01-08-2008 : FCG Market Report 28th July 2008
GBP/EUR
Both the British and EuroZone economies have looked weak, so neither is exhibiting enough strength to achieve a significant gain against the other. As a result, the Euro fluctuated very little over the past week, remaining between 1.2450 and 1.2750 throughout (Interbank).
The reduction in oil prices to below $125/barrel should provide some relief from fears of inflation, leaving the Bank Of England unlikely to increase rates before the end of the year, allaying fears of inflation voiced by Monetary Policy Committee member Besley who voted to raise interest rates in the MPC meeting at the start of July.
All of last week’s data releases proved more disappointing than expected, with retail sales dropping by 3.9%, significantly more than the predicted 2.6%, and the Rightmove.co.uk house pricing index for July showed a 1.8% reduction in prices, compared with a 1.2% reduction in June, indicating there may be further to fall before house prices level out.
Bank of England minutes and weak IFO figures from Germany both caused the GBP/EUR rate to climb into the 1.27s on Wednesday and Friday, however both settled down, with analysts expecting the rate to remain rangebound between 1.23 and 1.29, slightly biased towards the lower end in the short term as the markets will have to take account of a predicted rise in interest rates in the Euro Zone.
Analysts anticipate a similar week to last week; however UK consumer credit figures on Tuesday and Euro Zone Unemployment figures on Thursday may bring unwelcome surprises and cause the Pound to retrace its recent gains.
GBP/USD
Last week saw a rebound of the Dollar against sterling based on several critical factors. The first major factor was centred on the controversy that had plummeted the Dollar through the two to the pound mark in the previous week; the Fannie Mae and Freddie Mac debacle. News therefore that a rescue package, with positive aspects for all concerned, was imminent last week, gave the dollar much needed strength. Indeed a steep plummet in oil prices was an important player in the dollar strength as well, combined with some further positive economic data and positive sentiment from economists.
However, this sentiment is not necessarily going to save the dollar in the long run. Most of the data that is released stateside is resoundingly bearish and expected to continue to be so for some time. The only decent news for the cable pairing is that the British economy is apparently set to slow down rapidly as the Bank of England appears to be behind its interest rate cutting cycle which will surely have to materialise soon. If this does happen, and the Fed is forced to hike interest rates again because of high inflationary pressures then we could see the greenback go through a period of strengthening against the pound. Therefore with levels still extremely attractive for UK buyers of the Dollar, forward contracts are looking a particularly clever option in this climate.
CAD
Disappointing economic data has weekend the Loonie against the GBP for the second consecutive week. Retail sales figures fell below analysts bullish forecast and the CAD tumbled as a result.
Inflation data has surged above the BoC’s 1-3% target for the first time since September 2005, however more importantly core inflation, which stripes away volatile items like gasoline and food, remained unchanged. This is in line with BoC’s projection that inflation would peak at 4.3%, but would remain in check without any monetary tightening.
So despite inflation tipping over the BoC’s target, these inflation figures are encouraging and could even allow the BoC to cut rates if required. However analysts say it is unlikely that they will cut rates before the end of the year.
The CAD/GBP cross is likely to remain range bound between 2.05 and 1.98 in the short term.
AUD
News from Australia has continued to depress, after a second major domestic bank said it would book more losses from its exposure to distressed credit markets. This has furthered speculation that interest rates in Australia have peaked, news that is likely be damaging for a currency which generally benefits from Carry Trading, due to its relatively high interest rates.
A cut in interest rates in a country usually leads to the respective currency weakening on the global markets as it becomes less attractive to hold funds in the particular country. This can be seen by the effect the cut in interest rates in New Zealand had last week.
The potential gains, however, are expected by most analysts to be fairly short-lived as even with a .25 cut the base rate would remain at a relatively high level on the global market at 7%.
Long-term it remains to be seen as to whether or not the Aussie economy will suffer as much from the global credit crunch as the UK, but some degree of volatility is more than likely in the near future.
NZD
The kiwi remained under pressure against a basket of currencies at the earlier part of last week a head of the RBNZ rates decision on 24th.
There wasn’t much data released last week. However on Thursday we had the RBNZ rate decision out, with a rate cut of 0.25 basis points bringing it down to 8%, this surprised many market participants, as many weren’t expecting a cut until September. This is the first rate cut in 5 years and the RBNZ has indicated that there was more to come. It is reported that Hanover Finance (NZ fifth largest finance company) has suspended repayments on all of its loans as the credit crisis goes on, this comes after the National Australia Bank announced that is was writing off $798 million in credit market related losses.
The week ahead doesn’t look great for the NZD, with the release of Trade Balance for June, which is due out later today and the NBNZ (National Bank of New Zealand) Business Confidence survey due out at the end of the week, however if they are to come in positive, the Kiwi still faces a potential upside over the coming weeks.
With the RBNZ cutting rates it has caused the currency to drop. Now is an ideal opportunity to buy NZD as it is at a 3 month high, and with the pound looking to be in a vulnerable position, we don’t expect to see it go any further.
To ensure you get the best rate when buying your Currency stay in regular contact with your account manager, who will monitor the volatile currency markets for you and make sure you are in a position to move quickly with your funds so that you can take advantage of any spike in the market as and when it occurs as on large sums of money the saving can be ‘000s.