Spotlight on Egypt

With the front pages dominated by news of the crisis in Egypt, it’s hard to escape the chaos that has brought the country to a virtual standstill.

Protestors demonstrating against corruption, elevated inflation, chronic unemployment and a lack of democracy are currently exorcising their democratic right, which has been thwarted for too long by Murbaraks 30-year dictatorship.

Their frustrations have come to the fore, with the disruption spilling over to a seventh day – the impact understandably having an effect on the global markets (something I’m sure the demonstrators, quite rightly, aren’t that concerned about).

A by-product of this political turmoil has been for Moody’s to downgrade Egypt’s government bond ratings to Ba2 from Ba1, and changing their outlook from stable to negative. In the currency markets, the Egyptian pound has also taken a hammering sinking to a four and a half year low against the safe-haven dollar, with the Turkish Lira and Israeli Shekel among the other currencies under selling pressure due to their relative proximity to the disorder.

The classic safe havens of gold, oil and the US dollar were the immediate beneficiaries of this crisis, with traders pulling out of riskier stocks whilst keeping a watchful eye on these uncertain times - hoping the seeds of discontent aren’t sewn too close to the oil exporter counties of the Middle East, and the Suez canal – an artery responsible for the shipment of around a million barrels of crude and refined oil a day. Indeed oil has already climbed back to within a whisker of $100 per barrel and could quickly climb through that level if risks to production manifest themselves.

Uncertain times indeed then. However, perhaps rather surprisingly, the market’s today do seem to be regaining lost ground. The yen, US dollar, and Swiss franc have all given back Friday’s gains suggesting that Egypt’s civil unrest is not yet undermining broader risk appetite. Have we seen an end to this story? I expect not.

Edward Knox
Analyst

US economy accelerates – dollar turn around seen

In contrast to Britain’s laughably poor economic growth figure earlier in the week, data this afternoon has shown that the US economy expanded by an annualised 3.2% in the final three months of 2010. Although the figure is marginally below the median forecast (3.3%), it does reaffirm the improving economic conditions seen in the US at present.

Earlier in the week the Fed stood by its stance to keep interest rates on hold “for an extended period” and I doubt that today’s figure will alter that view in any way. The real thorn in the side for the Fed is the stubbornly high rate of unemployment. Until economic growth starts to bring jobless numbers down we can expect the Fed to stand pat on policy, despite the recent addition of a couple of hawks onto the voting council.

We have seen a slight pickup for the dollar this afternoon. The GDP figure, although solid, is hardly setting the headlines alight and I think traders will probably be content to close up shop early for the weekend without the need to rush into new positions. However, looking to next week I expect that the dollar could begin a steady comeback as the disparity between the strength of the US and UK’s respective recoveries is made evident.

The pound’s been floating around up near $1.60 for the past two weeks, helped in part by a firmer euro and higher interest rate expectations. With those expectations now dashed and the euro looking vulnerable at $1.37, I can see a brighter outlook for the greenback.

Clearly conditions in the US are improving and the markets expect another positive employment change number at the end of next week. Certainly when compared to the snow bitten UK economy and the debt ridden eurozone, the US is looking like an increasingly good bet. And for those investors still looking for a safe-haven, Japan’s credit downgrade has down the yen no favours giving another reason to look out West.

The factors are building in favour of a stronger dollar. One convincing order on the sell side of EUR/USD and the trend will turn.

Duncan Higgins

Senior Analyst – Caxton FX

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Is this a blip, or the beginnings of a double-dip?

It seems from yesterday's MPC minutes – the meeting to which was crucially held prior to the release of our shock GDP figure - that the balance of power between the hawks and the doves has shifted. The idea of raising interest rates to combat rising inflation - estimates of which reach to 5% by end of the year thanks to the triple whammy of high energy prices, import costs and the VAT rise - is increasingly on the agenda.

The anticipation of raising interest rates was enough to boost sterling at the beginning of the month. However, with negative economic growth, stagflation is fast becoming the new buzzword and any further rally for sterling has been well and truly checked. 

Imagine if you will, if on the 13^th January, the 9 member committee had voted for a quarter point increase in the base rate. Borrowing costs on the rise, just as the word double-dip is reintroduced to every editor trying to flog their paper. Panic? Probably, yes.

To this end King was probably correct in keeping monetary policy loose, at least for now. After all, how is a UK based rate rise going to curb rising fuel and food costs exactly? 

King is walking a very fine line at the moment; keeping interest rates low for too long could inevitably lead to longer term problems for the economy; raising them too early and what little confidence there is in an already weak economy would be eroded.

To be fair, the paper floggers may be jumping on the bandwagon to a certain extent; are we facing a double dip? Not yet, at least not technically – we would need to see 2 quarters of consecutive contraction first. The GDP figure that is causing all this mischief for the pound (as I detailed in my previous blog post) could still be revised up. The weather, the volatile nature of data when emerging from recession, and the fact that the 0.5% figure only accounted for 40% of surveys issued heightens the possibility that the figure will be revised. The second estimate (not due until Feb 25^th) could offer a more uplifting figure for the policy members to get their teeth stuck into. The pound meanwhile hangs in the balance.

Edward Knox

Analyst

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What next for Sterling?

The MPC meetings minutes were released this morning much, I’m sure, to the embarrassment of policy member Martin Weale who decided to dance to the tune of raising interest rates. He now joins Andrew Sentance – who has been voting for this policy shift for the past 4 months  – and will probably be rethinking his decision after the release of Britain’s shock GDP figure.

Mervyn King meanwhile, smug in the knowledge that he refused to bow to inflationary pressures, used a speech yesterday to defend the Central Banks ultra lose monetary policy in the face of high inflation. He reiterated that the economic recovery would be ‘choppy’ (understatement if ever I saw one), and that real wages would be heading lower. I’d imagine that King’s Speech will not have been received quite as well by the public as its multi Oscar nominated names sake.

The question now is; what will become of the pound if these figures are to be relied on? How much of a toll did the weather take on these preliminary results? After all, the economic impact of the snow is extremely hard to quantify. My feeling is that the figure of -0.5% shouldn’t be taken at face value. Certainly the recovery has been blown off course, but we should wait for the second and final estimates before completely reassessing the situation. The figure is at odds with the PMI (Purchasing Managers’ Index) surveys and the National Statistics Office has been wrong before, notably coming in 0.4% wide of the mark in the final quarter of 2009. A similar revision this time around could well be on the cards.

Nonetheless, the pound must still deal with the dual hangover of weak economic growth and high inflation: ie stagflation. This is not a concept that will rest too comfortably for the pound. Whereas the expectation of higher interest rates gave sterling a boost in the early part of the year, that eventuality has lost all credibility. Indeed, the prospect of such a move from the Bank of England looks about as likely as Andy Gray presenting Woman’s Hour.

With key US announcements due today and Friday, the market should avert its attention from the UK economy at least in the short term. However, any lasting relief for sterling will depend on a fresh wave of eurozone concerns or these lowly €1.15 levels could endure for now.

Edward Knox

Analyst

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Sterling plummets as economy contracts

There was a shock to the system today, as the pound endured the currency equivalent of falling into an ice cold lake. GDP figures released this morning showed that the British economy contracted by 0.5% in the three months through December.

Although this was a first estimate, the realisation at just how poor these figures were (market forecast was a full percent higher) caused the pound to sink across the board. It fell over 2 cents against the US dollar and a cent over its euro neighbour in just a matter of minutes.

With Johnson out, the incumbent Shadow Chancellor Ed Balls will be smacking his lips at the prospect of getting stuck into Tory manifesto, hounding Cameron and Osborne for “complacently congratulating themselves” for securing the economic recovery back in the Autumn and urging the government to pause and "rethink" its deficit-reduction strategy.

Indeed it appears the back slaps may have been a little hasty. With the economic recovery grinding to a halt, arguments for an interest rate rise will surely have gone into full retreat. Adam Posen is another man who probably wore a wry smile on his face today. His dovish stance is likely to have attracted some followers among the MPC members, although an accompanying vote for QE is less likely with inflation as high as it is.

The question is, just how much will this new data affect policymaker’s decisions? It’s worth noting, however excitable/nervous the market gets over this figure, it’s only estimated data - I’m not expecting the Bank of England to fully reassess the strength of Britain’s economic recovery at this stage. We did also see a staggeringly bleak December weather-wise, and history tells us that the UK isn’t overly competent in the snow. How much did this adverse weather affect our growth? Osborne, understandably, thinks a lot.

What this data has done is to mark a substantial step back for Britain, and it could force downward revisions to both 2011 and 2012 growth forecasts. Sterling’s forecasted turnaround in trend against the euro also looks to have taken a step back. So the question now is just how long will this hangover last?

Duncan Higgins

Senior Analyst – Caxton FX
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Euro continues to gain but turnaround seen

The pound has started the week in much the same way as it ended the last: on the back foot. Steadily the UK currency is finding its early year gains being eroded as the market reassesses the situation in the eurozone.

To be honest this is a trend that we’ve become accustomed to. The euro started the year a long way from favour amid growing concerns about Portugal. However, following a couple of successful bond auctions and supportive comments from both Japan and China, the euro has staged a recovery. Indeed demand for the single currency from Far Eastern buyers has been particularly pronounced recently. The question now is how far can the euro go before it begins to trend lower once again?

Against the dollar, the euro has climbed to a two-month high this afternoon at $1.3665. However, there is growing speculation that $1.37 will prove too appealing a level for investors to ignore and they’ll start to sell the currency once again. In the longer term the underlying problems embroiling the eurozone are bound to re-emerge and it’d be a brave man who argued that the euro has much shelf-life at its current level.

Turning focus to this week, the economic calendar is filled with high profile announcements. Fourth quarter economic growth figures from both the UK and the US are due; the minutes to the Bank of England’s latest meeting are scheduled; and the Fed will give its first policy update of the year.

This barrage of announcements should keep the markets lively. But for those hoping the pound is on the verge of mounting a full scale attack on €1.20, they’ll have to wait a while longer. Ireland's latest political turmoil, although cause for concern, is far from the catalyst needed to dampen euro spirit. Even higher UK interest expectations are struggling to lend much support at present. When the argument is fully explored, it’s still pretty unlikely that the Bank will nudge; how is a 0.25% hike going to curb rising oil prices exactly....?

Duncan Higgins
Senior Analyst – Caxton FX
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The euro advances against the dollar

The euro continued to make significant gains against the US dollar today. Further rumours about Middle East and Russian buyers of European debt helped send the single currency higher, while weak housing data from the states dragged the greenback lower.

EUR/USD briefly went above $1.35 to hit an eight week high of $1.3537. A report in a German newspaper outlined a prospective new restructuring plan for Greece. The report said that the German government was drawing up a plan to allow the Greeks to buy back their own debt using a eurozone bailout fund. The report has been denied by the German parliament.

The seventeen-nation currency has had a few positive blips recently, through the ZEW figures yesterday, speculation of sovereign wealth funds purchasing EU debt and JC Trichet alluding to an increase in the EU’s interest rate. However, the macro issues affecting the region are still prevalent and should set the overall tone for the year. Any boost the euro has received since the start of the year is surely just band-aids re-attaching a dismembered limb.

Is everything going to be okay in Europe or is this simply another calm before another storm? Please add any thoughts and comments below.

Tom Hampton

Analyst – Caxton FX

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UK inflation figures send sterling higher

Sterling extended its gains against the dollar after a much higher than expected inflation reading fuelled expectations of an interest rate hike from the Bank of England.

The December Inflation Report came in at 3.7%, far higher than the expected 3.4%. Rising commodity (specifically food and fuel) prices are thought to be the main drivers behind the surge. These results show the largest rise between November and December in history. Further upward pressure is expected next month as the January figure will show the preliminary effects of the 2.5% rise in VAT. If the Core Price Index (CPI) continues to rise at a similar rate, the BoE will be forced to raise interest rates, perhaps as early as May.

Focus will now shift to next week’s BoE Monetary Policy Committee meeting minutes to see if other policy members have joined the hawkish sentiments of Andrew Sentence in calling for a rate rise.

The euro has also pushed over 1% higher against the greenback after economic confidence figures came in considerably higher than expected. Also, reports of investors from the Middle East and Russia buying eurozone debt have helped to send the single currency higher. However, speculation that the EU’s policy makers plans to stop the crisis from deepening are working are premature, if not pre-glint-in-the-milkman’s-eye. The true depths of the debt crisis have not been realised and national plans to cut deficits are lightweight at best. There could still be a long way to go in this saga. Don’t forget that it was not until May 2010 that the Greek tragedy unfolded. Expect to see a couple of unanticipated events this year.

When should Merv and the boys increase interest rates and by how much? Any thoughts or questions, please feel free to post below.

Tom Hampton
Analyst – Caxton FX
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Sterling bolstered by speculation about tomorrow mornings inflation report

Sterling rallied to a two month high against the dollar on Monday, fuelled by increased speculation over tomorrow’s UK inflation report and the timing of the next rate rise from the Bank of England. If the figures come in at the expected 3.3% or higher, the rally may well extend beyond €1.20 and $1.60.

In a break from the normal trend, which usually tracks euro/dollar, the pound is actually making its own route higher today. A bank holiday in the States combined with investors looking for greater reassurance over the extension of the European Financial Stability Facility (EFSF) helped GBP move higher. It rose as high as $1.5954 and €1.1975 against the dollar and seventeen-nation currency respectively.

Last week’s strong Iberian bond sales were backed by the ECB’s sovereign debt buying scheme which rose to €2.313bn for the week. The implication of this figure is that the unexpected euro strength last week was unfounded and we expect to see the single currency fall this week with sub $1.30 increasingly possible.

When will the euro bottom out? If you have any questions, please feel free to comment below.

Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

An unexpected bounce in the euro’s step

A successful Spanish bond auction helped ease some concerns about the debt crisis plaguing the eurozone’s most indebted nations and finally gave the market some interest and direction.

The euro hit a one month high against the Swiss franc and regained some ground against most of its counterparts following the news. News last night that Germany’s principal, Angela Merkel, may be willing to extend the EU’s relief fund helped to put investors mind at ease and the bond auction went through without a problem. Both the Portuguese and Spanish auctions were concerns at the start of the week, helping to suppress the single currency. However, with the US dollar’s weakness late in the session yesterday and the news of the Iberian sales going well, the 17 nation currency has appreciated to €1.19 and €1.33 against the pound and greenback respectively.

The outlook for EUR remains to the downside in the medium term however. With no plan set in stone and Southern Europe’s debt snowballing, one set of bullish data from the US could turn everything back on it head.

In other news, Timothy Geithner once again called for the People’s Bank of China to allow the yuan to appreciate. Its artificially low value gives China an advantage over the rest of the export market and makes American goods less competitive. However, it seems highly unlikely that the world’s second largest economy would give up such a strong opportunity to hunt down the ailing world ‘no 1.’

Should China do what is best for them or the world economy? To comment on this or any part of the blog please write a comment below.

Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The end is nigh for two of the most boring sessions in history for sterling/euro

Having waited with bated breath for a tragic Portuguese bond auction and the next jolt in the euro’s demise, the market was bitterly disappointed.

Having stayed within a sixty pip range yesterday, the possibility of the single currency freefalling was all but snubbed out. A strong auction for Portuguese bonds quelled immediate concerns about the country’s debt problems and forced GBP/EUR to trade within an even smaller range this morning. The 17-nation currency barely moved after Lisbon sold €1.29billion in debt, including ten year bonds which were sold at a lower average cost than the previous sale.

Although the euro may have survived this round, it will remain under heavy selling pressure and remain near its four month low against the pound. Bond auctions from both Spain and Italy tomorrow will be heavily scrutinised, while Portugal is still expected to seek a bailout for its mounting debt.

Positive speculation (that interest rates will rise sooner than thought to fight inflation) ahead of tomorrow’s interest rate decision from the BoE has sent the US dollar temporarily downwards against GBP. Also, a lack of any news out of the US has not helped with the greenbacks lack of support this week. However, with trade balance and PPI data out tomorrow, we could see a resurgence, especially against the euro.

If you do have any currency related questions, or an opinion on the next interest rate decision, please feel free to comment below.

Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The euro hovers before Portugal’s bond auction tomorrow

Sterling remains near its four month high against the floundering euro as the debt crisis continues to undermine the single currency.

The euro has managed to claw back a few points against the pound; however the pair have remained within a fifty pip range and near the four month high. The general opinion within the market seems to be for GBP to make further gains against the seventeen nation currency. Focus is fixed firmly on Portugal’s bond auction tomorrow. The question as to whether the more indebted nations within the EU can raise money is keeping EUR very much on the back foot. If the Portuguese do not manage to raise the necessary funds from the debt market, they will be forced to turn to the EU and IMF for financial aid.

Further bond auctions on Thursday for Spain and Italy could set the tone for the next few months, despite China and Japan’s rescue efforts.

In other news, it is bonus season for many city institutions and rumours are rife. JP Morgan are reported to be sharing £4.2billion between their 11,000 staff in London, the question of how big the bonus pool is at RBS is making politician’s blood boil and now Barclay’s is finding its name in the tabloids crosshair. Why? Well, the points outlined are based around the use of Cayman Island bank accounts to minimise the amount of tax paid in the UK and US. Which financial institution doesn’t? Surely we should revere a bank that made it through the financial crisis without needing to be bailed out? Surely we should take notes on the fact they came through the bad times having picked up some of the best bits of some failing companies? And, surely Bob Diamond deserves his £8million far more than Stephen Hester deserves his £2.5million?

If you have any strong views on bankers bonuses or currency related questions please feel free to make a comment.

Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Sterling start to the New Year

The pound’s outperformance continued through until the end of the year’s first trading week, taking the price over €1.20 for the first time since September 17th 2010.

On the afternoon of Thursday 6th Caxton FX sent copy to the FT for Saturday publication. The feature discussed whether or not the euro would reach 1.20 in 2011; before close of play Friday the euro had already reached this level. The speed at which the rate rose (4.0% in 4 days!) indicates just how quickly the market is shifting at present. This high level of volatility highlights the importance of regular and accurate analysis - sign-up for daily analysis from Caxton FX.

The question now is, will the rise in the euro continue unabated, or will it reach a plateau? All comments welcome...

Duncan Higgins
Currency Market Analyst
Caxton FX

Sterling romps ahead

After a very flat morning, sterling has made significant gains against most of its counterparts following worse-than-expected data from the US.

Despite poor PMI figures earlier in the week, the pound has managed to make up almost four cents against the euro (from €1.1591 on Monday to a high of €1.1970 today) and buck its downward trend against the US dollar.

Following a string of poor results this morning from the eurozone, GBP/EUR remained relatively flat as the market waited for the outcome of the US Non-Farm Payroll. The figure came in some 56,000 below expectation at 103,000. However, the more telling data for the pair may well have been that the unemployment rate fell from 9.7% to 9.4%.

The subdued mornings play suddenly erupted as the Reuters screen froze and refused to give a real number until the market settled down and the computer could catch up. The raging pound then shot up to €1.1969 from just under €1.19 and has spent the past hour yo-yoing up and down before coming to rest around €1.1950. The pound has now risen by almost 5% against the 17-nation currency in only four days.

Although I have waxed lyrical about today’s wild throws of trading, the truth is, as stated in the blogs of the past two days, the single currency is in a dire situation and the market will use any excuse to abuse it.

The poor numbers from across the pond at lunchtime have helped sterling stem its losses against the greenback today. However, this is more than likely to be just a blip. The theme of USD strength is set to continue until the Fed’s second round of QE abates (officially June 2011). Beyond the $600billion injection, it is hard to see exactly what will happen to the dollar, however the likely outcome would be a spell of weakness.

Indeed, JP Morgan has gone so far as to estimate EUR/USD hitting $1.48 by year end. Is this too much of a turnaround? Certainly a turnaround is expected in the latter half of the year as monetary policy in the US stays loose whilst Europe looks too tighten. But surely the debt crisis in the EU is not close enough to a resolution to warrant a move of that level, particularly as the price could drop as low as $1.20.

In other news, well done England on winning their first test series in Australia since 1986. For a good laugh at an Aussie journalist, have a read of this article.
Tom Hampton

Analyst – Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The euro’s slide continues

Despite disappointing data from both the UK and US, the euro has not been able to make up any lost ground.

Sterling did take a slight knock this morning as the UK’s Services PMI figure came in at 49.7, well below the expected result of 52.9. However, any losses were soon regained and the pound hit an intraday high of €1.1855 against the single currency.

Aside from some slightly disappointing employment data, the greenback continues to climb. The euro is now just a shade away from collapsing below $1.30 and who would bet against the move coming as early as tomorrow?

The 17 nation currency continues to go from bad to worse. What would normally be bullish news, a successful Portuguese bond auction, turned sour as the premium Portugal will have to repay went up by well over 100 points. The news that the EU is potentially going to issue Europe wide bonds (rather than country specific) smells horribly like the actions bankers took in combining securities that got the world in this mess in the first place. Next week Italy and Spain will both have their first bond auctions of 2011. It will be very interesting to see what premium they will have to pay to secure finance. All-in-all, this storyline has legs and will dominate most of 2011.

In other news, well not that far from the apple tree, China’s shopping spree for entire nations (behind FT paywall) continues as they pledge to buy €6billion of Spanish debt. This is being viewed as a simple engagement to try to open up foreign markets to Chinese exports. However, with their cheaper yet comparable products, ownership of foreign government debt, vast currency and commodity reserves, could this be just another move to knock America from the top of global economics?

Tom Hampton

Analyst – Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Sterling is merely a spectator as the euro slumps against the US dollar

Despite worse than expected construction data from the UK, sterling has made gains against most of its major counterparts as it tracks the US dollar higher.

Positive employment data from the US and continuing fears about the eurozone debt crisis have sent the greenback higher with the pound hanging on to its coattails. A report showing that US companies created almost three times as many jobs in December than expected helped the US currency make its largest gains in almost three months. USD has recouped all losses made against the yen since new year’s eve and taken it back to pre-Christmas levels against the overinflated Swiss Franc.

Continuing issues in the eurozone will be the general theme for 2011 with a possible break-up of the single currency the most extreme prediction from some analysts (see this piece by Harry Wilson in The Telegraph). While this is unlikely, pressure from the stronger EU nations for a resolution could well lead to a state of greater fiscal union with Germany inevitably picking up the pieces.

Reading ‘Peston’s Picks’ from the BBC, I was interested to see his views on the Ipsos Mori survey published today. The survey outlines that FTSE 350 leaders are more upbeat about the start of 2011 than they were in 2010, despite heavy handed austerity measures. Mr Peston goes on to point out that despite muted optimism in early 2010, no one saw the collapse of Greece and Ireland (although according to this BBC piece his colleague James Robins, the BBC Diplomatic correspondent, did exactly that) . What will 2011 have in store for us?

In other news, further integration of China into the world economy took a leap forward as the World Bank has issued its first bond denominated in the Chinese yuan. The international lender could have plans afoot to make China its third largest stakeholder after the US and Japan.

And finally, pun’s about the state of the single currency reached fever pitch as Estonia has been enveloped into the EU’s economic bosom. Apparently, a cow in Tallinn, Estonia’s capital, offers an excellent exchange rate of one kroon to one euro, fifteen times better the actual exchange rate. Well, where there’s muck there’s brass! (sorry)
Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.