04-08-2008 : FCG Market Report 4th August 2008
GBP/EUR
Last week the British and Eurozone economies remained steady with the exchange rate range bound between 1.2606 and 1.2745. This was caused by a quiet week in terms of data releases with the Eurozone unemployment figures and the UK consumer credit figures bringing no major surprises.
The start of this week has seen some negative data coming from the CBI (Confederation of British Industry) and Experian survey, with manufacturers across the UK expecting production to fall in the next three months. HSBC, Europe’s largest bank, has also reported a 28% drop in profits as it announced its first half results.
Looking ahead to the rest of the week, it is expected that the Eurozone Producer Price Index released on Tuesday is to increase from 7.1% to 7.9% YOY, adding to Eurozone inflation. Despite this the Eurozone retail sales figures are expected to show a 1.3% decline YOY. Also out this week is the German trade balance which is expected to show a 1.5b increase YOY which is likely to strengthen the euro in the short term. As well as this the ECB rate decision is released on Thursday where they are expected to keep rates on hold. Some economists are speculating that the ECB may cut rates towards the end of the year which could lead to a slight bias to sterling strength given the need for the market to factor in the cut.
The UK also has some important data out this week with the Nationwide consumer confidence report released on Tuesday and the Bank of England rate decision on Thursday. It is expected the BoE will keep rates on hold after all of the 76 economists polled by Reuters said the Monetary Policy Committee would leave rates at 5%.With the data released this week it is expected that the exchange rate will follow a similar pattern as last week, with both the UK economy and the Eurozone economy looking bleak.
GBP/USD
The dollar continued to strengthen last week despite negative data, again highlighting the outlook for other major economies, including Europe, Britain and Japan are significantly worsening and much of the negative US data is already expected. Cable is still caught in a broad trading range over the medium term from 1.95 to 2.01 (interbank level), as rates look to remain on hold in both countries. In the longer term, sterling looks more vulnerable, with further significant negative data likely to come and with the BoE still behind in its interest rate cutting cycle.
As of Friday’s close, Fed fund futures were only pricing in a mild 6.9 percent chance of a 25bp rate increase this coming Tuesday, as the markets are widely expecting the FOMC to leave rates steady at 2.00 percent. While CPI remains uncomfortably high, the US economy is still facing a major slowdown, as evidenced by the collapse of the housing sector and marked deterioration in the labour markets. However, this doesn’t mean that the US dollar can’t gain further. Ultimately, the fate of the dollar this week will depend far more on what the FOMC says, rather than what it does.
As the world markets continue to suffer, the sickly dollar no longer controls the GBP/USD cross. Sterling is set to continue weakening as our housing market deteriorates and confidence hits an 18 year low, therefore catching the opportunities to buy at the peaks of Cables trading range is vital. Those buying should be targeting the mid to late 1.90s as a high, but be cautious as Sterling could steer the ship toward the 1.80s.
CAD
The Canadian dollar fell against most major currencies towards the end of last week, after recent data pointed to a stumbling economy and the market anticipated the next move the Bank of Canada will make on interest rates will be a cut.
The Canadian economy has been hard hit by the slowdown in the United States, where it sends over three-quarters of its exports. American consumers have been struggling under the weight of a housing slump and tight-credit. Reports suggest that the Canadian economy shrank by 0.3% in the first quarter and that the figure is expected to have been followed by a further loss of 0.1% since.
“The Canadian dollar remains under pressure and I think it's in large part due to the soft run of Canadian data, particularly the GDP data, and the growth outlook for Canada is softening," said Fergal Smith, managing market strategist at Action Economics.
The softening outlook for Canadian growth has led investors to start pricing in an interest rate cut by the Bank of Canada before the end of the year. Until recently, rising inflation had investors betting the next move by the Bank of Canada would be a hike.
The Loonie outlook, has the potential in the short term to show some bias towards Sterling, which would be worth keeping a close eye on for those with an upcoming Canadian Dollar purchase.
AUD
The release of some very bearish domestic data last week increased expectations of interest cuts in Australia at some point this year. This made the Aussie lose ground against a basket of major currencies due to global risk aversion as investors are now pricing in at least two quarter point cuts over the next year.
Not only did building approvals and retail sales data come out much worse than expected but we have also seen Australian banks including ANZB Group and National Australia Bank start to disclose write downs due to the credit crunch. The Aussie also suffered due to commodities prices falling last week with further risk aversion over worries of a global economic slowdown.
We expect that the AUD could lose further ground due to short term risk aversion but considering the recent periods of extremely robust growth in Australia, a slight cooling in the economy shouldn’t hurt the currency too much. When we compare this with the current weakness in the Pound and the impending recession (according to most of the UK media!) we realise that the Aussie doesn’t look to be in such bad shape, and with the fact that the BoE will have to look at cutting UK interest rates at some point to try and stimulate growth, we still expect the GBP/AUD cross to remain range bound between 2.02 and 2.15.
NZD
Following the interest rate cut on 23rd July, the Kiwi Dollar has continued to weaken against the pound, seeing the rate rise to over 2.70. With the economy struggling amid fears of recession, analysts predict further interest rate cuts causing a volatile kiwi dollar.
The GBP/NZD cross is now at its highest since December 2007, but with the pound also struggling in the global market, analysts believe the rate should stabilise around the current level, with neither currency strong enough to exert strength over the other. The only data release in New Zealand this week is the labour cost index for the private sector, which is likely to have an insignificant impact on the currency rate.
We do not anticipate any major swings in the GBP/NZD cross over the next week, therefore it would be advisable to set up limit orders to take advantage of the high points of the market.
ZAR
According to the Central banks Chief Economist Monde Mnyande, who is also one of the seven MPC members of the SARB, the interest rates are currently at the right level based on inflation figures. Although he has said it will be hard to predict where they will be after the next MPC meeting, it is strongly expected to stay on hold.
This makes South Africa a prime target for foreign inflow, as it is still offering some of the highest rates around.
As for the GBP/ZAR cross, the rand has been benefiting from the rise in emerging market sentiment, as more people are looking for carry trades and are ignoring dampening growth. It is expected to remain range bound between 14.1 & 14.8 in the short term.
CHF
The SNB has not changed rates since quarter three of 2007, and with indications emerging that the Swiss economy may be slowing, there is little chance that the conservative central bank will pull an aggressive move like the ECB president Trichet and hike rates.
The PMI figures are anticipated to slump to a nearly 3-year low of 53.6 from the previous 54.9, which would reflect a deterioration of conditions in the Swiss manufacturing sector.
Since the Swiss economy is so highly dependent on exports of manufactured goods, this is an important indicator of trading levels in coming months.