MARKET REPORT 2nd June 2008
GBP/EUR
Last week we saw sterling remain firm against the euro despite further poor data, the market reached a peak of 1.2752. In with all the poor data that we saw, we had Hometrack reporting on Monday that house prices in England and Wales fell for the eighth month in a row in May, down 1.9% from a year earlier. The BBA (British Bankers Association) reported on Tuesday that mortgage approvals had dropped nearly 40% y/y in April, making it the second weakest April on record. On Friday we had the German GFK survey out which showed further unexpectedly deteriorating consumer morale in June. David Blanchflower (BoE policymaker) said that ever growing oil prices are the cause of rising inflation, but policymakers will have to “grin and bear” it for now.
In May we saw the Eurozone inflation rise to 3.6%. Despite this we expect to see the Eurozone interest rates remain on hold amid expectation of slower growth and decline in consumer confidence.
With the following week we have various data due, the major one being the BoE and ECB interest rate decisions which are due out on Thursday. However we expect to see the BoE also hold their rates. Many people will wait to hear Jean-Claude Trichet’s ECB statement after the rate announcement to hear of any future expectations, although it is not expected to be a very hawkish one.
If the ECB was to deliver a very hawkish statement then we could see the Euro strengthening against the Pound, pushing it back down towards 1.22 (82p per Euro). Even with high inflation forcing the BoE to keep its rates on hold for now, we still expect to see the Pound weaken against the Euro. Having already seen a 1.5 cent drop since Friday afternoon, and further drops expected, now is a good time to secure your Euros, before the rate gets lower.
GBP/USD
Sterling fell on Thursday, extending losses against the dollar after a record fall in UK house prices provided more evidence that the domestic housing market is deteriorating and could weigh on the broader economy. British house prices fell 2.5 percent in May, its biggest drop ever, figures from the Nationwide Building Society showed on Thursday, and heightening concerns that a property market downturn may transform into a crash and further weaken the economy.
The data added to the dollar's rally against the pound that had been triggered by stronger-than-expected U.S durable goods data and comments from Dallas Federal Reserve President Richard Fisher on Wednesday that interest rates may rise "sooner rather than later".
Falling property prices are slowing growth in Europe’s second-largest economy just as rising food and fuel prices prevent the central bank from adding to three interest-rate cuts since December. The Bank of England will keep its benchmark rate at 5 percent at its June 4th-5th meeting, according to most market economists.
Due to last week’s statements from the FED it looks as though the rates may rise this year giving more dollar strength against sterling. Clients with dollar purchasing requirements over the next few months may wish to forward purchase their currency before the FED increase interest rates.
AUD
The Aussie Dollar, was relatively flat against most of the major currencies last week following mixed data and volatile swings in the carry trades.
Growth of credit in the private sector and the housing sector were disappointing and both weaker than were expected which put some pressure on the Australian Dollar. However, figures released showed that growth in the construction industry improved by 2.3% for the first quarter which gave some much needed support to the currency.
The Aussie also met pressure toward the end of the week amid falling commodity prices and a recovering US Dollar. If rates in the US rise sooner than expected the change in interest rate differential could harm carry trades and therefore affect the strength of the Australian Dollar.
This coming week could be interesting for the currency with a number of important data releases including further data regarding growth figures as well as the RBA interest rate decision. The growth figures are important as they are likely to have a bearing on expectations for interest rate rises or falls later in the year. Despite this, the Dollar still remains very strong, especially against Sterling. Broadly speaking this is expected to remain the same irrespective of the forth coming data, because the UK economy is that much more fragile than Australia’s.
NZD
Last week saw the Kiwi slightly stronger against a basket of major currencies but critically against the pound, was mainly unchanged. This sideways trading was due mainly to a lack of domestic kiwi data and the strong expectation of interest rate holds in both the UK and New Zealand. Indeed we feel that this cross is likely to remain range bound under the current market conditions as there is not a large element of risk appetite and thus slow carry trading with the NZD. With the Pound bearish at the moment as well, unless global market conditions trigger a sell off of current carry trades and force a sell off against the pound and a move lower towards to 2 dollars to the pound mark, we feel that current trading levels just under 2.5 could hold steady this month.
CAD
Poor Canadian GDP data last week weakened the Loonie against the Pound. Finance Minister Jim Flaherty maintained his forecast for Canadian economic growth of 1.7% in 2008 but warned that the economy faces serious challenges with the slowdown in the US. We then saw Canadian GDP shrink unexpectedly by 0.3% during the first quarter of 2008 which is the first negative quarter for five years.
The contraction in Canadian GDP is a concern as another negative quarter would mean that the Canadian economy is in a recession. The BoC are in a position to try and prevent this though as inflation is still below the 2% target leaving room for further interest rate cuts to try and stimulate the economy. With further cuts expected in Canada we should see the Sterling/CAD cross sitting just below the 2 Dollar mark as high inflation in the UK is tying the Bank of England’s hands in terms of further interest rate cuts.