06-04-2009 : FCG Market Report 6th Apr.2009
EUR
Following the ECB (European Central Bank) decision to reduce interest rates by 0.25% last week and the worse than expected unemployment data from the Euro Zone the Euro was unable to regain lost ground against Sterling. The GBP/EUR interbank rate has remained close to the 1.10 area during trading today.
Further data showed the UK deficit figure being higher than expected according to the IFS (Institute for Fiscal Studies) and Sterling is holding position against the Euro. The reason the data had not impacted the Pound may be due to the fact that the IFS figures include large allowance for losses attributed to the recent bailing out of the Banking sector, whereas the Governments figures do not and therefore the data is closer to expectations.
Alistair Darling will have his work cut out to manage pre-budget expectation in the build up to April 22nd. The figure of £1250 in additional taxation per family has already been muted. Clearly the market’s perception of the sustainability of Mr Darling’s plan for economic recovery will impact on Sterling strength.
Euro Zone PPI (Producer Price Index) was down 1.8% year on year, worse than the predicted figure of 1.5% and the retail sales figures came out 4.0% down year on year, worse that the expected drop of 2.5%
Watch out for this week’s European CPI figures and ECB report due on Thursday morning. Any positive data may see the Euro strengthen against Sterling, combined with the BoE rate announcement (Thursday midday) will set the tone for the respective strength of the Euro and the Pound, in trading during the run up to Easter.
USD
A rally of global stocks last week led to an increase in investor risk appetite and therefore reduced demand for safe haven currencies such as the Greenback, and when coupled with some worse than expected data releases, we saw the Dollar weaken from lows of 1.42 last Tuesday against the Pound, to a high yesterday of over 1.49.
We also saw weaker than expected house price figures in the US, but the main release of the week was Friday’s non-farm payrolls report, which confirmed market expectations of another 663,000 job losses in March, and the downward revision of January’s figure to 741,000 made this the biggest fall since 1949. This week the market will be watching for clues as to US policymaker’s future intentions when we have the release of the minutes from the FOMC’s latest meeting, where the Fed funds target range was left at 0.0 - 0.25% and they officially announced quantitative easing measures. We should also get a good idea of the FOMC’s longer term economic projections for inflation, unemployment and growth, and strangely, if they are worse than previously thought, we could actually see the USD strengthen off the back of it, as it could increase risk aversion and investors would most likely start piling funds back into the Greenback.
We will also see the Dollar move somewhat if trade balance figures on Thursday continue to show weak domestic demand.
On this side of the pond last week we had better than expected UK manufacturing PMI and a release from Nationwide showing a slight rise in house prices in March (which has already been contradicted by the Halifax this morning with a 1.9% drop in figures). This does however suggest that the slump could be starting to bottom out in some areas.
Thursday will be the main focus of this 4 day week in the UK when the BoE release their interest rate decision at midday. It is widely expected that they will be kept on hold at 0.5% as there is not a great deal more room to cut further, and also underlying fears of how inflation could rise uncontrollably in the future. It will be interesting to see though if there is any further indication of how much more quantitative easing from the Bank of England we may see over the coming months, and also any further predictions for the UK economy, especially after Alistair Darling’s comments over the weekend that he and the UK Treasury had “underestimated” the severity of the recession in Great Britain.
All in all it will be a volatile week with both central banks being closely watched, and with any change in risk appetite/aversion, we could see some big one day moves in Cable. It is therefore very important that you understand the tools at your disposal (such as STOPS & LIMITS) to secure the best rate of exchange, so contact your FCG Account Manager for more information.
AUD
The Australian Dollar held firm throughout the week, despite poor data, as investors (buoyed by renewed confidence) sought the higher risk and higher potential return offered by its 3.25% interest rate. Data continued to paint a gloomy picture: retail sales for February showed a 2% drop, against a consensus forecast fall of 0.5%.
The GBP/AUD rate closed on Friday at 2.075, up 0.6% from 2.062 a week earlier, benefiting those converting Sterling into Australian Dollars.
Undoubtedly the key release in the week to come will be the Reserve Bank of Australia's (RBA) interest rate decision on Tuesday. Economists expect policymakers to keep rates unchanged at 3.25%, following Governor Glenn Stevens’ logic arguing that the cumulative effects of monetary and fiscal measures already in place will “provide significant support to domestic demand over the period ahead”. A 0.5% cut (to 2.75%) is a possibility but the Australian Dollar may benefit if the cut is smaller (or non-existent), thus maintaining its interest rate advantage over other major currencies.
The extent to which the Dollar is helped by its relatively high yield will, as always, be closely related to risk tolerance levels globally. The Australian Dollar will face added downward pressure if the market’s recent taste for risky assets should be reversed. There are substantial reasons to believe that the current rebound in risk appetite is temporary: the dismal outlook for global economic growth in 2009 does not bode well for demand and will almost certainly be reflected in poor earnings reports. The initially supportive effects of the G20 summit in London may quickly fade as a detailed look at the final ‘communiqué’ reveals policymakers actually offered little substance, hiding behind big promises but committing to relatively few tangible actions to deal with deepening global economic turmoil.
Dour labour market data could also compound any bearish momentum, with expectations calling for the economy to shed 25,000 jobs through March to bring the unemployment rate to a 4-year high of 5.4%.
Key Data Releases This Week
Below we have a list of key data releases which are likely to influence the currency markets over the week ahead.
There are 2 Interest Rate decisions this week. The first is in Australia on Tuesday where rates are currently at 3.25% and are likely to be held again. The second is the Bank of England interest rate decision here in the UK on Thursday. Rates are currently held at 0.5% and are also expected to be kept on hold this month.
Other information of note is Eurozone Gross Domestic Product figures for Q4 released on Tuesday. GDP measures the total amount of goods and services produced by the Eurozone. Although due to the time delay before the figures are released the results are often well anticipated, But given its overall significance GDP has the tendency to move the market upon release, especially if it upsets expectations.
Mon: EU – Producer Price Index
EU – Retail Sales
Tue: AUD – RBA Interest Rate Decision
UK – Industrial Production
UK – Manufacturing Production
EU – Gross Domestic Product (Q4)
UK – Nationwide Consumer Confidence
Wed: EU – German trade balance
EU – German Current Account
CAD – Housing Starts
US – Minutes of FOMC Interest Rate Meeting (March)
Thu: AUD – Employment Data
NZ – Business Performance of Manufacturing Index
UK – Producer Price Index
UK – Trade Balance
EU – German Industrial Production
UK – Bank of England Interest Rate Decision
US Trade Balance
Fri: MARKET HOLIDAY