unwinding of carry trades.
The Kiwi is expected to remain near the recent lows against most major currencies, as investor attitude to risk continues to decide the direction of the markets. Therefore we are likely to see further weakness for the Kiwi until stock markets calm down.
The NZD/GBP cross is likely to remain between 2.8 to 2.9 although could drop further in the short to medium term.
ZAR
Risk aversion has remained elevated amid fears of a looming global economic slowdown, which kept investors wary of risky assets and encouraged large scale unwinding of carry trades.
The South African Treasury have cut their economic growth forecast from 4% to 3.7%.
The finance minister has said he will keep their ambitious spending plans to help stimulate the economy. However he has reassured investors that inflation targeting will remain the same.
He also said that South Africa is fairly well equipped to deal with the economic slowdown because of their relatively stable banking sector.
To sum up the Rand suffered last week as market participants continued to pull money out of risky assets. However, poor data from the UK has kept the cross fairly stable. We expect the ZAR/GBP cross to remain between 16 and 18 in the short term.