MARKET REPORT 9th June 2008
STERLING vs. EURO
Sterling ended a disappointing week last week as the currency continued to slide against the euro on Friday, extending losses a day after the European Central Bank said an interest rate rise was possible next month. Trichet's comments came after Thursdays interest rate decisions where both the ECB and the Bank of England kept rates on hold at 4 percent and 5 Percent respectively.
Trichet went on to say that the central bank may raise rates at its next meeting to tackle inflation risks, which should move to shrink the difference between euro zone and British rates and take the shine off sterling-denominated assets.
The blow from the ECB added to this week's pummelling of sterling, which lost ground against the Euro and hit a near three-week low versus the Dollar. Data released from the retailer John Lewis didn’t help matters with a 4.7% fall in sales highlighting the UK’s continuing economic weakness.
The start of the week saw Bradford and Bingley, who are the largest UK provider of buy to let mortgages, lose 25% on the value of their share price after they posted huge losses in the first quarter of 2008. Mortgage approvals fell to 58,000 in April which is a record low. At the same time, the Halifax reported that house prices fell another 2.4% in May which was nearly twice as much as expected.
This week’s key data releases will be inflation data in the UK on Monday followed by further housing and retail figures on Tuesday. In the Eurozone we will see import and export data on Monday and inflation data at the end of the week. With an interest rate rise in the Eurozone very much back on the agenda and Sterling very much on the back foot with probable rate cuts in the third quarter Stirling buying power is expected to remain definitively subdued.
STERLING vs. DOLLAR
It was a surprising time for the US Dollar with a very mixed bag of data released last week. On Tuesday Ben Bernanke amazed greenback bears by coming out with one of the most openly pro-dollar speeches by any Fed chairman in a very long time (increasing thoughts that the Fed will hold their rates at 2%) although there is now speculation that Bernanke’s comments early last week were designed to protect the dollar from hawkish comments due from the ECB later that week.
On Friday everyone was shocked by the massive rise in the unemployment rate which spiked from 5.1% to 5.5% in one month. This meant that there was a complete turnaround in the dollar's fortune, causing the cross to spike to 1.9848.
The sharp rise in unemployment is likely to have a very negative impact on the psyche of the US consumer as most are keenly aware of the direction the unemployment rate is heading, the wrong one! This is the most recent signal that US growth is stalling and companies are more reluctant to hire as profits are squeezed by a consumer slowdown and soaring oil and raw material costs. The next key data point for the US economy will be Retail Sales due Thursday June 12th. Given the fact that employment has suffered its fifth consecutive month of losses, the US consumer is likely to cut down on spending.
The one bright spot on the US calendar may be the Trade Balance data. Although it is forecast to print worse than last month, the favorable exchange rate could create an upside surprise in both exports and imports, but the help to the greenback is likely to be minimal as fears of a much more severe downturn in the US economy is constantly in the forefront of the market’s mind.
We are expecting the cross to remain rangebound between 1.935 and 1.985 for the time being.
AUD
The Aussie enjoyed another week of continued strength last week, against a basket of major currencies and especially the Pound. The main drivers of this strength were bullish domestic data and the hold of interest rates at 7.25%.
The data that has supported the Aussie has been in areas where many of the other developed economies have struggled on the back of the credit crunch, providing a double blow as it were when considering currency crosses such as the GBP-AUD. Indeed sharp rises in, company profits, building approvals, the current account deficit and importantly GDP are in direct contrast to the UK economy and were behind the drive towards Inter bank Levels approaching only 2 dollars to the pound, with trading actually below 2 at certain points last week.
- The Aussie economy is still looking strong therefore, and is indeed coping much better with the credit crunch than the UK and US economies. It is still riding high on the carry trades and realistically only falter if we see large scale unwinding of these investments. However with traders and investors keen to find their feet again, the attractive rates in Australia should keep the Aussie Dollar strengthening against the pound for some time. If you need to buy Australian Dollars from Sterling in the near future, the use of Stop Loss and Limit orders could certainly play into your hands.
NZD
The Kiwi has fallen against a basket of major currencies last week after the decision to keep interest rates on hold at 8.25%. This move was widely expected, but the central bank delivered a dovish statement that opened the doors for future rate cuts. Many analysts believe, the rates could be cut as low as 7.5% before the end of the year, the first of these being forecast for September. A sharp kiwi sell off, could put more pressure on the NZD before and after September, as its high yielding appeal wears off. Future cuts from the royal bank of New Zealand would weigh heavily on the kiwi and depending on what happens in the UK, a sharp fall in global risk appetite and unwinding carry trades would see a possibly significant downward correction against the GBP.
With little meaningful economic data out this week any movements are expected to come off the back of shore events.
CAD
Fridays release of the Canadian Unemployment rate which came in at an expected 6.1% (no change), did nothing to fuel any interest in the Loonie. The market has been pricing in a 25 basis point cut in Canadian interest rates when the Bank of Canada meets on Tuesday, which has forced the Canadian Dollar weaker against the Pound. We have therefore seen the GBP/CAD cross move up from a low of 1.9630 on Tuesday last week to open this morning just above the 2 Dollar mark. We also have housing starts for May due out today which are expected to rise from 213.9k to 217.5k but we don’t see this positive data doing much for the Loonie.
The general consensus for the cross is to sit between 1.98 and 2.04 for the time being as the Bank of Canada are in a position to cut interest rates as inflation is still well below their target of 2%, whereas the Bank of England are facing a tough juggling act of high inflation and slowing economic growth. The BoE held interest rates last Thursday and are expected to do the same for the coming few months. We therefore expect to see slight CAD weakness as they look to cut interest rates in an attempt to boost growth and avoid a recession. However, if the rate continues to move upwards, this must not be misconstrued as Sterling strength as we still expect to see a tough 12 months for the Pound.