FCG Market Report 2nd March 2009 www.foremostcurrencygroup.co.uk
EUR
This week we have lots of economic data releases for both the UK and the EU, and so we are likely to see some volatility in Sterling Euro exchange rates. We have already seen UK Mortgage approvals for January showing less mortgages were agreed than forecast, confirming the continuation of the downturn in the UK property market. This data has already started to weaken the Pound in Monday morning trading.
Interest Rates
This Thursday we see both the Bank of England (BoE) and the European Central Bank (ECB) announce their Interest Rate decisions at 12:00 and 12:45 respectively. As you can see from the chart above, Interest Rates in the UK are at a record low of 1%. Most analysts expect both the BoE and ECB to cut rates by 50 basis points. This will leave EU rates at 1.5% and UK rates at new a low of 0.5%. With such low rates, investors will receive next to no return on Sterling; the currency could therefore become weaker. The reason for this is that as investors move funds to currencies with a higher yield such as the Euro. The Euro then becomes stronger and Sterling becomes weaker, and the net result is lower exchange rates.
Current levels for purchasing Euros are more than 10% better than at the start of this year. With expected interest rate cuts, and further negative economic data releases also expected, consider locking in today's rates using a Forward Contract - for a small deposit you can guarantee today's rates and protect yourself from a possible weakening of the Pound.
Look out also for UK Nationwide Consumer Confidence data on Wednesday, and UK Producer Price Index Data on Friday. Both of these releases could cause volatility for the Pound.
USD
This afternoon we saw the GBP/USD Interbank rate drop below 1.4 for the first time since 27th January, yet we have seen a high today of 1.4350 so it looks like Cable could have another volatile week. Last week US consumer spending fell more than expected and the Dollar suffered from deteriorating risk appetite accordingly as it is now seen as the Safe-Haven currency with its 0% interest rate and after Japan entered recession. The US government also announced its support package for Citigroup with the authorities taking a larger stake in the bank which triggered more risk-aversion and therefore investors ploughed more of their funds into the Greenback, supporting the US currency. These swings in risk appetite have made for choppy trade in Cable with over 7 points between the high and low of the last 10 days. The Pound was a bit of an innocent bystander in all of this and the market mainly moved on the back of US data releases as the only UK data of interest was Actual 4Q GDP figures which were only slightly better than expected.
This morning the US announced a new $30billion support package for flailing insurance giant AIG, creating further downward pressure on equity markets; therefore causing more risk aversion and supporting the Dollar. Cable is also being forced down with markets starting to price in a 50 basis point cut in UK interest rates which is expected when the MPC make their announcement at the end of their 2-day meeting on Thursday. Also out this week we have US Pending Home Sales for January on Tuesday, and more importantly US Non-Farm Payrolls on Friday. The forecast is for the US unemployment figure to rise from 7.6% to 7.9%. In the UK, other than the rate decision, the only release of interest is Nationwide Consumer Confidence, in the early hours of Wednesday morning which is expected to fall slightly from last months reading; a further indicator of the economic downturn in the UK.
All in all we are expecting a volatile week with Sterling being driven lower against the Dollar if interest rates are reduced to 0.5% on Thursday as expected. Either way, those looking to trade the US Dollar in the not too distant future should talk to their FCG Account Executive as the added factor of global risk appetite must now be taken into account, whether you are buying or selling Dollars.
CAD
The market was relatively placid last week for GBP/CAD, fluctuating broadly within a 4 point range, and with it ending the week virtually where it began. The only data of significance released was a much bigger than expected decline in Canadian retail sales in December, which briefly gave the Pound a boost, however this was short lived following a bout of Sterling weakness.
Looking to the week ahead, Canada sees the release of Q4 GDP figures which is expected to show that year on year the economy shrank by 3.6 percent. If this is the case it will be the biggest drop in 18 years and dispels any discussion that Canada is fairing better than other economies in this Global recession.
All eyes are focused on the Bank of Canada's interest rate decision on Tuesday, with consensus expectation of a 0.5% cut to 0.5%. With a cut in interest rates it is possible that we could see further losses for the CAD against a basket of currencies, including the Pound, as Canada becomes a less attractive proposition for investor to place their funds. However, with such a consensus, it is more than likely that the decision will have already been priced in to the market. Speak to your FCG Account Manager for up to date market information.
AUD
Weak data and bad news blighted Sterling last week but it finished at $2.21 by the end of the week against the Australian Dollar, meagre data such as Construction Work Done and Wage Price Index had no particular impact on the currency.
The week ahead will prove to be an important one for the Aussie Dollar with a mix of significant economic data and any surprises are likely to cause substantial volatility. The Reserve Bank of Australia interest rate decision is released on Tuesday, traders are predicting that there will be a 25 basis point cut to 3% but a more aggressive cut of 50 basis points is possible. It will be important to watch the decision and its commentary as any number of results could cause major reactions for the currency.
GDP figures and trade balance reports make up the rest of the significant data this week with the GDP expected to show an expansion through the final quarter of 2008. These unexpectedly strong economic results have given rise to Bullish sentiment but negative surprises could dampen the recent economic hope. Likewise the same could be said for the Trade Balance on Wednesday, the Australian industry relies heavily on global demand and falling exports will reflect badly on economic growth.
Data out this week should be watched with a keen eye, speak to your Account Manager at FCG to keep you up to date with the RBA rate decision and other prevalent data and to take advantage of any spikes in this volatile week.
NZD
The New Zealand Dollar strengthened against the Pound early last week, but was unable to maintain these gains as Sterling rallied on Friday afternoon.
The January trade deficit in New Zealand narrowed to its lowest level in eight years, emphasizing central bank Governor Bollard's recent comments that the weakening NZD is helping exporters to become more competitive. Bollard's statement suggests that the RBNZ are willing to allow the NZD to remain relatively weak, at least while it continues to benefit those businesses whose products attract buyers from overseas.
Despite the increasing demand for products made within New Zealand, the National Bank Business outlook survey remained downbeat - with a 6% increase in the proportion of businesses expecting worse conditions over the next year.
The contrasting information makes it incredibly difficult to forecast the outcome of the next interest rate decision from the RBNZ, which will take place on 12th March. With the rate currently at 3.50%, relatively high considering global interest rates at the moment, most analysts expect that there will be a further cut.
With very little data out from New Zealand this week the direction of the cross is likely to be determined by sentiment from the UK, particular focus will be on this Thursday's interest rate decision from the BOE and statements from Mervyn King (Governor of the Bank of England).
ZAR
The eagerly awaited growth figures for the last quarter of 2008 were released last Tuesday. It showed that the South African economy contracted for the first time in a decade in the Q4 of 2008. GDP contracted 1.8% after rising 0.2% in the third quarter.
South Africa's economy is set to shrink further this year, as the global downturn affects financing and external demand.
With South Africa's leading domestic and global indicators continuing to deteriorate, the Economist Intelligence Unit (EIU) has revised its growth forecast downwards. It is now expected that South Africa's GDP growth will contract by 0.8% in 2009, reflecting tough financing conditions, and much weaker external demand for the country's commodity exports (excluding gold), before posting a recovery in 2010 as the global economy begins to pick up.
The South African Chamber of Commerce and Industry's business confidence index fell almost 2% to a six-year low in December 2008, and the 1% interest rate cut has done very little to brighten the mood, with many believing that the central bank should have gone further. Similarly, month-on-month output and retail sales data for the final months of 2008 indicate that the downturn could be steep, especially for the first half of 2009.
With all this in mind it is strongly expected that South Africa will continue to cut their interest rates throughout 2009, the first of these may be ahead of the next MPC meeting and we could see the GBP/ZAR cross rise well above 15.0 where it has been trading since the end of last year.
Anyone looking to buy Rand in the short to medium term would be wise to speak with there FCG Account Manager about the various contracts to make the most of the market movements.
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