Away from the eurozone debt issue, we have had the story surrounding Project Merlin's lending targets story this week and the subsequent British Bankers Association statement. Why is it important that UK banks get back to lending?
Liquidity is essential to a healthy economy, this is why economies such as the UK, US and Japan have been pumping money into their economies through quantitative easing – it stimulates growth. This is exactly why under Project Merlin, the largest UK retail banks were set lending targets by the government. Borrowing rates on UK loans have surged to a ten year high, which has really deterred borrowers’ appetite.
Whilst reduced borrowing does suggest businesses and consumers are trying to address their balance sheets, it does not do the UK’s growth prospects much good. With people saving rather than spending, UK retail sales are doing awfully. Commercial debt can be very positive for an economy, encouraging innovation and ambition, but most businesses are understandably more concerned with staying afloat and consolidating.
If businesses remain conservative, and reluctant to borrow, then economic growth will be capped. Poor growth means a weaker pound, because as long as the UK recovery remains vulnerable to a double dip recession, sterling will be out of favour. Stronger growth means the Bank of England can raise interest rates from their record lows, giving investors a higher-yield to chase.
Richard Driver
Analyst – Caxton FX
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Wednesday 25 May 2011
Monday 23 May 2011
Andrew Sentance departs - where does this leave the MPC?
Arch-hawk Andrew Sentance made his last MPC interest rate vote earlier this month, as his tenure comes to an end. He voted for a 0.5% Bank of England interest rate rise, with fellow hawks Andrew Weale and Spencer Dale both voting for a 0.25% interest rate rise. This left the voting pattern as six in favour of keeping rates on hold, and three voting for a rate rise.
Former Goldman Sachs economist Ben Broadbent is Sentance’s replacement, and comments last week suggest he is by no means as hawkish as his predecessor. In his appearance before Parliament’s Treasury Committee last week, he stated that if VAT and high commodity prices are stripped out of the headline UK inflation figure, we are much closer to the BoE’s official 2% target. These comments are not consistent with those of a ‘nailed on’ hawkish voter. He is likely to be viewed as a swing voter, and this could push expectations of a BoE rate rise back, or at least makes bringing expectations forward more difficult.
Richard Driver
Currency Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Former Goldman Sachs economist Ben Broadbent is Sentance’s replacement, and comments last week suggest he is by no means as hawkish as his predecessor. In his appearance before Parliament’s Treasury Committee last week, he stated that if VAT and high commodity prices are stripped out of the headline UK inflation figure, we are much closer to the BoE’s official 2% target. These comments are not consistent with those of a ‘nailed on’ hawkish voter. He is likely to be viewed as a swing voter, and this could push expectations of a BoE rate rise back, or at least makes bringing expectations forward more difficult.
Spencer Dale has come out with some real hawkish rhetoric of late, stating that he was “not at all confident that the recovery has taken hold and will definitely power away. However, I'm even more worried about what's going on in terms of inflation.” Perhaps it is Dale that will replace Sentance as the sabre-rattler in chief.
As it is, the market has the BoE raising rates in its January 2012 meeting. There is so much that can change in this time that for us to commit to a specific month seems more than a little speculative. However, we currently would be sceptical of bets being brought forward to this year, based on the current performance of the UK economy at present and based on the removal of the hawkish faction’s most outspoken voter. Richard Driver
Currency Analyst – Caxton FX
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Thursday 19 May 2011
Sterling v South African Rand Outlook
The South African rand has been the most volatile emerging market currency this year and the GBP/ZAR recent fluctuations have been reflective of this. The appreciation of the rand in the past three months has been largely thanks to the return of risk appetite, which is attributable to growing confidence in the global economic recovery. This confidence has faltered of late but should be a prominent feature looking forward.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.
The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.
Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.
Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.
However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.
Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.
Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.
The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.
Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.
Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.
However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.
Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.
Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 17 May 2011
Sterling fails to sustain gains after sharp inflation rise
One would expect a 0.5% surge in a headline inflation figure which was already double the BoE’s official target to give sterling a genuine and sustained boost. This has not been the case today, sterling has erased the pretty decent gains it made in the build up to the data release, to trade flat on the day presently.
Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.
Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.
In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.
Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.
In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
UK inflation provides an upside surprise
Data this morning has shown that the UK headline inflation figure has risen to 4.5%, but expectations of a higher figure had already been priced in over the morning. With the previous figure showing that prices had increased by 4.0% from the same point last year this latest monthly rise is in line with strong global price pressures. As the highest UK inflationary figure rise since 2008, the increase is well ahead of the forecasted 4.2% rise.
This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.
King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.
Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.
This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.
King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.
Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.
Monday 16 May 2011
Could the US really default on its debt?
This week has started with some good old fashioned scaremongering surrounding US debt. US Treasury Secretary Geithner said a few days ago that his department is taking “extraordinary measures” to avoid hitting the government’s $14.3 trillion debt ceiling, on which US lawmakers will be voting for a possible rise in a few months.
Members of both the Republican and Democratic parties will be attempting to hammer out a deficit-reduction deal in coming weeks. Ideally this will happen before Aug 2nd, when Geithner claims he will run out of ways to evade a US default!
One worry is that the Republicans will see this as an opportunity to undermine Obama – how far would they be prepared to go in order to bring down the Democratic government? Would they be prepared to block a rise? Thankfully, it looks like Republican House Speaker Boehner is prepared to side with Obama, but how long it takes them to come to an agreement is another problem altogether.
“We could have a worse recession than we already had” said Obama, as he suggested that if the US defaults, then all the dominoes fall. Obama’s statement could be seen as tantamount to blackmail. The US is too big to fail (as was Lehman Brothers), therefore they should be allowed to borrow more – if they do not then the world will suffer a second, larger credit crisis. On the other hand, perhaps these are just the facts of the matter, Obama’s comments do have the support of major think tanks who cite massive job losses , falling stocks and tightened lending as inevitable consequences. Nonetheless, it all seems a bit rich given that Obama himself opposed a similar debt raising proposal back in 2006.
So what would happen with the dollar if the US reached their $14.3trillion debt ceiling?
Well, news from the US can often have an inverted impact on the greenback. Good news means that the world’s largest economy is functioning well; confidence is high and investors leave the dollar in seek of riskier, higher-yielding assets. Bad news from the US spooks the market, and investors chase the safety of the world’s reserve currency- the dollar. So for example when Lehman’s collapsed and triggered a global recession, the dollar appreciated massively as a result. So it is reasonable to expect that a disaster of similar proportions, which Obama asserts is possible, would see the dollar benefit again.
With so much on the line, we’d expect US law-makers to find some sort of solution as it edges closer to the brink, just as we expect eurozone leaders to find a solution to the Greek and Portuguese debt situations this week. The stakes are just too high.
On another note, I recently had an interview with the excellent forexblog – definitely one to follow if you are interested in the money markets.
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Members of both the Republican and Democratic parties will be attempting to hammer out a deficit-reduction deal in coming weeks. Ideally this will happen before Aug 2nd, when Geithner claims he will run out of ways to evade a US default!
One worry is that the Republicans will see this as an opportunity to undermine Obama – how far would they be prepared to go in order to bring down the Democratic government? Would they be prepared to block a rise? Thankfully, it looks like Republican House Speaker Boehner is prepared to side with Obama, but how long it takes them to come to an agreement is another problem altogether.
“We could have a worse recession than we already had” said Obama, as he suggested that if the US defaults, then all the dominoes fall. Obama’s statement could be seen as tantamount to blackmail. The US is too big to fail (as was Lehman Brothers), therefore they should be allowed to borrow more – if they do not then the world will suffer a second, larger credit crisis. On the other hand, perhaps these are just the facts of the matter, Obama’s comments do have the support of major think tanks who cite massive job losses , falling stocks and tightened lending as inevitable consequences. Nonetheless, it all seems a bit rich given that Obama himself opposed a similar debt raising proposal back in 2006.
So what would happen with the dollar if the US reached their $14.3trillion debt ceiling?
Well, news from the US can often have an inverted impact on the greenback. Good news means that the world’s largest economy is functioning well; confidence is high and investors leave the dollar in seek of riskier, higher-yielding assets. Bad news from the US spooks the market, and investors chase the safety of the world’s reserve currency- the dollar. So for example when Lehman’s collapsed and triggered a global recession, the dollar appreciated massively as a result. So it is reasonable to expect that a disaster of similar proportions, which Obama asserts is possible, would see the dollar benefit again.
With so much on the line, we’d expect US law-makers to find some sort of solution as it edges closer to the brink, just as we expect eurozone leaders to find a solution to the Greek and Portuguese debt situations this week. The stakes are just too high.
On another note, I recently had an interview with the excellent forexblog – definitely one to follow if you are interested in the money markets.
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 12 May 2011
The greenback’s resurgence: temporary or permanent?
Sterling was trading at $1.67 at the beginning of last week and was set to push $1.70, but it is now trading below $1.63. The euro/dollar rate was over $1.49 a week ago, and is now trading below $1.42. What has the dollar done to deserve such a pull back? Nothing really.
Lat week, Trichet dealt the euro a blow by effectively ruling out an ECB rate rise in June (though July remains a good bet). This saw speculation on further near-term ECB tightening unwound, which helped the dollar. More importantly we heard various news stories of a Greek euro-exit and rumours of a Greek debt restructure, which saw the dollar benefit from strong safe-haven inflows. In addition, commodities prices slid horrifically, and whilst they stabilised in the early part of this week, they have had another bad day today.
There are also growing concerns over global growth, caused by a slow in output from China and monetary tightening from the Peoples Bank of China. With risk appetite well and truly hemmed in, global stocks have fallen and which asset stands to benefit from all this? Safe-haven currency, one of which is the dollar. Gold usually benefits from such widespread uncertainty but a sharp slide in the precious metal is a key contributor to the current environment.
So the dollar is doing well now but should we adapt our forecasts as a result? Working in the dollar’s favour moving forward is that the Federal Reserve’s QEII programme will be brought to an end in June in all probability, which has been a major source of the dollar’s long-term weakness. Assuming eurozone officials reach some sort of agreement with Portugal and Greece over their debt crises (probably in the form of some unsatisfactory bailouts which will only delay disaster, but will calm the markets for now), then confidence should return. Commodity prices seem very likely to bounce back.
I see monetary policy returning to dominate currency movements. Whilst the Fed may be ending QEII, it seems unlikely to raise rates this year and is behind the BoE and ECB. US growth is certainly nothing to get excited about, as shown by today’s disappointing US retail sales growth. So for at least the next month, I expect sterling and the euro to regain the front foot from the dollar (provided the eurozone debt crisis reaches some sort of solution!).
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Lat week, Trichet dealt the euro a blow by effectively ruling out an ECB rate rise in June (though July remains a good bet). This saw speculation on further near-term ECB tightening unwound, which helped the dollar. More importantly we heard various news stories of a Greek euro-exit and rumours of a Greek debt restructure, which saw the dollar benefit from strong safe-haven inflows. In addition, commodities prices slid horrifically, and whilst they stabilised in the early part of this week, they have had another bad day today.
There are also growing concerns over global growth, caused by a slow in output from China and monetary tightening from the Peoples Bank of China. With risk appetite well and truly hemmed in, global stocks have fallen and which asset stands to benefit from all this? Safe-haven currency, one of which is the dollar. Gold usually benefits from such widespread uncertainty but a sharp slide in the precious metal is a key contributor to the current environment.
So the dollar is doing well now but should we adapt our forecasts as a result? Working in the dollar’s favour moving forward is that the Federal Reserve’s QEII programme will be brought to an end in June in all probability, which has been a major source of the dollar’s long-term weakness. Assuming eurozone officials reach some sort of agreement with Portugal and Greece over their debt crises (probably in the form of some unsatisfactory bailouts which will only delay disaster, but will calm the markets for now), then confidence should return. Commodity prices seem very likely to bounce back.
I see monetary policy returning to dominate currency movements. Whilst the Fed may be ending QEII, it seems unlikely to raise rates this year and is behind the BoE and ECB. US growth is certainly nothing to get excited about, as shown by today’s disappointing US retail sales growth. So for at least the next month, I expect sterling and the euro to regain the front foot from the dollar (provided the eurozone debt crisis reaches some sort of solution!).
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 11 May 2011
Sterling enjoys a major boost from hawkish BoE Inflation Report
Mervyn King took the market by surprise this morning by indicating that the Bank of England could raise interest rates this year. So, after a session on the back foot yesterday, sterling has spiked aggressively against most of its major counterparts today, gaining a cent on the dollar and well over a cent on the euro.
Before today’s Quarterly Inflation Report, pessimism surrounding the UK economy was such that no interest rate rise was fully priced in by the market until January next year. Investors now seem confident that we will see some monetary tightening by the end of this year. Why? Not because of a more positive view of the UK economy, that’s for sure. Indeed, King expressed concern that first quarter growth was slower than expected and that the UK’s near-term outlook moving forward was downgraded.
The UK’s inflation expectations were upgraded, with the figure likely to hit 5% in coming months and to remain above the BoE’s official target of 2% for the whole of next year. We have already been warned that inflation could reach these levels, so why the huge response?
It was the somewhat hawkish tone of King that seemed to seal it. King has been distinctly dovish in the past, and it seemed like he meant business today, “Bank rate will rise at some point, it cannot stay at this level indefinitely.” He also stated that his May inflation forecasts were based on the assumption that interest rates will rise to 0.8% in the fourth quarter of 2011 and to 1% in the early part of 2012. So, a 25 basis point hike is now fully priced in for December.
Views surrounding BoE monetary tightening range from two rate rises this year (with the first in August) to none this year, and none next. Not to be fence-sitters, but we are somewhere in the middle. Today’s sterling positivity has been overdone in our opinion, we are more cautious about the UK’s struggling recovery.
Particularly in the absence of arch-hawk Andrew Sentance , the MPC seems likely to remain in wait for growth to come before raising rates. The picture will be clearer if last month’s slow in growth is shown to be temporary, as King indicates, or reflective of an even more fragile recovery than initially recognised. What’s more, the MPC has shown little concern with accusations that its weakening grip on inflationary pressures is calling its credibility into question. So despite King’s hawkish tones we'd prefer to wait for further evidence before bringing interest rate expectations forward.
Comments, as ever are welcome!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Before today’s Quarterly Inflation Report, pessimism surrounding the UK economy was such that no interest rate rise was fully priced in by the market until January next year. Investors now seem confident that we will see some monetary tightening by the end of this year. Why? Not because of a more positive view of the UK economy, that’s for sure. Indeed, King expressed concern that first quarter growth was slower than expected and that the UK’s near-term outlook moving forward was downgraded.
The UK’s inflation expectations were upgraded, with the figure likely to hit 5% in coming months and to remain above the BoE’s official target of 2% for the whole of next year. We have already been warned that inflation could reach these levels, so why the huge response?
It was the somewhat hawkish tone of King that seemed to seal it. King has been distinctly dovish in the past, and it seemed like he meant business today, “Bank rate will rise at some point, it cannot stay at this level indefinitely.” He also stated that his May inflation forecasts were based on the assumption that interest rates will rise to 0.8% in the fourth quarter of 2011 and to 1% in the early part of 2012. So, a 25 basis point hike is now fully priced in for December.
Views surrounding BoE monetary tightening range from two rate rises this year (with the first in August) to none this year, and none next. Not to be fence-sitters, but we are somewhere in the middle. Today’s sterling positivity has been overdone in our opinion, we are more cautious about the UK’s struggling recovery.
Particularly in the absence of arch-hawk Andrew Sentance , the MPC seems likely to remain in wait for growth to come before raising rates. The picture will be clearer if last month’s slow in growth is shown to be temporary, as King indicates, or reflective of an even more fragile recovery than initially recognised. What’s more, the MPC has shown little concern with accusations that its weakening grip on inflationary pressures is calling its credibility into question. So despite King’s hawkish tones we'd prefer to wait for further evidence before bringing interest rate expectations forward.
Comments, as ever are welcome!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 10 May 2011
A Modern Greek Tragedy
The euro has tanked in the last few sessions, it was pushing $1.50 last week but is trading down near $1.43 today. Why? Well, Trichet disappointed in his press conference, and a slide in global commodity prices contributed to an increase in risk aversion. But the Greek debt crisis is primarily responsible. So what’s going on?
It has been widely accepted that Greek debt has been at unsustainable levels for some time now, its bond yields are through the roof. Rumours circulated that Greece was mooting a euro exit, but these have been strongly denied by all Greek and eurozone officials. Nonetheless it seems the power that be have finally concluded that something needs to be done. Various options are available in terms of addressing the Greek debt problem, some softer and shorter-term, some far more unprecedented and risky. It looks as if a genuine restructure of Greek debt has been ruled out, rather its financial rescue plan is to be restructured.
Loan maturity dates could be extended, Greece could have their bailout loan interest rate cut, they could receive additional funding, debt could be written off, or a combination of these and other methods could be used (as explained in an FT Alphaville blog). Talks are taking place this week and we should know more by the middle of next week what is to be done. However, the question remains, are these bailouts working?
The only way these nations- Portugal, Ireland, Greece- can get out of trouble is through economic growth. The eurozone bailouts we have seen, as an Economist blog argues, do what is necessary to avoid total disaster, but little more. The Greek problem is evidence that the current bailout system does not work; Greece received aid - it had to make horrific spending cuts, tax heavily and incur much heightened borrowing costs, making growth impossible. So a year on from Greece’s initial €110bn bailout, Greece is knocking on the door once more.
Ireland could well need to follow Greece in adjusting its bailout plan and we have just seen Portugal request a fresh bailout. Who’s next? Spain is the obvious candidate but thankfully bond yields there are holding up OK, though they are still rising and who knows whether investors will lose their faith.
The bottom line is that growth in the periphery is essential for a genuine fiscal turnaround, and this seems unattainable under the current approach. But what is the alternative? Well, that’s for another blog...
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
It has been widely accepted that Greek debt has been at unsustainable levels for some time now, its bond yields are through the roof. Rumours circulated that Greece was mooting a euro exit, but these have been strongly denied by all Greek and eurozone officials. Nonetheless it seems the power that be have finally concluded that something needs to be done. Various options are available in terms of addressing the Greek debt problem, some softer and shorter-term, some far more unprecedented and risky. It looks as if a genuine restructure of Greek debt has been ruled out, rather its financial rescue plan is to be restructured.
Loan maturity dates could be extended, Greece could have their bailout loan interest rate cut, they could receive additional funding, debt could be written off, or a combination of these and other methods could be used (as explained in an FT Alphaville blog). Talks are taking place this week and we should know more by the middle of next week what is to be done. However, the question remains, are these bailouts working?
The only way these nations- Portugal, Ireland, Greece- can get out of trouble is through economic growth. The eurozone bailouts we have seen, as an Economist blog argues, do what is necessary to avoid total disaster, but little more. The Greek problem is evidence that the current bailout system does not work; Greece received aid - it had to make horrific spending cuts, tax heavily and incur much heightened borrowing costs, making growth impossible. So a year on from Greece’s initial €110bn bailout, Greece is knocking on the door once more.
Ireland could well need to follow Greece in adjusting its bailout plan and we have just seen Portugal request a fresh bailout. Who’s next? Spain is the obvious candidate but thankfully bond yields there are holding up OK, though they are still rising and who knows whether investors will lose their faith.
The bottom line is that growth in the periphery is essential for a genuine fiscal turnaround, and this seems unattainable under the current approach. But what is the alternative? Well, that’s for another blog...
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 5 May 2011
Trichet grabs the headlines
Today’s session was an exciting one; with key news from both the UK economy and two major central banks. UK services data for April showed a slow in growth, even slower than forecast, in addition to the poor UK construction and manufacturing figures that came this week.
Elsewhere, the ECB and the BoE kept interest rates on hold but as expected Trichet’s press conference stole the show. Trichet failed to include the phrase “strong vigilance” with regard to eurozone inflation levels; and this has triggered a pretty massive euro sell-off. GBP/EUR has gained by a cent on the news, and EUR/USD has come off by two cents. It seems that the market was really expecting a far more hawkish approach from Trichet today. A June ECB rate rise is now off the cards, but bets on July remain realistic.
So do today’s major movements change our outlooks? Well not really, we are still negative on sterling. Sentiment towards the UK economy is at its worst in a very long time; services growth was supposed to be the ‘banker.’ When this week’s poor data is put together with the UK’s ailing consumer confidence/retail sales figures, it paints a very grim picture indeed. Some are not forecasting a BoE rate rise until 2013!
It is difficult to see how sterling can continue its rally once the dust settles on Trichet’s comments; there just isn’t a catalyst for further sterling other than a freak upsurge in UK inflation. With arch-hawk Andrew Sentance leaving the MPC this month, the doves remain firmly in control.
Contributing to the euro’s fall today has been some poor German factory orders data and a fairly sharp increase in risk aversion ahead of tomorrow’s key US unemployment data; these factors will fade from focus so a euro/dollar climb back up towards $1.50 cannot be written off. Regardless of Trichet’s comments, the factors that took the euro so high remain in place.
As ever, comments are welcomed.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Elsewhere, the ECB and the BoE kept interest rates on hold but as expected Trichet’s press conference stole the show. Trichet failed to include the phrase “strong vigilance” with regard to eurozone inflation levels; and this has triggered a pretty massive euro sell-off. GBP/EUR has gained by a cent on the news, and EUR/USD has come off by two cents. It seems that the market was really expecting a far more hawkish approach from Trichet today. A June ECB rate rise is now off the cards, but bets on July remain realistic.
So do today’s major movements change our outlooks? Well not really, we are still negative on sterling. Sentiment towards the UK economy is at its worst in a very long time; services growth was supposed to be the ‘banker.’ When this week’s poor data is put together with the UK’s ailing consumer confidence/retail sales figures, it paints a very grim picture indeed. Some are not forecasting a BoE rate rise until 2013!
It is difficult to see how sterling can continue its rally once the dust settles on Trichet’s comments; there just isn’t a catalyst for further sterling other than a freak upsurge in UK inflation. With arch-hawk Andrew Sentance leaving the MPC this month, the doves remain firmly in control.
Contributing to the euro’s fall today has been some poor German factory orders data and a fairly sharp increase in risk aversion ahead of tomorrow’s key US unemployment data; these factors will fade from focus so a euro/dollar climb back up towards $1.50 cannot be written off. Regardless of Trichet’s comments, the factors that took the euro so high remain in place.
As ever, comments are welcomed.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 3 May 2011
UK Manufacturing Data Flops
The monthly figure for UK manufacturing growth has come in well below expectations and sterling has understandably plummeted as a result. Going into today’s session, sentiment towards the UK economy was tentative at best given last week’s first quarter GDP figure of 0.5%. Anything less than 0.5% would officially have put the UK economy back in recession.
The market would have been looking for a clean sweep of positive UK data this week, and this morning’s drastic undershoot only increases the pressure on growth elsewhere. With growth in services and construction expected to slow, risks are certainly to the downside on sterling.
The MPC will make its monthly rate statement on Thursday, and no change in the 0.5% BoE rate is anticipated. With arch-hawk Andrew Sentance set to leave the MPC this month, a BoE rate rise this summer is looking increasingly unlikely.
The ECB is also making its monthly rate decision on Thursday, and whilst the market consensus is that it will follow last month’s rate hike in June, there is a small chance it will tighten policy again this week. Eurozone inflation is well above the official target, and the ECB (unlike the BoE) has shown it is more concerned with maintaining price stability than with safeguarding economic growth. In all likelihood it will be Trichet’s press conference on Thursday that will hold focus, as the market looks for firmer indications that the ECB will raise rates again next month.
Having fallen through robust support levels against the euro at €1.12, sterling looks highly vulnerable to further losses this week. Moreover, it is difficult to pinpoint a catalyst for a sterling turnaround unless this week’s figures show some unexpected growth.
All eyes are on tomorrow morning’s UK construction figures then. Sterling is in dire need of a surprise acceleration in growth. As always, comments are welcomed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The market would have been looking for a clean sweep of positive UK data this week, and this morning’s drastic undershoot only increases the pressure on growth elsewhere. With growth in services and construction expected to slow, risks are certainly to the downside on sterling.
The MPC will make its monthly rate statement on Thursday, and no change in the 0.5% BoE rate is anticipated. With arch-hawk Andrew Sentance set to leave the MPC this month, a BoE rate rise this summer is looking increasingly unlikely.
The ECB is also making its monthly rate decision on Thursday, and whilst the market consensus is that it will follow last month’s rate hike in June, there is a small chance it will tighten policy again this week. Eurozone inflation is well above the official target, and the ECB (unlike the BoE) has shown it is more concerned with maintaining price stability than with safeguarding economic growth. In all likelihood it will be Trichet’s press conference on Thursday that will hold focus, as the market looks for firmer indications that the ECB will raise rates again next month.
Having fallen through robust support levels against the euro at €1.12, sterling looks highly vulnerable to further losses this week. Moreover, it is difficult to pinpoint a catalyst for a sterling turnaround unless this week’s figures show some unexpected growth.
All eyes are on tomorrow morning’s UK construction figures then. Sterling is in dire need of a surprise acceleration in growth. As always, comments are welcomed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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