08-12-2008 : FCG Market Report 8th Dec.2008
GBP/EUR
Financial news in Europe was dominated last week by the announcement of interest rate cuts from the European Central Bank and the Bank of England. BoE rates now sit at 2.0%, a 100 basis point cut, whilst a 75 basis point cut down to 2.5% was announced by the E.C.B, the biggest since the single currency was formed.
The economic calendar bore grim news for the Euro, with depressing figures showing increased unemployment and a 0.5% decrease in food purchasing, furthering evidence that Europeans are tightening their belts in preparation for recessionary times. The economic calendar also confirmed that the region entered into a recession with a 0.2% contraction in Q3. You would think that an economy could not be much worse than the Eurozone but this is not the case. The U.K had equally, if not more damning figures with the service PMI reading, falling to its lowest level since records began. The reading included employment, new orders, outstanding business and business expectations all hitting new series lows.
For the upcoming week the U.K needs positive data to make any significant gain on the Euro and not visit the all time lows of last week. BRC retail sales are out this week which will provide a reading on growth ahead gauging consumer spending trends. Positives are needed from the RICS house price figures in order to pull out of its current nose dive and boost a real recovery for the economy. The ECB report may also provide some Euro weakness allowing the Pound to possibly gain some much needed ground. With dour figures being released from all quarters it may be prudent for buyers and sellers alike to consider Forward Contracts to avoid any large losses.
GBP/USD
How long can the mighty Dollar remain strong?
Sterling & Euro weakness has provided an ideal platform for the Dollar to gain ground over the past few months as speculators appear to remain Bullish and support the US.
However, that is not to say that the US will always be the currency that panicked traders will turn to. Massive bailout efforts, rate cuts and stimulus packages have offered a sense of stability for the world’s largest economy; but this combined endeavour cannot prevent a recession or even a natural bear market. And, when financial conditions worsen and the economy continues its slide, policy makers will find they have few options left to curb the pain on a national level. Since US officials have been the most aggressive in their efforts, they could reach their limit first; and then the sanctity of US government debt will come into question. There are other countries that are less liquid but are experiencing better stability so perhaps the Dollar is set to slide in 2009.
But when exactly?
The vulnerability of the Pound and Euro will continue to underpin the Dollar in the short term and we can expect continued high levels of volatility throughout as the global economy tries to find its feet. It is therefore more crucial than ever to stay well informed by speaking with you FCG Broker.
CAD
Last week saw a host of poor data releases in Canada reflecting the state of affairs in the country and also the rest of the world.
Similarly to the US, Canada released its monthly employment figures last week, and again like the US, the figures read much worse than were expected. Payroll figures were expected to drop by 21,000 but actually fell by 71,000 representing the largest drop in 26 years.
Housing figures released for November also showed a slowdown and to a greater extent than expected. New home starts were down 18.8% from 211,800 in October to 172,000 in November and worse than the 194,000 expected.
However, despite the disappointing news from Canada, Sterling remained unable to make any gains against most currencies, including the Loonie. As the economic situation in the UK continues to look evermore bleak and with interest rates cut a further percentage point last week, the Pound’s buying power seems to have been damaged more than all of the other major currencies.
For those buying Canadian Dollars, this week’s interest rate announcement may provide some support for Sterling as the markets are expecting a cut of up to 50bhp. However purchasers should exercise caution as gains may be short lived as the markets are likely to have priced this movement in to a large extent.
AUD
Currency news last week was of course dominated by the world wide interest rate decisions, and of course the GBP AUD cross was particularly affected by these. Tuesday’s decision from the Reserve Bank of Australia announced an interest rate cut of 100bps, leaving the cash rate at 4.25%. The slashing of rates has been aggressive in Australia as the RBA has attempted to swiftly cushion the impact of the global economic downturn. Indeed this was the fourth interest rate cut in as many months, the result of which has been 300bps discounted from interest rates, which now stand at a 6 and a half year low. Normally this would weaken the AUD dramatically, but in a week where the Bank of England lowered interest rates to only 2%, the cross saw a move from the high 2.3’s to the high 2.2’s. With uncertainty still surrounding the British economy and pessimism the overriding feeling in the square mile, it is likely that the cross will continue this trend and test the lower end of the 2.2’s during the course of this week.
NZD
The New Zealand Dollar gained some ground against Sterling last week as the Pound continued to struggle in the global market. Both currencies saw rate cuts weigh heavily, with the 150 basis point cut to 5% in New Zealand mostly priced in in advance by the market, as was the case for Sterling.
The RBNZ announced that they expect the New Zealand economy to shrink by 0.2% in the first half of 2009. This is echoed by technical analysts, who also predict that the first two quarters will show a contraction in the economy. RBNZ Governor Alan Bollard also hinted that further rate cuts are likely, with futures markets now pricing in at least another 1.00% cut over the next 12 months. This reduction in base rate as well as continued risk aversion is likely to weigh on the New Zealand Dollar over the medium term.
This may suggest that Kiwi buyers would consider holding off on buying their currency, however given the current uncertainty surrounding Sterling, the direction and sentiment of the GBP/NZD cross is very difficult to predict. Therefore, it may be wiser to secure your currency on a Forward Contract for the future and fix an exchange rate.
ZAR
Despite poor data such as retail sales and house prices coming from the UK, the Rand has failed to gain any ground against the Pound.
Trading has been relatively stable over the last week with the GBP/ZAR cross showing a fairly small spread, between 14.9 and 15.2.
With gold prices low and the political situations still causing problems in South Africa the Rand could weaken off but with no sign of any positive data in the UK trading should remain steady.
Anyone looking to buy Rand should talk to the FCG account manager about Stops, Limits and Forward Contracts to take advantage of any short term gains.