Investors finally punishing the euro

Euro suffers heavy losses

The euro suffered heavy losses last week as the markets set about pricing in a lack of any real or satisfactory progress at the Dec 9th EU Summit, and the near certainty that 2012 will be another very rocky year for the single unit. Eurozone downgrades are currently the number one driver of market fears at present. Moody’s has cut Belgium’s rating, Fitch has asserted that a comprehensive solution to the debt problem is “technically and politically beyond reach” and has proceeded to place major eurozone nations such as Italy and Spain on a negative watch. Action from Standard &Poor’s seems highly likely before long and it could well be France’s triple-A rating in the firing line.

The euro is trading at an eleven-month low against the pound and the US dollar. Eurozone bond yields remain under pressure, the markets are clearly frustrated and it is quite clear that the rating agencies are too. In this environment, we see the euro making a difficult start to 2012.

Eurozone finance ministers agreed yesterday to bolster the IMF’s resources by €150bn. The market will always welcome greater commitment to support the eurozone’s struggling nations by increasing available aid, but with the decisions contingent upon the parliamentary approval of individual member states, the euro has failed to gain as a result. Besides in reality, €150bn does little to change the complexion of the eurozone crisis.

UK data disappoint further, but sterling unperturbed

Last week’s UK growth figures added to an already gloomy economic picture. UK unemployment is now at a fresh 17-year high and retail sales contracted by 0.4% in November. Still, sterling was largely unaffected by these figures.

Rating agency action n the UK’s triple-A status is the key risk as far as sterling is concerned. The market has come to terms with low growth and high debt in the UK, but if these two factors worsen sufficiently to prompt rating agencies to downgrade UK debt, then sterling could well lose the quasi-haven status it has been benefiting from in the past few months. If UK gilts lose their appeal, then so too will sterling to a certain extent.

The MPC minutes are released this Wednesday, and expectations surrounding it are fairly muted. The MPC will remain in wait-and-see mode until it steps up it QE programme in February and there are not too many talking points besides the UK economy’s uncertain outlook.

Sterling is trading at €1.1950 and €1.20 before the year’s end is by no means out of reach. Against the US dollar, again sterling is looking decidedly more vulnerable but having climbed up towards $1.57 today, is actually holding up pretty well in what are distinctly risk averse trading conditions. The euro is desperately holding on to the $1.30 level but we continue to favour the safety of the US dollar, particularly with S&P liable to make their voice heard in coming sessions.


End of week forecast
GBP / EUR 1.1975
GBP / USD 1.56
EUR / USD 1.3025
GBP / AUD 1.57

Richard Driver
Analyst – Caxton FX
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Richard Driver, Analyst No major moves were seen yesterday and it was broadly a Monday of range-bound trading. Many books will now be closed for the holidays but there is still scope for some movements, most likely in favour of safer currencies like the US dollar and the pound. The euro held up reasonably well despite uninspiring comments from ECB President Draghi to the effect that more aggressive bond purchases will not be adopted. Today’s session brings some CBI realized sales data, but aside from this the coming session if fairly data light.
STERLING/EURO: Sterling has enjoyed another push higher this morning, with ECB President Draghi disappointing the markets. The outlook for controlling eurozone bond yields was dealt a blow yesterday as ECB President reiterated his stance on refusing to step up bond purchases; he clearly believes it is not in the ECB’s mandate to do so. He also reminded investors that eurozone banks would have a tough 2012 and that growth would be slow to recover. On a mildly more positive note, eurozone finance ministers agreed to boost IMF capacity by €150bn in bilateral loans, though the UK abstained. The loans will still have to be approved by the relevant national parliament, which is by no means guaranteed. This explains why any market positivity has been suppressed.  Sterling is trading up at a fresh multi-month high above €1.1950 this morning, as the march towards €1.20 continues.	FORECAST
STERLING/US DOLLAR: Sterling is even rallying against the US dollar this morning, perhaps by a better than expected UK consumer confidence figure. A consumer confidence gauge ticked up last night, perhaps easing a little of the poor sentiment towards the struggling UK economy. There may also have been a sterling-positive response to the UK’s refusal to get involved with yesterday’s addition to the IMF’s resources. On a positive note for the US dollar, Fed policymaker Lacker yesterday argued against the case for further monetary stimulus (QE) in the US. If the US economy can avoid further QE, then this removes one of the key long-term downside risk factors for the US dollar. Sterling is trading positively up above $1.5550.	FORECAST
EURO/US DOLLAR: The euro is perhaps surprisingly holding up around the $1.30 mark but a downside move is bound to come. News of a bolstered IMF fund failed to see the euro rally yesterday and we should hardly be surprised. We have heard these announcements before, only to see agreements fall apart or get rejected at national level. One thing is clear, yesterday’s IMF agreement is certainly not a game changer, as reflected in the flat trading in this EUR/USD pair. The euro is trading comfortably above $1.30 this morning, German consumer climate data provided a much needed upside surprise this morning, but euro gains may be short-lived.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling crept up against the aussie dollar but gains were capped in light of less dovish than expected RBA minutes. The minutes from the Reserve Bank of Australia’s recent meeting were less dovish than expected last night. Further rate cuts, in addition to the two recent 0.25% cuts we have seen in the past two months, were not indicated, which is supportive of the aussie dollar. However, the RBA’s policy will almost entirely be dictated by events in the eurozone, and if our fairly rocky outlook on the debt crisis plays out, their hands may be forced on further interest rate cuts. Sterling is trading up at 1.56 and if sterling can continue its current positive tone, then further gains may come today.	FORECAST
STERLING/NEW ZEALAND DOLLAR: This pair saw some choppy trading, the market remains very nervous ahead of S&P’s almost inevitable downgrade action.    Sterling ticked higher against the risky kiwi dollar despite a slight recovery in Asian stocks. Sentiment remains pretty weak at present, with investors nervous about S&P’s possible eurozone downgrades. The coming evening session brings some New Zealand current account data, but the kiwi dollar is likely to be pushed and pulled around by international headlines. This pair is trading at 2.0450 and further gains are possible.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling crept a little higher against the Canadian dollar, which was hurt by some pretty significant losses in US stocks. US stocks made a poor start to the week and the price of Brent crude fell as low as $1.02 per barrel yesterday, $8 lower than last week’s high. The loonie lost a little ground to sterling as a result, despite some positive Canadian growth data. It is tricky to see appetite for riskier currencies to really bounce back in the coming holiday period. Sterling is trading above 1.61 and this pair should remain well-supported if sterling can build on its strong start to today’s session.	FORECAST