03-11-2008 : FCG Market Report 3th Nov. 2008
GBP/EUR
Last week saw a relatively stable week of trading for the Euro, with the mid market range moving between 1.23 and 1.28, the pound gradually strengthening as the week went on following the all time low of 24 October. Politicians and Policymakers were also very active, with Prime Minister Gordon Brown announcing that falling inflation would allow world central banks to lower interest rates. Bank of England Deputy Governor John Gieve spoke on Tuesday cautioning that the financial crisis may not be over, and governments need to remain ready for further urgent action if required. Finally, MPC Member David Blanchflower continued his calls for aggressive interest rate cuts in order to prevent a deep recession. All of these announcements from key UK economic figures make it almost certain that we will see a cut in the base rate from the Bank of England on Thursday.
Looking to the week ahead, the most significant factor affecting the GBP/EUR cross will be the interest rate announcements from the Bank of England and European Central Bank. The majority of investors expect the BoE to cut 50 basis points down to 4%, although an ever increasing number of analysts are predicting up to a 1% cut. In the Eurozone, President Trichet remarked last week that a cut was “a possibility, not a certainty,” although almost all market participants expect the ECB to cut at least 25 basis points. A larger cut in the UK will undoubtedly weigh on the pound, causing it to lose some strength against all major currencies. Other data out this week includes Eurozone Retail Sales figures and PPI inflation data, neither are expected to have a significant impact on the cross.
As with a fortnight ago, it is likely that the best time for buying Euros will be nearer the start of the week, with Euro sellers likely to enjoy the best returns at the end. Many have also speculated that the GBP/EUR cross may hit another all-time low, a record which currently stands at 1.2181. Speak to your account manager at FCG for more details, and to ensure that you purchase your currency at the optimal time.
GBP/USD
The Federal Reserve has again cut the base interest rate in America, slashing the rate by half a percentage point to only 1% on Wednesday. This expected move could well be mirrored by further coordinated cuts around the globe, importantly by the Bank of England, who may in fact go as far to cut UK rates by a whole percentage point.
The Fed is expected to cut again, possibly by a quarter point before 2008 is out, however it is the expectations of UK cuts that dominates the cross. An initial period of drastic rate cutting has already been made in the US and the belief that that the stateside economy will come out of the downturn first is keeping Sterling under heavy pressure against the Greenback. To further enhance this current position of Dollar strength, its safe heaven status is bolstering the dollar against the pound as US investors look to repatriate more risky overseas assets as world markets continue to struggle. The severity of these combined factors saw the pound fall to its lowest level in six years early last week, bottoming out at below 1.53.
The most significant data releases this week are Friday's Non-farm Payrolls figures for September, and the corresponding Unemployment Rate. If these figures are worse than expected, the Dollar could lose some support as the outlook for the US economy deteriorates. Indeed the presidential election may have some effect on the Dollar come Wednesday when the news breaks as to who has won. It is likely that whatever outcome, the dollar will strengthen in the short term; only in the medium and long term will either candidate’s election show their effects on the currency.
CAD
The Loonie strengthened a little against the pound last week, amid a rebound in prices for various commodities.
The Forex markets have paid little attention to economic data as of late, focusing more on movements in broader financial markets which have dominated price action in currencies. The markets have arguably priced in significant deterioration in Canadian economic conditions, thus any surprises in upcoming economic reports could force corrections in the currency.
The upcoming Canadian Employment Change report could potentially force major moves in CAD pairs. September’s result unexpectedly showed impressive job growth in the domestic labour market and now we wait to see whether the event was simply an anomaly. Any signs of deterioration in labour figures will confirm what markets have already priced in; that the Canadian economic outlook remains gloomy.
Data from the UK and Canada has been poor over the last few months, with both countries contracting in Q3. Both economies face difficult challenges going forward and for this reason the currencies have been sold off in the mist of risk aversion. As economic conditions deteriorate, market participants tend to liquidate high yielding currencies like the Pound and commodity linked currencies like the Loonie amid weakening demand for commodities. Therefore, given the expectations of a global economic slowdown over the next 6 months, it is likely that both currencies will be under pressure equally and the cross is expected to remain rangebound.
AUD
Last week the AUD suffered from continued risk aversion and unwinding carry trades, reaching record lows against the Yen and 5 year lows against US Dollar. With risk aversion dominating markets around the world, equities suffered more losses and in turn, sharp losses in commodities prices put additional pressure on the AUD.
The RBA has also intervened in the currency market. By purchasing the AUD, the central bank artificially propped up its currency in an effort to stave off further declines and saw the AUD gain 850 pips. A return of risk appetite made the high yielding currency attractive to investors that were seeking a greater return, with bullish fundamental data and a stabilizing of commodities prices also adding support.
This week the Reserve Bank of Australia surprised the forex markets by cutting benchmark borrowing cost by a greater than expected 75bps to bring rates down to 5.25%. RBA Governor Stevens sounded ominous in the statement accompanying the decision, saying that “it appears likely that spending and activity will be weaker than earlier expected. Stevens reiterated that although consumer price inflation remained high in September, the RBA policy continues to believe that inflation will moderate over time as slowing global and domestic demand takes its toll.
If the RBA sees a need to defend its currency, then they may decide to limit their easing as another measure to provide support to the Australian dollar. We may also see some brief gains for the AUD against Sterling, if the BoE cut their interest rates by a full 100bps this week, as a number of analysts are forecasting. The RBA is also expected to cut further next month, with the cross stabilizing before the end of November.
NZD
The Kiwi experienced an extremely volatile week with violent swings in risk appetite controlling the market. The Kiwi reached fresh lows against the majority of currencies due to unwinding carry trades and continued risk aversion.
Towards the end of the week, improved risk appetite and rallying equity markets saw the Kiwi recovering from its recent lows. The Yen and Dollar descended from their respective highs and investors readjusted their carry trade positions.
This week the NZD is holding near recent lows despite the renewed improvement in risk appetite, investor attitude to risk is likely to dictate the direction in the markets. Therefore volatility in the market is likely to continue and we expect GBP/NZD cross to be remain driven by Sterling weakness.
The GBP/NZD cross is likely to remain between 2.6 and 2.7 in the short to medium term.
ZAR
The financial markets calmed down a lot towards the end of last week, with receding risk aversion strengthening the Rand against the GBP and USD.
Despite this recent decline in risk aversion, we still expect it to stay fairly elevated over the next six months. Meaning the GBP/ZAR cross is likely to remain very volatile.
In the short term the Rand may gain further ground due to the expected rate cut in the UK later this week.
However looking forward to the medium term, despite the dire condition in the UK data, we expect the cross to remain above the 15.25, as the UK is thought to come out of the current slowdown before South Africa.