05-01-2009 : FCG Market Report 5th Jan. 2009
GBP/EUR
With fresh lows on the GBP/EUR cross last week continuing the trend for December it was a much needed respite for the poor beleaguered Sterling when it rallied from its recent lows against a broadly weakened Euro on Monday. It finally seems that the main drive to parity has for the time being taken a short break, but how long will this break last, if at all?
Three key events will have an impact on Sterling and may well see it flirt with near parity levels again, these being Tuesdays Purchasing Managers Index, Wednesdays Nationwide Consumer Confidence Survey for December and the all important BoE rate announcement on Thursday.
Expectations weigh heavy on the likelihood of a rate cut with markets pricing in an 80% chance that the Bank of England will slash borrowing costs again down to 1.25% from 2%. This would take the rate to its lowest since the bank was founded in 1694, rates have never been as low as the current 2%. The tight credit conditions and the threat of deflation paint a very bleak economic picture which looks likely to convince the Monetary Policy Committee (MPC) that a hefty cut is necessary.
The likelihood of a rate cut will end any strong rally for Sterling against the Euro, Friday’s release of Producer Price Index will add further downside to Sterling and the relentless barrage of negative data which is expected from the U.K economy is sure to yet again push GBP/EUR cross to record lows.
GBP/USD
As the first full week of trading begins for 2009, analysts are watching with interest to see whether Sterling will continue to slide against the Dollar, or if we are reaching the bottom of the market. The festive period saw a reduced volume of trade in the currency markets, as a result the cross remained uncharacteristically rangebound, albeit at the low end of the market, hitting a fresh 8-year low before a slight recovery.
The main point of interest this week will be the rate decision from the Bank of England MPC on Thursday. A further cut is expected which is likely to weaken the Pound due to both lower interest yield, and falling investor confidence. Tuesday also sees the release of the minutes from the Federal Reserve meeting last month where rates were slashed to 0%. Many investors have questioned the FOMC policy, which leaves little room for manoeuvre in the near future if we do not see a rapid return to growth in the US economy.
It is likely that market participants will begin to price in a rate cut in the UK as the week goes on, therefore the impact of the expected cut from the Bank of England may be minimal when it occurs. If the cut is greater as some have predicted, we could see extended Sterling weakness, and Dollar buyers should be wary of fresh lows in the 1.30s.
Other significant data releases for the week include PPI Inflation Data for December in the UK likely to show a slight drop in the core rate, and US Non-Farm Payrolls & Unemployment data are expected to show increased unemployment in US Industry. In theory these should strengthen the Pound and weaken the Dollar respectively, providing some support for Sterling.
With all of this new data coming out in the following week, we expect a much wider trading range. Speak to your account manager at FCG to ensure that you purchase your currency at the best time.
CAD
In line with most of the other Majors, Sterling continued to lose ground against the Canadian Dollar over the Christmas period off the back of a raft of negative Sterling sentiment and rhetoric indicating that the UK is heading deeper into recession.
However, the strength of the Canadian Dollar against the Pound doesn’t accurately reflect the state of the Canadian economy as a whole, as they too are suffering the effect of the global credit crisis. The interest rate cut in early December and accompanying statement was almost a U-turn in fiscal policy from only three meetings ago in July when there was a surprise rate hike and comment of upwards inflationary pressures, strong consumer spending and a healthy housing market.
The December rate cut indicated lower than expected inflation and a contraction of their export market which accounts for a large part of their economy. The drop in exports was attributed in part to the growing strength of the currency which has curbed their competitiveness in the global economy.
In the short term however, and in particular with the UK interest rate decision looming, we can expect the trend for the weakening Pound to continue for some time. For those with a Canadian Dollar requirement looking to the future, Forward Purchasing your currency offers you the ability to lock into a rate of exchange now – enabling you to be safe in the knowledge that any fluctuations over the period won’t affect you.
AUD
After a week of relatively quietness in the money markets, mostly due to the festive season, trading resumes in full force this week.
Sterling had a rather volatile time last week, with illiquid market conditions fuelling shocking moves against a basket of major currencies. A stream of disappointing data out of the UK is leaving Sterling in a depressed state, and further economic releases due this week, such as PMI services on Tuesday, Consumer Confidence report on Wednesday and BoE rate decision on Thursday are likely to exacerbate the woes. The PMI reading is predicted to show a contraction in key services sectors, prompting many investors to call for an aggressive rate cut by the BoE, as much as 50bps, although many analysts and traders may have already priced in a more aggressive easing from the Central Bank.
Economic data out of Australia this week is a somewhat bare, but with retail sales figures out on Wednesday together with New Home sales, it’s rather likely that we’re going to see more disappointing figures. New vehicle sales also showed a drop of 18% on the year.
For those looking to buy Australian Dollars, it’s worth considering buying Forward to secure a competitive rate, as we are likely to see Sterling drop further ahead of the BoE rate decision.
There are many options available to maximize your return, however, given the volatility of the markets, it is crucial that you contact your account manager at FCG and secure the best possible rate.
NZD
In 2008, the New Zealand Dollar lost value against every single major currency except for the British pound, making the GBP/NZD cross the weakest major currency cross on the globe at the moment. This considered it seems unlikely that short term movement will be effected by anything other than the relative performance of each economy.
As always with currency pairs much emphasis will be placed on the key interest rate decisions in both nations, while the massive reduction of the base rate in the UK has been well publicised there have also been notable cuts over in New Zealand. The Reserve Bank of New Zealand has cut interest rates by 325bp since July, with RBNZ Governor, Bollard, saying that he believes rate cuts will not come to an end until the middle of 2009. Many analysts suggest that following this monetary easing cycle we could see a sharp recovery towards the end of the year, but that is undoubtedly dependant on the success of the RBNZ’s fiscal strategy and a cooling of the global credit crunch.
All things considered both currencies had a torrid 2008 and at least for early 2009 that looks set to continue, with the cross almost certain to be dominated by negative figures from both faltering economies. Optimists will suggest that later in the year this could well change, but the direction of the exchange rate will depend on how quickly both countries can emerge from the global credit crunch and how badly damaged they are when they do.
ZAR
The GBP/ZAR cross has dropped quite dramatically over the last few weeks and is trading at the lowest levels in almost a year.
Although we have recently seen huge Sterling weakness affecting most of the GBP crosses, this is not the only reason for the rate drop.
Since South Africa’s economy is mainly based on resources like Gold and other precious metals the recent rise in gold prices has helped it greatly.
With very little data coming out from South Africa this week, any movements are likely to come off the back of offshore events.