So the euro has made some monster gains this month, first as a result of hopes and speculation of major action on some key eurozone debt issues, which were then built upon when EU leaders finally delivered the goods. Bailout fund enlargement, recapitalisation, Greek haircuts – some major decisions were made (though a whole world of detail remains yet to be negotiated). But what about another key issue that was cited as a priority in the build up to the EU Summit- eurozone growth.
Weak growth is plaguing the eurozone periphery; the austerity programmes in countries like Greece, Spain, and the ones that will soon be implemented in Italy are strangling any sort of economic expansion. Perhaps even more alarmingly, growth in the core nations of France and Germany has also slowed down considerably, leaving a dip back into a full eurozone recession a strong possibility.
Without plans for economic growth, the peripheral states will be unable to meet their austerity targets, and again they will come under heightened pressure in the bond markets. One way EU officials can help eurozone growth is through cutting interest rates. The ECB has been looking to hike throughout 2011, the eurozone base rate has risen from 1.00% to 1.50% to curb rising inflation. This has triggered gains in the strength of the single currency which has hurt the periphery further.
Incoming ECB President Mario Draghi will be chairing his first meeting next week, with Trichet having finished his tenure this month. It is not beyond the realms of possibility that he will respond to the downturn in regional growth by cutting interest rates and relieving some pressure. With inflation up at 3.0%, the ECB may be wary, and recent data actually showed that money supply growth accelerated in September. The markets are anticipating a 0.25% rate cut by the end of the year. Perhaps the periphery will have to wait until December for some respite.
The growth issue will come up again and again in coming months and years. It was clearly sidestepped at Wednesday’s EU summit, but the markets will force EU leaders to revisit it.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday 28 October 2011
Thursday 27 October 2011
EU deal sends the euro soaring
The euro is going from strength to strength today in the aftermath of yesterday’s EU Summit package. Have EU leaders solved the problem? No, not by a long way but they exceeded expectations and the market has welcomed it with open arms. US and European equities are booming (the FTSE is over 2.5% up), as are riskier currencies such as the aussie dollar and the euro.
Decisions have been made on all three of the key issues of contention -bank recapitalisation, Greece’s debt burden, and the eurozone bailout fund. European banks will benefit from around €100bn worth of recapitalisation, in order to deal with losses stemming from Greece. On the Greek debt issue, a 50% haircut has been agreed. With regard to the bailout fund (the EFSF); it is to be expanded by almost five times next month (to around €1trn).
There were rumours of a lack of progress and delayed decisions throughout yesterday, so these plans have triggered a wave of positive trading throughout the financial markets. Concerns surrounding the various holes in the plans (How will the EFSF be leveraged? Are the haircuts really voluntary? What about eurozone growth?) have been put on the backburner for now but will undoubtedly resurface. There is plenty of negotiation ahead, which means plenty more disagreement and plenty more alarm bells. Italy remains very vulnerable in the debt markets and it still remains to be seen whether the decision to write down Greece’s debt will succeed in putting the country on a sustainable footing.
If the euro is to kick on further from here, the trigger is likely to come from outside. One method of expanding the EFSF is through external investment from countries like China or Brazil. It is no secret that Asian sovereigns are eager to diversify away from the dollar and into the euro, so such investment would make sense. It is not beyond EU leaders to fail to implement this plan, or for the deal to collapse altogether. The risk is there, but you have to say the recent deal certainly brightens the prospects of the euro in the longer-term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Decisions have been made on all three of the key issues of contention -bank recapitalisation, Greece’s debt burden, and the eurozone bailout fund. European banks will benefit from around €100bn worth of recapitalisation, in order to deal with losses stemming from Greece. On the Greek debt issue, a 50% haircut has been agreed. With regard to the bailout fund (the EFSF); it is to be expanded by almost five times next month (to around €1trn).
There were rumours of a lack of progress and delayed decisions throughout yesterday, so these plans have triggered a wave of positive trading throughout the financial markets. Concerns surrounding the various holes in the plans (How will the EFSF be leveraged? Are the haircuts really voluntary? What about eurozone growth?) have been put on the backburner for now but will undoubtedly resurface. There is plenty of negotiation ahead, which means plenty more disagreement and plenty more alarm bells. Italy remains very vulnerable in the debt markets and it still remains to be seen whether the decision to write down Greece’s debt will succeed in putting the country on a sustainable footing.
If the euro is to kick on further from here, the trigger is likely to come from outside. One method of expanding the EFSF is through external investment from countries like China or Brazil. It is no secret that Asian sovereigns are eager to diversify away from the dollar and into the euro, so such investment would make sense. It is not beyond EU leaders to fail to implement this plan, or for the deal to collapse altogether. The risk is there, but you have to say the recent deal certainly brightens the prospects of the euro in the longer-term.
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 26 October 2011
So how will the market respond to today’s eurozone plans?
Today’s EU Summit will be covering a range of issues, top of the list are the recapitalisation of Europe’s banks, the expansion of the EFSF (bailout fund) and the haircuts to be imposed on Greek debt. The meeting has been the sole focus of the market for the past fortnight.
There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.
It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.
We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
There was already disappointing news yesterday that a meeting between EU finance ministers scheduled today has been cancelled due to a lack of agreement, though the main meeting between EU leaders is set to go ahead. Expectations for progress have been heightened; market confidence in EU leadership remains palpably lifted it seems. Though all the tell-tale signs of delay and disagreement point to the strong possibility of a fudged and inadequate compromise being delivered today.
It would be surprising if the EU Summit failed to deliver something that represented a decent attempt at “comprehensive package.” Many will be betting that the euro stands to benefit from any signs of genuine progress on the eurozone’s severe economic and fiscal woes. However, we are betting that the euro will suffer a slide. First, there is a strong chance that the package could fail to meet market expectations. Second, the package could be impressive, but the market may well take “buy the rumour, sell the fact” approach and choose to take profit on the euro’s gains this month.
We know one thing for sure, today’s EU Summit will leave plenty of details to be ironed out, plenty of obstacles to be overcome, and plenty of issues unresolved. These are factors that could see the euro sell-off in the immediate aftermath of tomorrow’s Summit, or alternatively once the dust settles. Either way, the euro looks a little strong at €1.15 and $1.39 and we are looking for a downward correction for the euro.
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 19 October 2011
MPC Minutes show unanimous vote for quantitative easing
This morning’s release of the minutes from the MPC’s meeting in early October reveals that all nine policymakers voted in favour of further quantitative easing. The MPC settled on £75bn extra asset-purchases, bringing the programme up to £275bn.
Quantitative easing involves printing money and pumping it into the economy. This increases the supply of a currency and historically weakens its demand.
There is a positive to have surfaced from the today’s MPC minutes. The market will value the fact that the MPC is showing a united front on the issue of QE; the policymakers appear clear that QE is absolutely necessary in order to safeguard the UK economy.
The minutes show that fears for the UK’s economic outlook have risen significantly in recent months. Data out of the UK this month has not actually been too bad; the manufacturing and services sector growth figures for September were significantly better than expected. However, concerns that forward-looking data suggests a further slowdown are prevailing. There are signs that concrete progress on the eurozone debt crisis will be made this weekend, but there will be no magic wand solution and the UK remains vulnerable to financial tensions in Europe. These are the two key concerns for the MPC.
Amid the context of weak growth and global financial turmoil, the QE call from the MPC was the right one. The fact that £100bn worth of asset-purchases was debated at the last MPC meeting suggests that there is plenty of scope for yet more quantitative easing here in the UK. The BoE’s last quarterly inflation report gave a glowing assessment of the boost the last round of QE gave to UK GDP, so more asset-purchases early next year would not be a surprise. The minutes clearly show that the MPC will be constantly reviewing the size of the asset-purchase programme in line with developments at both home and abroad.
One major issue is that of soaring UK inflation, which quantitative easing could well exacerbate. Data this week showed that UK headline inflation hit 5.2% in September, which represents a three year high. The BoE is convinced the figure will come back down to 2.0% next year due to weaker growth. However, if inflation persists at these sorts of levels, the MPC may delay its decision to introduce yet more asset-purchases. Such high inflation combined with such weak growth also highlights the threat of stagflation in the UK.
Sterling suffered a knee-jerk slide on the news that the MPC voted unanimously for QE, but losses were quickly recouped against both the euro and the dollar. The minutes really just confirmed the market’s strong suspicions that the MPC acted assertively on QE and is happy to do so again if conditions dictate. Sterling is likely to struggle to gain any real favour until economic growth picks up. External factors, particularly events in the eurozone, are likely to determine whether sterling can climb.
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.
Quantitative easing involves printing money and pumping it into the economy. This increases the supply of a currency and historically weakens its demand.
There is a positive to have surfaced from the today’s MPC minutes. The market will value the fact that the MPC is showing a united front on the issue of QE; the policymakers appear clear that QE is absolutely necessary in order to safeguard the UK economy.
The minutes show that fears for the UK’s economic outlook have risen significantly in recent months. Data out of the UK this month has not actually been too bad; the manufacturing and services sector growth figures for September were significantly better than expected. However, concerns that forward-looking data suggests a further slowdown are prevailing. There are signs that concrete progress on the eurozone debt crisis will be made this weekend, but there will be no magic wand solution and the UK remains vulnerable to financial tensions in Europe. These are the two key concerns for the MPC.
Amid the context of weak growth and global financial turmoil, the QE call from the MPC was the right one. The fact that £100bn worth of asset-purchases was debated at the last MPC meeting suggests that there is plenty of scope for yet more quantitative easing here in the UK. The BoE’s last quarterly inflation report gave a glowing assessment of the boost the last round of QE gave to UK GDP, so more asset-purchases early next year would not be a surprise. The minutes clearly show that the MPC will be constantly reviewing the size of the asset-purchase programme in line with developments at both home and abroad.
One major issue is that of soaring UK inflation, which quantitative easing could well exacerbate. Data this week showed that UK headline inflation hit 5.2% in September, which represents a three year high. The BoE is convinced the figure will come back down to 2.0% next year due to weaker growth. However, if inflation persists at these sorts of levels, the MPC may delay its decision to introduce yet more asset-purchases. Such high inflation combined with such weak growth also highlights the threat of stagflation in the UK.
Sterling suffered a knee-jerk slide on the news that the MPC voted unanimously for QE, but losses were quickly recouped against both the euro and the dollar. The minutes really just confirmed the market’s strong suspicions that the MPC acted assertively on QE and is happy to do so again if conditions dictate. Sterling is likely to struggle to gain any real favour until economic growth picks up. External factors, particularly events in the eurozone, are likely to determine whether sterling can climb.
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.
Monday 17 October 2011
Weekly Round-up: Hopes high for a final solution but market may be overexcited
The eurozone picture continues to brighten
Risk appetite returned with a vengeance last week. Global stocks rallied, and much of the dollar strength we have seen in recent weeks has been unwound. The key driver behind this is the heightened optimism surrounding the eurozone situation.
First, Merkel and Sarkozy promised to deliver a comprehensive plan to deal with the various fiscal and economic problems that have surfaced in the region. The weekend’s G20 meeting has produced a one week deadline to provide the package, which will deal with key issues such bank recapitalisation in Europe, Greece’s debt situation, eurozone growth and the region’s rescue fund. The market has been waiting for months for such an attempt at a long-term solution to the debt crisis, and sentiment has turned quite sharply positive in anticipation.
Greece’s second bailout deal, struck in July, allowed for a 21% haircut on the troubled nation’s debt. Germany’s finance minister has recently recommended that greater write downs be implemented, in order for Greece to be set upon a sustainable recovery. The haircuts could well head towards 50%, which demonstrates that there is still plenty of scope for sentiment to weaken in the near-term. Such a large-scale plan is highly unlikely to please everyone, the content and the extent to which it satisfies market players remains to be seen.
The German finance minister has today taken the edge off the euro’s climb, warning that this weekend’s summit would not come up with a “definitive solution” to the region’s crisis. Merkel’s spokesman has added that dreams of some sort of final solution are “unrealistic.” The commitment to decisive action has taken the euro a long way in the past fortnight, but these comments serve as a reminder that market optimism may be slightly overdone.
The week ahead brings some important German and eurozone economic sentiment figures, but as this morning has shown, really the focus is more likely to be upon unscheduled comments from EU officials.
The pound and dollar on the back foot
The dollar has come way off its highs in the past fortnight. Stronger US stocks invariably weaken the dollar and this has held true. The S&P 500 climbed by almost 6.0% last week. Some improved US retail sales figures have also contributed to improved confidence levels. Any major figure which suggests the world’s largest economy may avoid another recession will see funds redirected from the greenback.
Sterling’s status as a ‘safer’ currency, though far from a safe-haven, has seen it struggle in recent sessions. Concerns surrounding further UK quantitative easing have also weighed, but the pound’s decline has more to do with greater global risk appetite. The one positive for the pound though is that the extreme dollar to euro flows have seen GBP/USD climb almost five cents off its early-October lows.
Sterling is trading at €1.1450 today, and at 1.5750 against the US dollar. The euro/dollar pairing has retreated from this morning’s $1.39 high to trade a cent and a half lower. Another attempt at $1.40 looks likely to be made this week however, which should drag GBP/USD higher, and weigh on the GBP/EUR pairing.
End of week forecast
GBP / EUR 1.1375
GBP / USD 1.58
EUR / USD 1.3975
GBP / AUD 1.5250
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.
Risk appetite returned with a vengeance last week. Global stocks rallied, and much of the dollar strength we have seen in recent weeks has been unwound. The key driver behind this is the heightened optimism surrounding the eurozone situation.
First, Merkel and Sarkozy promised to deliver a comprehensive plan to deal with the various fiscal and economic problems that have surfaced in the region. The weekend’s G20 meeting has produced a one week deadline to provide the package, which will deal with key issues such bank recapitalisation in Europe, Greece’s debt situation, eurozone growth and the region’s rescue fund. The market has been waiting for months for such an attempt at a long-term solution to the debt crisis, and sentiment has turned quite sharply positive in anticipation.
Greece’s second bailout deal, struck in July, allowed for a 21% haircut on the troubled nation’s debt. Germany’s finance minister has recently recommended that greater write downs be implemented, in order for Greece to be set upon a sustainable recovery. The haircuts could well head towards 50%, which demonstrates that there is still plenty of scope for sentiment to weaken in the near-term. Such a large-scale plan is highly unlikely to please everyone, the content and the extent to which it satisfies market players remains to be seen.
The German finance minister has today taken the edge off the euro’s climb, warning that this weekend’s summit would not come up with a “definitive solution” to the region’s crisis. Merkel’s spokesman has added that dreams of some sort of final solution are “unrealistic.” The commitment to decisive action has taken the euro a long way in the past fortnight, but these comments serve as a reminder that market optimism may be slightly overdone.
The week ahead brings some important German and eurozone economic sentiment figures, but as this morning has shown, really the focus is more likely to be upon unscheduled comments from EU officials.
The pound and dollar on the back foot
The dollar has come way off its highs in the past fortnight. Stronger US stocks invariably weaken the dollar and this has held true. The S&P 500 climbed by almost 6.0% last week. Some improved US retail sales figures have also contributed to improved confidence levels. Any major figure which suggests the world’s largest economy may avoid another recession will see funds redirected from the greenback.
Sterling’s status as a ‘safer’ currency, though far from a safe-haven, has seen it struggle in recent sessions. Concerns surrounding further UK quantitative easing have also weighed, but the pound’s decline has more to do with greater global risk appetite. The one positive for the pound though is that the extreme dollar to euro flows have seen GBP/USD climb almost five cents off its early-October lows.
Sterling is trading at €1.1450 today, and at 1.5750 against the US dollar. The euro/dollar pairing has retreated from this morning’s $1.39 high to trade a cent and a half lower. Another attempt at $1.40 looks likely to be made this week however, which should drag GBP/USD higher, and weigh on the GBP/EUR pairing.
End of week forecast
GBP / EUR 1.1375
GBP / USD 1.58
EUR / USD 1.3975
GBP / AUD 1.5250
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.
Thursday 13 October 2011
Monthly Swedish Krona Report: Risk appetite returns
September was another month of low market confidence and risk averse trading. The worsening state of the European banking system, as a result of a continued lack of progress on the eurozone debt crisis, saw investors flooding out of higher-yielding currencies into safe-haven currencies. Concerns over global growth have also been very prominent in recent weeks, with increased speculation of a plunge back into recession for the eurozone, the US and the UK.
However, there have in recent sessions been some signs of progress in the eurozone however, which has been positive for risk appetite. Merkel and Sarkozy have ‘committed’ to providing a comprehensive plan to deal with the Greek issue, the recapitalisation of Europe’s banks, and poor growth in the eurozone. At present this just represents rhetoric and yet another promise, but it has been received enthusiastically by the market. The two EU leaders have set themselves a deadline of November 3rd. In addition, the eurozone bailout reform looks almost certain to be fully ratified by Slovakia, the last member state to accept the fund’s expanded powers.
The performance of the Swedish Krona is being dictated more than ever by international developments than by domestic issues. Accordingly, improved market confidence has helped the krona to recoup some decent ground in the past week or so, after spending September very much on the back foot.
EUR/SEK
The euro benefited from the ECB’s decision not to cut its 1.50% base rate in early October. Speculation was rife that the ECB would lend the ailing periphery a hand, particularly in light of an economic slowdown in the eurozone’s core nations, so the interest rate hold represented a relief. The Riksbank also decided to hold interest rates at 2.0%, which was in line with expectations. Growth has slowed down significantly in Sweden and inflationary pressures are subsiding; the Riksbank has recently confirmed that “the financial crisis has probably lowered the growth rate of potential GDP.”
In line with the Swedish krona’s riskier profile, this pair posted fresh 2011 highs up above 9.35 in late September as fears grew of a messy Greek default and a Lehman’s style fallout. These krona losses have since been corrected and this pair is actually trading flat on the month. Optimism surrounding the chances of some genuine and concrete action in Europe is prevailing at present and it certainly brightens the krona’s prospects.
In addition and importantly, the Troika (the ECB, IMF and EU) has indicated that Greece will receive its next emergency loan in November. Granting further aid to what many believe is a ‘lost cause’ may sound like madness, but the market is inherently concerned with the short-term. This next Greek aid tranche allows EU officials the time to avoid a near-term Greek default and to work on a credible long-term solution.
The market has certainly enjoyed some positive stories of late and risk appetite has clearly returned to favour the krona, but there will undoubtedly be some stumbling blocks to come with regard to eurozone progress (as demonstrated by Slovakia’s recent ‘no’ vote on the bailout fund reforms). Positive sentiment has taken this pair down to 9.16 and the coming weeks look likely to help the krona maintain these levels, though 9.10 will probably provide some fairly stiff support on the downside.
USD/SEK
The dollar performed excellently in September, benefitting from plummeting global stocks and the associated heightened demand for safe-haven assets. The dollar found even more favour because of ongoing issues surrounding the two other haven currencies; the swiss franc is suffering from currency intervention by the Swiss National Bank and threat of similar action surrounds the yen.
However, market confidence is on the up at present and the dollar strength that characterised September has been largely unwound. Still, the greenback will be the key beneficiary of any alarm bells that do emerge out of the eurozone.
The US dollar remains vulnerable to domestic events. At its meeting last month, the US Federal Reserve decided against introducing a third programme of quantitative easing (QE3). Instead, it introduced Operation Twist, in which it sells short-term bonds and buys long-term bonds. The market was noticeably unimpressed but hopes for QE3 remain very much on the table. Should the Fed decide to add further stimulus to the US economy, global stocks would spike and the dollar would suffer a further downward correction on top of what we have seen in recent sessions. We are betting that the QE3 measure will be saved by the Fed for the worst case scenario (another US recession). Consequently, we don’t see this downside risk event occurring in coming weeks, but it is still likely to weigh on investors’ minds.
The USD/SEK rate hit a 9-month high of almost 7.00 in early October, but this climb has been erased and the rate is back down below 6.70. Continued improvements in investor confidence levels may see the rate head down towards 6.50, but dollar losses beyond this look to be a bridge too far.
GBP/SEK
Sterling has suffered as a result of the Bank of England deciding to introduce additional quantitative easing. The MPC voted to increase asset-purchases by £75bn and predictably, sterling has come under severe pressure. Economic data from the UK has been poor of late; indeed the revised second quarterly figure for UK GDP was halved to a paltry 0.1%. It is an equally gloomy outlook for the third and fourth quarter GDP figures, combined with downside risks to inflation and an increasingly dovish-sounding MPC, which makes yet more quantitative easing a real possibility.
Again, the performance of this pair in the coming weeks is very much dependent on how risk appetite pans out. The current rate stands at 10.50, but the recent good news stories of action and commitment in the eurozone should see the krona hang on to its impressive recent gains. That said, sterling’s slide looks a little overdone and further downside too far below 10.50 should be capped.
NOK/SEK
This pair has remained range-bound between 1.16 and 1.19 levels for the past four months or so now, excluding a brief spike to 1.20 in early September as a result of panic related to the Swiss National Bank’s intervention. On a fundamental economic basis, the Norwegian krone shades its Swedish counterpart but there really is very little to choose between these two currencies at present.
The Norges Bank Iooks highly likely to leave interest rates on hold at 2.25% until the middle of next year and the Riksbank will be unwilling to resume hiking until the financial uncertainty in the eurozone has subsided. One major factor limiting the NOK’s upside is that he Norges Bank has made it quite clear that it will not allow the currency to strengthen significantly and is willing to cut interest rates to buffer against this.
This pair is currently trading around the 1.18 mark and it is highly likely that we will see it continue to fluctuate within the 1.16-1.19 range for the next few months.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
However, there have in recent sessions been some signs of progress in the eurozone however, which has been positive for risk appetite. Merkel and Sarkozy have ‘committed’ to providing a comprehensive plan to deal with the Greek issue, the recapitalisation of Europe’s banks, and poor growth in the eurozone. At present this just represents rhetoric and yet another promise, but it has been received enthusiastically by the market. The two EU leaders have set themselves a deadline of November 3rd. In addition, the eurozone bailout reform looks almost certain to be fully ratified by Slovakia, the last member state to accept the fund’s expanded powers.
The performance of the Swedish Krona is being dictated more than ever by international developments than by domestic issues. Accordingly, improved market confidence has helped the krona to recoup some decent ground in the past week or so, after spending September very much on the back foot.
EUR/SEK
The euro benefited from the ECB’s decision not to cut its 1.50% base rate in early October. Speculation was rife that the ECB would lend the ailing periphery a hand, particularly in light of an economic slowdown in the eurozone’s core nations, so the interest rate hold represented a relief. The Riksbank also decided to hold interest rates at 2.0%, which was in line with expectations. Growth has slowed down significantly in Sweden and inflationary pressures are subsiding; the Riksbank has recently confirmed that “the financial crisis has probably lowered the growth rate of potential GDP.”
In line with the Swedish krona’s riskier profile, this pair posted fresh 2011 highs up above 9.35 in late September as fears grew of a messy Greek default and a Lehman’s style fallout. These krona losses have since been corrected and this pair is actually trading flat on the month. Optimism surrounding the chances of some genuine and concrete action in Europe is prevailing at present and it certainly brightens the krona’s prospects.
In addition and importantly, the Troika (the ECB, IMF and EU) has indicated that Greece will receive its next emergency loan in November. Granting further aid to what many believe is a ‘lost cause’ may sound like madness, but the market is inherently concerned with the short-term. This next Greek aid tranche allows EU officials the time to avoid a near-term Greek default and to work on a credible long-term solution.
The market has certainly enjoyed some positive stories of late and risk appetite has clearly returned to favour the krona, but there will undoubtedly be some stumbling blocks to come with regard to eurozone progress (as demonstrated by Slovakia’s recent ‘no’ vote on the bailout fund reforms). Positive sentiment has taken this pair down to 9.16 and the coming weeks look likely to help the krona maintain these levels, though 9.10 will probably provide some fairly stiff support on the downside.
USD/SEK
The dollar performed excellently in September, benefitting from plummeting global stocks and the associated heightened demand for safe-haven assets. The dollar found even more favour because of ongoing issues surrounding the two other haven currencies; the swiss franc is suffering from currency intervention by the Swiss National Bank and threat of similar action surrounds the yen.
However, market confidence is on the up at present and the dollar strength that characterised September has been largely unwound. Still, the greenback will be the key beneficiary of any alarm bells that do emerge out of the eurozone.
The US dollar remains vulnerable to domestic events. At its meeting last month, the US Federal Reserve decided against introducing a third programme of quantitative easing (QE3). Instead, it introduced Operation Twist, in which it sells short-term bonds and buys long-term bonds. The market was noticeably unimpressed but hopes for QE3 remain very much on the table. Should the Fed decide to add further stimulus to the US economy, global stocks would spike and the dollar would suffer a further downward correction on top of what we have seen in recent sessions. We are betting that the QE3 measure will be saved by the Fed for the worst case scenario (another US recession). Consequently, we don’t see this downside risk event occurring in coming weeks, but it is still likely to weigh on investors’ minds.
The USD/SEK rate hit a 9-month high of almost 7.00 in early October, but this climb has been erased and the rate is back down below 6.70. Continued improvements in investor confidence levels may see the rate head down towards 6.50, but dollar losses beyond this look to be a bridge too far.
GBP/SEK
Sterling has suffered as a result of the Bank of England deciding to introduce additional quantitative easing. The MPC voted to increase asset-purchases by £75bn and predictably, sterling has come under severe pressure. Economic data from the UK has been poor of late; indeed the revised second quarterly figure for UK GDP was halved to a paltry 0.1%. It is an equally gloomy outlook for the third and fourth quarter GDP figures, combined with downside risks to inflation and an increasingly dovish-sounding MPC, which makes yet more quantitative easing a real possibility.
Again, the performance of this pair in the coming weeks is very much dependent on how risk appetite pans out. The current rate stands at 10.50, but the recent good news stories of action and commitment in the eurozone should see the krona hang on to its impressive recent gains. That said, sterling’s slide looks a little overdone and further downside too far below 10.50 should be capped.
NOK/SEK
This pair has remained range-bound between 1.16 and 1.19 levels for the past four months or so now, excluding a brief spike to 1.20 in early September as a result of panic related to the Swiss National Bank’s intervention. On a fundamental economic basis, the Norwegian krone shades its Swedish counterpart but there really is very little to choose between these two currencies at present.
The Norges Bank Iooks highly likely to leave interest rates on hold at 2.25% until the middle of next year and the Riksbank will be unwilling to resume hiking until the financial uncertainty in the eurozone has subsided. One major factor limiting the NOK’s upside is that he Norges Bank has made it quite clear that it will not allow the currency to strengthen significantly and is willing to cut interest rates to buffer against this.
This pair is currently trading around the 1.18 mark and it is highly likely that we will see it continue to fluctuate within the 1.16-1.19 range for the next few months.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday 10 October 2011
Merkozy to the rescue...euro enjoys strong start to the week
Bank of England introduce QE3
The Bank of England decided to introduce further quantitative easing last Thursday. Another £75 billion of asset-purchases were announced in order to boost the UK’s struggling economy and safeguard it from potential shockwaves that may come as a result of financial stresses in the eurozone. Sterling dropped sharply across the board but losses were soon reversed. The market was confident that the measure would be adopted in coming months so there were no great surprises, though the size of the programme was slightly above consensus. The noises out of the MPC suggest that there is scope for further monetary stimulus in the UK, given the long-term downside risks to UK growth and inflation.
The recent sector-by-sector growth figures were actually reasonably encouraging; contrary to expectations of a slowdown, we saw expansion in the manufacturing and key services sectors accelerate, though the construction sector now only teeters above negative territory. In truth, it is going to be events outside the UK that determines sterling’s performance in coming months.
Merkel and Sarkozy ‘commit’ to action in three weeks
The euro has started this week very strongly, gaining two and a half cents against the dollar and over a cent against the pound. Merkel and Sarkozy have announced that they are going to take action to recapitalise Europe’s banks, settle the Greek issue and improve economic growth in the eurozone. There was no reiteration of the “Greece cannot fail” pledge of a fortnight ago, which perhaps shows that EU leaders have come to accept the need for Greek debt to be restructured (which will involve significant haircuts). Certainly the recapitalisation of Europe’s bank looks to be a prelude to a write down of Greek debt.
The news has been taken positively, with ‘Merkozy’ setting a November 3rd deadline at which they intend to deliver a comprehensive plan. The market has been disappointed time and again by missed deadlines, but the euro has rallied regardless. The single currency was also given a boost by the absence of a cut to the eurozone interest rate at last week’s ECB meeting.
With regards to the approval of changes to the bailout fund, only two countries are yet to ratify; Slovakia and Malta. There is a significant risk of a disappointment from the former nation, where the vote is finely balanced.
US non-farms help to boost risk appetite
Last week’s monthly US non-farm payroll figure posted twice as many new jobs than expected. This, combined with optimism with regard to the eurozone debt situation, has improved market confidence and boosted riskier assets. Accordingly, safe-haven assets such as the US dollar have weakened. The euro has reversed some significant losses to the dollar and the GBP/USD rate has bounced with it.
Sterling is trading below €1.15 this afternoon, whilst it is back up towards 1.57 against the US dollar. The EUR/USD pairing looks hard-pushed to make significant gains beyond its current $1.3650 level, which is likely to cap further gains for GBP/USD. Sterling looks oversold at 1.1460 against the euro, but with the optimism surrounding the euro today, we may have to look beyond this week for a bounce.
End of week forecast
GBP / EUR 1.1450
GBP / USD 1.57
EUR / USD 1.37
GBP / AUD 1.55
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The Bank of England decided to introduce further quantitative easing last Thursday. Another £75 billion of asset-purchases were announced in order to boost the UK’s struggling economy and safeguard it from potential shockwaves that may come as a result of financial stresses in the eurozone. Sterling dropped sharply across the board but losses were soon reversed. The market was confident that the measure would be adopted in coming months so there were no great surprises, though the size of the programme was slightly above consensus. The noises out of the MPC suggest that there is scope for further monetary stimulus in the UK, given the long-term downside risks to UK growth and inflation.
The recent sector-by-sector growth figures were actually reasonably encouraging; contrary to expectations of a slowdown, we saw expansion in the manufacturing and key services sectors accelerate, though the construction sector now only teeters above negative territory. In truth, it is going to be events outside the UK that determines sterling’s performance in coming months.
Merkel and Sarkozy ‘commit’ to action in three weeks
The euro has started this week very strongly, gaining two and a half cents against the dollar and over a cent against the pound. Merkel and Sarkozy have announced that they are going to take action to recapitalise Europe’s banks, settle the Greek issue and improve economic growth in the eurozone. There was no reiteration of the “Greece cannot fail” pledge of a fortnight ago, which perhaps shows that EU leaders have come to accept the need for Greek debt to be restructured (which will involve significant haircuts). Certainly the recapitalisation of Europe’s bank looks to be a prelude to a write down of Greek debt.
The news has been taken positively, with ‘Merkozy’ setting a November 3rd deadline at which they intend to deliver a comprehensive plan. The market has been disappointed time and again by missed deadlines, but the euro has rallied regardless. The single currency was also given a boost by the absence of a cut to the eurozone interest rate at last week’s ECB meeting.
With regards to the approval of changes to the bailout fund, only two countries are yet to ratify; Slovakia and Malta. There is a significant risk of a disappointment from the former nation, where the vote is finely balanced.
US non-farms help to boost risk appetite
Last week’s monthly US non-farm payroll figure posted twice as many new jobs than expected. This, combined with optimism with regard to the eurozone debt situation, has improved market confidence and boosted riskier assets. Accordingly, safe-haven assets such as the US dollar have weakened. The euro has reversed some significant losses to the dollar and the GBP/USD rate has bounced with it.
Sterling is trading below €1.15 this afternoon, whilst it is back up towards 1.57 against the US dollar. The EUR/USD pairing looks hard-pushed to make significant gains beyond its current $1.3650 level, which is likely to cap further gains for GBP/USD. Sterling looks oversold at 1.1460 against the euro, but with the optimism surrounding the euro today, we may have to look beyond this week for a bounce.
End of week forecast
GBP / EUR 1.1450
GBP / USD 1.57
EUR / USD 1.37
GBP / AUD 1.55
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 6 October 2011
Monthly Report: US dollar goes from strength to strength
September failed to bring the bounce in global investor confidence and risk appetite that we were anticipating. We have a revised our longer-term forecast for euro strength and dollar weakness due to a sharp deterioration of the global financial environment. Market fears have gone from bad to worse in recent weeks; faith in eurozone officials’ ability to make any real progress on the debt issue is waning and economic data is pointing evermore towards a global economic slowdown. As a result, the equity markets have consolidated early August’s sharp sell-off and the dollar has strengthened significantly. The outlook has probably not looked this gloomy since the last global recession, which favours safe-haven assets considerably.
Perpetual weakness in the US economy, Standard & Poor’s downgrade of US debt and the certainty of ultra-loose Fed monetary policy for the foreseeable future has failed to hold the US dollar back. More pressing global matters have ensured major dollar gains. Added to this, the Swiss National Bank has intervened in the strength of the swiss franc, and the Bank of Japan has been posturing for a similar move, leaving the greenback as the safe haven currency of choice. Sterling is suffering against the dollar accordingly, but has made gains against riskier currencies such as the euro and the commodity currencies.
The euro has really suffered a downward correction over the past five weeks. A Greek default looks inevitable, the European banking system looks vulnerable to a major crisis and a concrete plan to ensure Italy and Spain are not sucked into the eurozone’s bailout cycle remains elusive. On top of this, eurozone growth has slowed to such an extent that a rate cut from the ECB looks is looking increasingly likely at coming meetings.
GBP/EUR
On its own merits, sterling remains an unappealing currency. This is unlikely to change any time soon; economic growth is only teetering above negative territory, which has caused investors to scale back Bank of England interest rate bets to 2013. Indeed, far from tightening monetary policy, the Monetary Policy Committee has pulled the trigger on further quantitative easing (QE2). £75bn in extra asset purchases has been announced in order to boost the UK economy and safeguard it from heightened volatility in the financial markets.
Nonetheless, the eurozone is suffering a comparable slowdown to that of the UK and although the ECB held interest rates at 1.50% this month, there is still a very significant risk of a rate cut in 2011. The debt crisis is clearly impacting activity in the region, as shown by two consecutive months of contraction in the eurozone’s services sector.
Importantly, the UK has maintained its AAA credit rating and is being seen to be ‘doing the right thing’ with regard to reducing its debt. Debt concerns have surrounded the euro all year, with Portugal, Ireland and Greece (for the second time) all seeking aid. However, concerns have reached such heights that the euro has finally borne the brunt of the market’s frustration. There is now a near certainty of some form of Greek default and growing speculation that private investors are going to have to accept a substantial hair cut on their Greek holdings. This has seen the EUR/USD pair decline by over twelve cents from late August’s rate of $1.45.
A key factor weighing on the euro is the inability of EU officials to convince the market that they have any genuine handle on the debt crisis consuming other, larger eurozone states such as Spain and Italy. There is quite clearly lack of any real consensus on any long-term solution, which has brought about the realisation that progress is likely to take months, not weeks. Crucially, Asian sovereign funds seem to be losing their appetite for the euro and have reduced their previously reliable support for the single currency.
Sterling has made some decent gains over the euro in recent weeks then, climbing from a low of €1.13 to trade at its current level two cents higher. We foresee little progress on the debt issue in the near-term, giving the GBP/EUR rate further upside potential. Indeed, the muted market responses to what were anticipated to be significant relief stories, such as the recent German ‘yes’ vote for the expansion of the bailout fund, suggest market sentiment is going to require a really major development to bounce back. Sterling could well edge up by one or two cents from its current trading level of €1.15 in the month ahead.
GBP/USD
The dollar has gone from strength to strength over the past month or so. Safe haven flows have increased as a result of the worsening global economic picture and in addition, the dollar has taken the lion’s share of these safe-haven flows due to the deteriorating appeal of the alternatives (the yen and the swiss franc).
The Fed decided against introducing a QE3 programme last month, instead opting for ‘Operation Twist,’ where by it sells short-term debt and buys long-term debt. The market was unimpressed and thus the dollar remained strong. Still, QE3 remains a possibility in coming months, though it is unlikely that Bernanke will pull the trigger just yet given the slight upturn in the growth data coming out of the US of late. If and when there is further quantitative easing in the US, expect the dollar to weaken off considerably. For this month at least, this looks unlikely.
Sterling has broken out of its long-term trading range against the dollar to the downside. In late August this pair was trading at $1.65, it is now trading at a thirteen month low of $1.53. Sterling has fallen a long way very fast against the dollar, but it is looking vulnerable to a further decline. The pound will continue to struggle against the dollar as long as funds continue to be redirected from the euro to the greenback, which is exactly what we foresee in the coming weeks.
Caxton FX one month forecast:
GBP / EUR: 1.17
GBP / USD: 1.51
EUR / USD: 1.29
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.
Perpetual weakness in the US economy, Standard & Poor’s downgrade of US debt and the certainty of ultra-loose Fed monetary policy for the foreseeable future has failed to hold the US dollar back. More pressing global matters have ensured major dollar gains. Added to this, the Swiss National Bank has intervened in the strength of the swiss franc, and the Bank of Japan has been posturing for a similar move, leaving the greenback as the safe haven currency of choice. Sterling is suffering against the dollar accordingly, but has made gains against riskier currencies such as the euro and the commodity currencies.
The euro has really suffered a downward correction over the past five weeks. A Greek default looks inevitable, the European banking system looks vulnerable to a major crisis and a concrete plan to ensure Italy and Spain are not sucked into the eurozone’s bailout cycle remains elusive. On top of this, eurozone growth has slowed to such an extent that a rate cut from the ECB looks is looking increasingly likely at coming meetings.
GBP/EUR
On its own merits, sterling remains an unappealing currency. This is unlikely to change any time soon; economic growth is only teetering above negative territory, which has caused investors to scale back Bank of England interest rate bets to 2013. Indeed, far from tightening monetary policy, the Monetary Policy Committee has pulled the trigger on further quantitative easing (QE2). £75bn in extra asset purchases has been announced in order to boost the UK economy and safeguard it from heightened volatility in the financial markets.
Nonetheless, the eurozone is suffering a comparable slowdown to that of the UK and although the ECB held interest rates at 1.50% this month, there is still a very significant risk of a rate cut in 2011. The debt crisis is clearly impacting activity in the region, as shown by two consecutive months of contraction in the eurozone’s services sector.
Importantly, the UK has maintained its AAA credit rating and is being seen to be ‘doing the right thing’ with regard to reducing its debt. Debt concerns have surrounded the euro all year, with Portugal, Ireland and Greece (for the second time) all seeking aid. However, concerns have reached such heights that the euro has finally borne the brunt of the market’s frustration. There is now a near certainty of some form of Greek default and growing speculation that private investors are going to have to accept a substantial hair cut on their Greek holdings. This has seen the EUR/USD pair decline by over twelve cents from late August’s rate of $1.45.
A key factor weighing on the euro is the inability of EU officials to convince the market that they have any genuine handle on the debt crisis consuming other, larger eurozone states such as Spain and Italy. There is quite clearly lack of any real consensus on any long-term solution, which has brought about the realisation that progress is likely to take months, not weeks. Crucially, Asian sovereign funds seem to be losing their appetite for the euro and have reduced their previously reliable support for the single currency.
Sterling has made some decent gains over the euro in recent weeks then, climbing from a low of €1.13 to trade at its current level two cents higher. We foresee little progress on the debt issue in the near-term, giving the GBP/EUR rate further upside potential. Indeed, the muted market responses to what were anticipated to be significant relief stories, such as the recent German ‘yes’ vote for the expansion of the bailout fund, suggest market sentiment is going to require a really major development to bounce back. Sterling could well edge up by one or two cents from its current trading level of €1.15 in the month ahead.
GBP/USD
The dollar has gone from strength to strength over the past month or so. Safe haven flows have increased as a result of the worsening global economic picture and in addition, the dollar has taken the lion’s share of these safe-haven flows due to the deteriorating appeal of the alternatives (the yen and the swiss franc).
The Fed decided against introducing a QE3 programme last month, instead opting for ‘Operation Twist,’ where by it sells short-term debt and buys long-term debt. The market was unimpressed and thus the dollar remained strong. Still, QE3 remains a possibility in coming months, though it is unlikely that Bernanke will pull the trigger just yet given the slight upturn in the growth data coming out of the US of late. If and when there is further quantitative easing in the US, expect the dollar to weaken off considerably. For this month at least, this looks unlikely.
Sterling has broken out of its long-term trading range against the dollar to the downside. In late August this pair was trading at $1.65, it is now trading at a thirteen month low of $1.53. Sterling has fallen a long way very fast against the dollar, but it is looking vulnerable to a further decline. The pound will continue to struggle against the dollar as long as funds continue to be redirected from the euro to the greenback, which is exactly what we foresee in the coming weeks.
Caxton FX one month forecast:
GBP / EUR: 1.17
GBP / USD: 1.51
EUR / USD: 1.29
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.
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