30-03-2009 : FCG Market Report 30th Mar.2009
EUR
The Euro strengthened against Sterling on Friday for a short time, influenced by the release of the Q4 UK GDP data. Friday’s interbank rate fluctuated from a low of 1.0655 to a high of 1.0776.
This week see’s two events and subsequent data releases, likely to affect those buying Euros from Sterling; the G20 London summit and the meeting of the ECB (European Central Bank) committee this Thursday.
The G20 sees the gathering of World leaders in London and will be hugely influential in shaping economic policy and setting out the plans and strategies for economic recovery for the member countries. This will undoubtedly affect the respective strength of the Euro against sterling, depending on the markets perception of the agreements reached we will potentially see some volatility in pricing. Not until the dust has settled on the summit will we be able to see which way confidence in the Euro is swayed by the press releases from the G20. You can find out more about the G20 summit at http://www.londonsummit.gov.uk/en/
The ECB committee is also due to announce its decision on base rates this Thursday. This is an indicator of the committee’s opinion of the economic situation in the Eurozone and will influence banks around the world on the quantity of Euros placed on the ECB overnight deposit scheme. Therefore, if rates are lowered this may affect the value of deposits placed, but if taken as a sign of economic stimulation, we could see investors placing assets into European funds.
USD
The US Dollar initially continued its decline against Sterling last week, with the GBP/USD trading at a six-week high of over 1.47 on Tuesday. The Pound's relative strength proved short-lived, although the US Dollar's subsequent gains were limited after comments from China ahead of this week's G20 meeting calling for an alternative reserve currency. In determining the greatest threat to the US Dollar, we can learn from the financial crisis that has plagued the markets now for over a year-and-a-half. Through a tempestuous 18 months, investors have had to deal with diminishing returns and a global recession, however, the real panic set in when the true functioning of the markets was called into question. For the Dollar, the loss of its reserve status would be a complete disaster.
The US Dollar's strength last week was underpinned by stronger than expected economic data, supporting views that the US economy could be amongst the first to recover. Existing and new home sales rose unexpectedly in February, whilst US durable goods orders rose for the first time in seven months. Despite the final estimate of Q4 economic activity, as measured by Gross Domestic Product (GDP), being revised lower to an annualised 6.3% contraction, this was also better than expected.
The GBP/USD rate closed on Friday 1% down at 1.431, from 1.446 a week earlier, benefiting those converting US Dollars into Sterling.
The G20 meeting on Thursday will be closely assessed for longer-term implications for the US Dollar's status as the major reserve foreign currency. If the G20’s only focus and influence were over the safe haven status of the US currency, it would be easy to lay out clear scenarios for price action following the event. Any real changes to its role in the global market place would send it plunging; and conversely its passing without incident would lead to a rally.
However, it isn’t that simple. Policy makers will cover more than just the Dollar at this meeting. Their real purpose for the gathering is to try and develop a global resolution to the world’s economic and financial troubles. There have been calls for greater spending, larger bailouts and other unique solutions; but there has so far been little cooperation beyond coordinated rate cuts. Ultimately, for the Dollar, it will come down to whether or not there are any joint efforts to come out of this meeting. If there are, any plans will be judged on their ability to relieve the US from shouldering the responsibility of turning the global economy around all by itself.
Other data releases in the week include; consumer confidence (Tuesday), manufacturing sector (Wednesday) and service sector (Friday) activity reports, as well as the closely watched non-farm payrolls report (Friday). These will all provide important indicators of US economic prospects likely to be of interest anyone buying US Dollars.
AUD
Last week the Australian Dollar gained against Sterling for its fourth consecutive week. So-called 'commodity currencies' such as the Australian Dollar are often viewed as a bellwether for global growth prospects, and found support last week from stronger oil prices and improved investor sentiment. The central bank's Financial Stability Review highlighted that it believes the Australian banking system is better placed than many to weather the current financial market conditions. The four largest domestic banks, by virtue of holding relatively little exposure to the 'toxic assets' plaguing many other financial systems, have maintained high credit ratings matched by few of their international peers.
The GBP/AUD closed at 2.062, down 2% from 2.104 a week earlier, benefiting those converting Australian Dollars into Sterling.
The upcoming economic data releases may give traders a clue as to whether the Australian economy is indeed contracting. Retail sales are expected to have fallen by 0.5% following an unexpected 0.2% gain in January. A deteriorating labour market with unemployment at 5.2% (the highest since 2005) may see demand drop for consumer discretionary items leading to a lower headline reading.
The RBA is expected to cut their target cash rate by another 0.50% to 2.75% at their April policy meeting as they try and stem the current downturn. Ultimately, price action may be dictated by risk appetite and if we continue to see confidence in the banking sector increase and stocks trade higher, then the high yielding currency could push even lower against the weary Pound.
Key Data Releases This Week
Below is an outline of some of this week’s key economic data. Of note are Purchasing Managers index data for the EU, UK, US and Germany. This captures business conditions in various sectors and so is a good overall indicator of the state of the economies.
We also have the ECB interest rate decision on Thursday. Currently rates are at 1.5%, hence there is scope to cut. Today’s Consumer Price Index data will no doubt have an impact. Euro buyers will be hoping for this, as it would weaken the Euro making it cheaper to buy, and exchange rates may rise.
Of course the main news this week, that is not included in the scheduled releases, is this weeks G20 summit. World leaders are meeting in London to discuss plans to tackle the current economic crisis.
What’s the G20?
The G20 is a group of the world's most powerful countries that together represent 85% of the world's economy. It includes both major industrial powers such as the US and Germany, and emerging economic powers such as Brazil and China.
The UK government, which holds the rotating presidency of the G20, is organising the London summit to tackle the growing economic crisis. In unprecedented security in the capital this week, it is hoped a co-coordinated action to revive the global economy is agreed.
Keep a close eye on developments, as any announcements could have a big impact on the currency markets, depending on what action is agreed.
Tuesday
UK – Index of Services
EU – Consumer Price Index
Canada – Gross Domestic Product
US – Consumer Confidence
Japan – Manufacturing Data
Wednesday
Aus – Retail Sales
Swiss – Purchasing Managers index
EU – Purchasing Managers Index
UK – Purchasing Managers Index
UK – Halifax House Price Data
EU – Unemployment
US – Home Sales
US – Manufacturing and Construction
Thursday
Aus – Trade Balance
EU – Interest Rate Decision
US – Jobless Claims
US – Factory Orders
Friday
Swiss – Consumer Price Index
Germany – Purchasing Managers Index
UK – Purchasing Manager Index
US – Non Farm Payrolls
US – Average Earnings
US – Unemployment