29-09-2008 : FCG Market Report 29th Sept. 2008
GBP/EUR
The British Government have recently announced a widely expected bailout plan of mortgage lender Bradford and Bingley. Bradford and Bingley’s branch network and deposit business will be sold to Spain’s Banco Santander and the remainder of the group will be nationalised. This has prompted sharp selling of the pound earlier in the global session as it further highlights the demise of the housing market.
The leading indicator for the growth of the Eurozone’s largest economy, the German IFO index, fell to its lowest level since May 2005. Also we have seen ECB officials this week showing concern over the outlook of the Eurozone growth, although they have maintained a tough stance on inflation which means interest rates will remain on hold for the time being. On Friday, this was further confirmed when one ECB official did state that there may be a rate cut in March, or possibly before, given the current economic and financial situation.
Key releases from the U.K. will be the announcement on Tuesday of second quarter GDP, which is expected to be 0%. However if the U.K. economy shows any negative growth then we will be another step closer to a nationwide recession. Also out on Thursday we have the release of Nationwide’s house prices for the last 12 months. Last month showed a year on year fall of house prices at -10.5%, this month it is expected to increase to -12.6% indicating further lack of growth in the housing market.
GBPEUR cross is expected to be at the mid to low 1.20’s due to the poor figures this week.
GBP/USD
Volatility dominated the US currency last week. The dollar fell sharply from 1.8550 to as low as 1.80. Lawmakers finally released the details of the $700-Billion dollar plan to rescue America’s financial system and end the credit crunch. An agreement on this plan could well be positive for the Dollar and may bring much needed stability to the US markets. On the other hand, even if Congress can hammer out the details of a financial rescue, they may still come up short of reviving lender and investment confidence. In most of the major failures that have resulted from the subprime meltdown, the final nail in the coffin has come from a panic withdrawal of deposits and capital as opposed to business-ending losses. Even if the immediate fears are purged, we are still left with the long-term economic consequences of this crippling period. Many market participants had believed the US economy was heading for a recession even before this fundamental stress was added.
Trying to forecast direction at the moment is proving relatively difficult, however we have to say that in the near future we may yet see further rate cuts by the Fed, which would put pressure on the Dollar and push Cable up further, until the latest fallout impacts in the UK once again or the BoE cut their interest rates. Fed Fund futures are now fully pricing in a 25bp rate cut for the October 29th meeting and there is a 32% chance that the central bank will act by slashing the benchmark by 0.5%.
CAD
The Canadian economy was firmly focused last week towards the wrangling in the US over the $700 Billion bail out by the Government. The Canadian Finance Minister ‘Flaherty’ warned on Thursday of dire consequences to the global economy if the US Congress did not pass the rescue package.
Mark Carney, the head of the Bank of Canada echoed Flaherty’s comments, saying it could minimise the economic costs and length of the global credit crisis if executed well. He also went on to say that although the Canadian financial institutions were better capitalised, they were not immune to the global financial crisis. With this in mind, the Bank of Canada announced that they would pump an extra CAD $6 billion into the financial markets during October to provide extra liquidity.
In other data releases in Canada, retail sales contracted indicating a slowing economy. However, inflation pushed above expectation, therefore restricting the Bank of Canada’s ability to cut rates and provided strength for the Loonie in the short term.
This week for Canada will follow a similar path to the last, with anticipation over the $700 Billion rescue plan and whether it is ratified by Congress. If it is, renewed confidence in the Dollar could extend the Canadian Dollar’s purchasing power over the Pound pushing the Canadian Dollar up further against the beleaguered Pound. However, in the longer term, concern over falling demand for commodities could damage the CAD and provide some much needed support for Sterling.
AUD
With very little data out this week the Aussie is likely to remain fairly stable. It remains to be seen whether the U.S bailout plans will take place and while we wait on Congress’ decision the balance between risk aversion and risk appetite remains unusually fine.
AUD exchange rates are likely to be influenced heavily by the success of the bailout plan as the confidence it could restore to the global market would almost certainly bring with it a resurgence in carry trading.
Elsewhere, the RBA stated last week that Australian banks are showing healthy profits and good levels of capital, which should help to avoid the effects of the financial turmoil sweeping the globe. This positive news means that the AUD is more likely to strengthen than weaken in the near future. Taking this into consideration, it would be well worth looking into the option of a forward contract, particularly if you do not necessarily need the currency immediately.
NZD
Although we saw a relatively narrow trading range of 2.670 to 2.715 for the Kiwi last week, the daily range was usually on the verge of these two limits, however the recent strength shown by the New Zealand economy, and thus currency, has been obliterated. The recent weakness has been primarily caused by the reduction in carry trades as the risk-averse hedge fund managers move funds away from volatile economies in times of economic uncertainty. This is likely to weigh further on the currency over the next week, as we expect further bad news in the global economy.
Looking into October, all 17 of the analysts polled by Reuters expect a further rate cut from the RBNZ on 8 October, with a 9:8 split between a 25 and 50 point basis cut expected. This means we are likely to see the market pricing in a cut before the event actually happens, causing weakness in the currency. Given the expected weak, volatile nature of the Kiwi, it may be advisable to secure any New Zealand Dollars using limit orders to maximise your buying power.
ZAR
The Rand weakened against Sterling and a basket of major currencies at the beginning of last week amid the political upheaval of South African president Thabo Mbeki, as he was asked to quit before his term ended. The resignation was a result of an ongoing power struggle between Mbeki and ANC leader Jacob Zuma which led to great instability in the markets.
The reason it led to instability is that Jacob Zuma is almost certain to become president after the 2009 elections and foreign investors fear he will swerve away from Mbeki’s pro business policies.
Also following Mbeki’s resignation the Finance Minister Trevor Manuel, whose position in the cabinet was thought to be crucial for a stable transition, also resigned.
Stability was somewhat restored on Thursday when ANC deputy leader Kgalema Motlanthe was appointed as interim president and he reappointed the Finance Minister (Trevor Manuel). This helped lift the Rand once again.
We should see some fairly volatile times over the next few months, with the political problems and inflation rising, it is not looking good for the Rand. However the GBP/ZAR cross should remain range bound between 14.5 and 15.5 in the short term.