06-10-2008 : FCG Market Report 6th Oct. 2008
GBP/EUR
Last week we saw the Euro suffer one of its worst declines against a basket of major currencies, especially the US Dollar, falling under even more pressure from global credit jitters. The single currency also lost further ground after the ECB left interest rates on hold at 4.25% last Thursday.
The UK economy is also suffering from the credit fallout with mortgage approvals hitting a record low. The second quarter housing equity withdrawals have contracted for the first time in nearly a decade and the third quarter BoE credit conditions survey reported that the lending environment is likely to worsen in the near future. As a result, last week we saw Bradford & Bingley, the second major British financial firm, being nationalized as a last resort bailout.
Over the weekend, we saw the rescue package for Hypo Real Estate fall short as new liquidity gaps emerged, which led the government to issue guarantees for all bank deposits throughout Germany. Mounting turmoil throughout Europe has become a growing concern as the ECB noted increased downside risks for growth, and went on to say that ‘economic growth is slowing down significantly.’ The comments suggest that the ECB may look to lower the benchmark interest rate at their next meeting, which would only fuel bearish sentiment for the euro in the near-term.
Amid expectations of a rate cut by the ECB, U.K. Chancellor Alistair Darling announced that the government backs the BoE’s neutral policy stance, and went on to say that the government will take the necessary steps to counter the sharp decline in Europe’s second largest economy. The comments suggests that the BoE may have more room to hold the benchmark interest rate steady at 5.00% for the remainder of the year, with the government scheduled to release a new outline on Wednesday to how they will respond to the financial crisis.
GBP/USD
Last week saw a volatile week of trading for the cable, dominated by the on/off situation around the $700bn government bail out. When the deal was first rejected by the House of Representatives, the dollar weakened back to 1.84. The situation started to reverse when the revised bill was passed by the Senate on Wednesday, with the Dollar recovering massive strength after the bill passed its second reading in the House of Representatives. Cable trading on Monday began in the 1.75s as a result.
Looking into the week ahead, we expect to see the dollar continue to strengthen as the full effect of the bailout deal is felt around the world. In terms of significant events, Tuesday evening sees the minutes from the US Federal Reserve meeting of 23 September which will indicate the likelihood of a rate cut at the next meeting. Thursday sees the Bank of England Monetary Policy Committee meeting to examine our own interest rates. It is expected that the result of this meeting will be a very close vote between a 0.25 point cut, and a hold at 5%. A cut is likely to weigh heavily on Sterling, and the rate could slide into the 1.60s.
It is also worth noting that some analysts believe there has been significant overbuying of the US Dollar as hedge fund managers moved away from high-risk investments. As a result, we may see a Dollar sell-off as calmer waters approach, causing some weakness in the currency. For those looking to sell USD and buy Sterling, it may be advisable to cash out while the market remains in the 1.70s and insure your assets against any Dollar weakness. For Dollar buyers, you may want to consider using currency options, to capture the market at a high. Speak to your account manager at FCG for more details.
CAD
Early last week the Canadian Dollar continued its strength over the Pound reaching a 15 year high as the Global markets waited to hear the results of the US Bailout plan. However, towards the end of the week the Pound gained ground as commodity prices fell and investors chose to move their investments out of commodities.
Even with the $700 billion bail out by the US government the general view is that globally, things will continue to worsen for some time and therefore demand for commodities has started to fall. Added to that fact, America remains Canada’s largest trading partner and as the US Dollar becomes more expensive Canada’s import/export industries bear the brunt of the market movement.
Commodity prices will continue to play a large part in the Canadian Dollars’ fortunes looking into the near and longer term. However, as always there are two currencies involved in any cross and Sterling’s buying power is still widely seen as being the weakest in the G7 and the outlook for the UK remains poor.
AUD
Last week was another rollercoaster ride of extreme volatility and risk aversion as the Aussie Dollar suffered from heavy sell offs against most major currencies, not least against Sterling. The eleventh hour news from the US Senate has by proxy, strengthened Sterling against most of its major crosses as well. Furthermore the impending expectation of an interest rate cut on October 7th from the RBA, by at least half a percentage point, has also played its part in weakening the Aussie off against the pound. Indeed, with nerves still jangling across the financial markets, the expectation for heavy carry trade unwinding is high, as investors will seek higher yielding currencies than the Oz, especially as some market participants expect more than a half point cut.
We see more volatile trading ahead next week in line with the interest rate decision, and it may well suit buyers of the antipodean currency to move into the market early this week as there is a high likelihood that any movements will be priced in already. As a result it can only be a positive move to use Limit and Stop Loss orders to safeguard and maximise your funds with potentially turbulent times ahead for the GBP AUD cross.
NZD
Risk aversion was the main driver of the Kiwi last week as stock markets, commodities and higher yielding currencies such as the AUD & NZD suffered as the US Congress initially rejected the $700billion bailout plan in America. Later on Friday Congress voted yes on the bailout plan as widely expected but it looks as though it will take a lot longer to restore investor confidence and therefore improve global risk.
There is very little data of interest from NZ this week and the main ones to watch from the UK will be consumer confidence on Wednesday and the Bank of England interest rate decision on Thursday. There is a slight chance we could see a cut from the BoE this month after poor manufacturing and services data last week but it is more likely that we will see them hold rates for the time being and will see a cut either in November or December.
The relatively new dovish stance from the RBNZ and the uncertainty surrounding the outlook for global growth looks as though they will weigh heavily on the Kiwi for now. We saw a 50 basis points cut in interest rates from the RBNZ last month and expect to see the GBP/NZD cross remain in a higher range of 2.65-2.75, at least until we see the start of monetary easing from the BoE.
ZAR
The Rand suffered last Monday due to the rejection of the $700bn bail out plan in the US. This caused a huge sell off of the Rand which is seen as a high risk currency, in favour of safer assets. Since the revised bailout plan was accepted there has been some relief brought to the Rand, although concerns over the global economic demand have continued to weigh on the currency heavily.
The Rand also lost ground over tumbling precious metal prices such as platinum which fell near to a three year low. Gold prices were also hit, despite being regarded as a safe haven asset at a time of financial turmoil.
There has also been increased political risk as Mbeki’s resignation fuelled speculation that the ruling ANC party may split into rival fractions, however South Africa ruling ANC have denied these claims.
The GBP/ZAR cross is expected to remain range bound between 15 and 15.5, although with an interest rate cut expected from the BoE on Thursday, this may weaken off Sterling.