Bernanke unimpressed by US upturn
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Tuesday 27 March 2012
Tuesday 20 March 2012
Caxton FX Weekly Round-up: MPC minutes and UK budget in focus
Dollar struggling to sustain the gains that data would indicate
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Thursday 15 March 2012
NOK/JPY Overview and Outlook for 2012
The Norwegian krone has made an extremely impressive start to 2012. It was the top performing currency in February, which is largely due to a combination of domestic economic strength and soaring oil prices.
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
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There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
STERLING/EURO: Weak UK claimant count data has stalled this pair’s climb past €1.20.
STERLING/US DOLLAR: Sterling remains under pressure against the USD, which is very well bid amid impressive data.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
STERLING/AUSTRALIAN DOLLAR: This pair continues to climb as sentiment remains weak towards the aussie dollar.
STERLING/NEW ZEALAND DOLLAR: Sterling found some easy gains against the kiwi dollar yesterday, despite some excellent NZ manufacturing data.
STERLING/CANADIAN DOLLAR: The 1.55 level is providing some support at these low levels against the Canadian dollar.
Wednesday 14 March 2012
EUR/JPY Overview: Japanese yen to continue weakening
The yen has weakened off by around 11.5% against the euro in the past two months. This is largely attributable to the convergence of performance between the US and Japan economies and monetary easing from the Bank of Japan.
The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.
The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.
The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.
Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.
February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.
There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.
Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.
Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.
Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.
We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.
The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.
The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.
Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.
February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.
There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.
Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.
Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.
Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.
We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Tuesday 13 March 2012
Caxton FX Weekly Round-up: US economy goes from strength to strength
Private creditors finally participate in Greek debt swap
Greece managed to convince 85% of its private creditors to participate in the long-awaited debt-swap deal. This was converted into 95% participation when the collective action clauses were triggered to force some creditors to sign up. The deal represents the biggest sovereign debt restructuring in history.
The euro suffered from a classic case of ‘buy the rumour, sell the fact’ after the debt swap deal was agreed. The International Swaps and Derivatives Association has classified the Greek debt exchange as a ‘credit event,’ in which $3bn worth of credit default swaps are triggered. This places plenty of financial uncertainty back on the table, though the banking system is better placed to deal with in light of the ECB’s liquidity measures (3-year LTRO’s).
It is fair to say that the market is certain that this debt-swap is not the last time we’ll see Greece occupying the headlines this year. Many players expect Greece to be back in bailout territory before the end of 2012, which explains the rather muted response to the latest development. With regard to the second Greek bailout, Eurogroup head Juncker has indicated that it will be signed off this week and should include a significant IMF contribution.
US jobs figures impress once again and the dollar benefits
227 thousand jobs were added to the US non-farm payrolls in February, another excellent showing that highlights the pace of growth that is accumulating in the world’s largest economy.
The market will also have been impressed to see February’s growth in the US non-manufacturing sector pick up to its fastest pace in almost a year. In a recent speech, US Federal Reserve Chairman Ben Bernanke seemed to respond to the upturn in US growth by omitting reference to further US quantitative easing, to which the US dollar has responded positively.
The week ahead brings a statement from US Federal Reserve (Tuesday evening). If further optimism surrounding the US economy is revealed (which seems likely) then sentiment towards the USD should remain positive. This afternoon should bring some strong US retail sales figures to support this.
The relationship between the US dollar and US economic data is an unpredictable one but at present the two are demonstrating a positive correlation. Later on in the week, we will see some monthly consumer sentiment and manufacturing figures, all of which are also expected to be strong.
Sterling is trading just below €1.1950. Anything below €1.19, or above 84p, is looking a little too rich for the euro, bearing in mind that economic fundamentals seem to be turning the corner in the UK, whilst the eurozone economy continues to deteriorate. We are still having to patient for the GBP/EUR to kick on past €1.20 but in the longer-term we are sticking to this forecast.
Sterling has suffered a major downside move against the US dollar in the past fortnight, falling from just below $1.60 to the current level just below $1.57. We continue to look for lower levels as the US economy streaks ahead and as other safe-haven assets such as the Japanese yen lose their appeal.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.56
EUR / USD 1.30
GBP / AUD 1.4950
Richard Driver
Currency Analyst for Caxton FX
Greece managed to convince 85% of its private creditors to participate in the long-awaited debt-swap deal. This was converted into 95% participation when the collective action clauses were triggered to force some creditors to sign up. The deal represents the biggest sovereign debt restructuring in history.
The euro suffered from a classic case of ‘buy the rumour, sell the fact’ after the debt swap deal was agreed. The International Swaps and Derivatives Association has classified the Greek debt exchange as a ‘credit event,’ in which $3bn worth of credit default swaps are triggered. This places plenty of financial uncertainty back on the table, though the banking system is better placed to deal with in light of the ECB’s liquidity measures (3-year LTRO’s).
It is fair to say that the market is certain that this debt-swap is not the last time we’ll see Greece occupying the headlines this year. Many players expect Greece to be back in bailout territory before the end of 2012, which explains the rather muted response to the latest development. With regard to the second Greek bailout, Eurogroup head Juncker has indicated that it will be signed off this week and should include a significant IMF contribution.
US jobs figures impress once again and the dollar benefits
227 thousand jobs were added to the US non-farm payrolls in February, another excellent showing that highlights the pace of growth that is accumulating in the world’s largest economy.
The market will also have been impressed to see February’s growth in the US non-manufacturing sector pick up to its fastest pace in almost a year. In a recent speech, US Federal Reserve Chairman Ben Bernanke seemed to respond to the upturn in US growth by omitting reference to further US quantitative easing, to which the US dollar has responded positively.
The week ahead brings a statement from US Federal Reserve (Tuesday evening). If further optimism surrounding the US economy is revealed (which seems likely) then sentiment towards the USD should remain positive. This afternoon should bring some strong US retail sales figures to support this.
The relationship between the US dollar and US economic data is an unpredictable one but at present the two are demonstrating a positive correlation. Later on in the week, we will see some monthly consumer sentiment and manufacturing figures, all of which are also expected to be strong.
Sterling is trading just below €1.1950. Anything below €1.19, or above 84p, is looking a little too rich for the euro, bearing in mind that economic fundamentals seem to be turning the corner in the UK, whilst the eurozone economy continues to deteriorate. We are still having to patient for the GBP/EUR to kick on past €1.20 but in the longer-term we are sticking to this forecast.
Sterling has suffered a major downside move against the US dollar in the past fortnight, falling from just below $1.60 to the current level just below $1.57. We continue to look for lower levels as the US economy streaks ahead and as other safe-haven assets such as the Japanese yen lose their appeal.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.56
EUR / USD 1.30
GBP / AUD 1.4950
Richard Driver
Currency Analyst for Caxton FX
Wednesday 7 March 2012
Swedish Krona March Outlook
The Swedish krona and other risky currencies finished 2011 strongly and made an impressive start to 2012. Risk appetite has been spurred on by the ongoing impact of the European Central Bank’s (ECB) mid-December LTRO (cheap loan offering), further improvements to the US economic recovery and the emergence of a Greek bailout agreement.
However, huge uncertainties surround both the Greek and wider eurozone debt situation. In addition, data this year clearly points to the onset of a recession in the euro-area. The risks to a downturn in market sentiment, which will inevitably weigh on the krona, are all too apparent.
In terms of the Swedish economy, growth has deteriorated and the prospects for this year have weakened. Amid diminishing internal and external demand and rising unemployment, the Swedish economy contracted by 1.1% in the final quarter of 2012. Accordingly, the Riksbank is forecasting growth of just 0.7% for 2012.
The Riksbank cut the Swedish interest rate by 25 basis points to 1.50% in February, following the rate cut we saw in December. Further monetary easing this year cannot be discounted if conditions continue to worsen. In addition, after an impressive surplus last year, the Swedish National Debt Office has recently announced that it expects a budget deficit of 11bn krona this year.
We hold a pessimistic view for Greek and eurozone developments this year, on both the growth and the debt front. This should weigh on risk appetite and combined with the Swedish economy’s downtrend, the outlook for the Swedish krona is decidedly vulnerable.
GBP/SEK
Interest rate developments have gone against the Swedish krona in recent months, with the Riskbank reducing its yield from 2.00% to 1.50%. The moves were down to both diminishing global and domestic growth. With the eurozone accounting for more than half of Swedish exports, the recession that the region is heading into is likely to weaken Swedish growth to an even greater degree. The Swedish inflation outlook is also distinctly tame, so there is little scope for a Riksbank rate hike this year, while a further cut will certainly be considered if conditions both internally and externally deteriorate.
This Swedish downturn contrasts with the good news that has emanated from the UK economy in the past few weeks. UK retail sales figures have been excellent; the services sector continues to show decent growth and the construction sector also bounced back in February. These firmer figures have made a return to positive growth (after last quarter’s -0.2% GDP figure) highly likely in Q1 2012. This in turn should dissuade the MPC from deciding on further UK quantitative easing this year. It also increases the likelihood of the UK hanging onto its prized AAA credit rating, which is a major pillar of support for sterling.
The ECB’s cheap loans have fuelled a rally in risky assets in the past three months, as shown by the FTSE 100’s recent climb to a seven month high. However, an improved outlook for the UK economy (and therefore sterling), a deteriorating Swedish economy and a fairly sharp decline in risk appetite have seen GBP/SEK show signs of resuming last year’s uptrend. In line with a pessimistic view towards the overall eurozone situation, we see GBP/SEK consolidating on its recent bounce in the 10.7-10.8 area over the next few weeks. In the medium and longer-term, the risks are skewed towards a further upside move towards 11.00.
EUR/SEK
There have been some positive developments in the eurozone in recent months. The ECB’s cheap loans have ensured that credit conditions in Europe have eased this year and have fuelled a rally in eurozone equities and brought key peripheral bond yields in Italy and Spain down to more sustainable levels. A long-awaited Greek bailout agreement finally arrived in February, quelling fears of a messy Greek default in mid-March (albeit temporarily).
However, the market also remains incredibly tense about the Greek situation. A Greek bailout is by no means assured, which means we may yet see a messy Greek default this month. Greece has until the evening of Thursday 8th March to convince enough private bondholders to sign up to the debt-swap arrangement, failure to do so could result in a credit event in which credit default swaps are triggered.
The potential Greek scenarios that are currently on the table are many and varied and this lack of certainty is what is weighing on risk appetite at present. Even in a best case scenario in which Greece gets its second bailout and avoids a default without triggering a credit event, there are strong arguments that suggest this is simply an exercise in buying time and we could be back in bailout and default territory before long.
In addition, eurozone growth remains a key concern. The region contracted by 0.3% in the fourth quarter of 2011 and judging by growth figures out of Germany and the region as a whole, a slide back into a prolonged recession is now looking somewhat inevitable.
By virtue of the Swedish krona’s negative correlation with low levels of risk appetite and in line with our view that we are entering a period of damper market confidence in which safer assets than the krona will be turned to, we are confident that EUR/SEK will continue to climb. We have seen a sharp spike from 8.80 to over 8.90 in the past week and we are looking for a push towards 9.00 in March.
USD/SEK
To buck the global trend of weakening global growth, the US recovery has really gathered pace in recent months. The US economy grew at an impressive annualised pace of 3.0% in the fourth quarter of last year and there have been significant improvements to America’s chronic unemployment problem. This upturn seems to have caused US Federal Reserve Chairman (Ben Bernanke) to indicate that QE3 will not be utilised, which is a real positive for the US dollar.
By contrast, the US dollar made a very weak start to 2012 but we believe the greenback will be a major outperformer this year. With intervention doubts surrounding the other traditional safe-haven currencies (the yen and the swiss franc) and with the EUR/USD pairing looking increasingly vulnerable to a collapse, the USD is set for major gains in what will surely be a highly uncertain, dollar-friendly environment this year.
The bounce in the USD/SEK rate (from 6.55 to 6.80) in the past week should represent the start of a major reversal of dollar weakness. We see the USD strengthening in excess of 7.00 krona level in coming months, though over the next few weeks gains will probably be limited by the 6.90 level.
NOK/SEK
The Norwegian krone has made an extremely impressive start to 2012. It is the top performing currency over the past month thanks to a combination of domestic economic strength and soaring oil prices. Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that exports are not being hit as they are in neighbouring Sweden. The Norwegian economy outperformed the Swedish economy in the fourth quarter of 2011 by growing 0.6% (versus Sweden’s 1.1% contraction) and is almost certain to continue outshining this year.
Oil prices have risen by 15% already in 2012 amid worrying developments in Iran; Brent crude is currently trading just off a multi-month high above $125 per barrel. As a major producer of oil, the Norwegian economy stands to benefit and so too does its currency.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest another cut to the Norwegian base rate, which currently stands at 1.75% (slightly higher than the Swedish 1.50% rate). However, Governor Olsen has reiterated that the Norges Bank will consider the strength of the krone when evaluating its interest rate policy. Another rate cut may well come if the NOK continues to appreciate but the krone is likely to remain in demand regardless.
With the NOK/SEK rate having bounced from just above 1.14 to just below 1.20, the Norwegian krone is the clear outperformer here. NOK/SEK is actually trading only marginally below a 25-month high. However, the current pace of appreciation is unlikely to persist for another month as Norges Bank intervention concerns will inevitably temper progress. Still, we should not see too much of a downward correction away from the current 1.20 trading level.
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Fears are growing that Greece’s collective action clauses will be triggered in relation to the debt swap, due to inadequate subscription to the agreement. Bondholders may be forced to agree, meaning the haircuts will cease to be voluntary and ISDA will consequently decide this represents a credit event. These are the fears, but as yet there are several scenarios still on the table.
Today’s session brings some German factory orders data and an important US labour market indicator, whilst this evening brings the NZ interest rate decision.
Fears are growing that Greece’s collective action clauses will be triggered in relation to the debt swap, due to inadequate subscription to the agreement. Bondholders may be forced to agree, meaning the haircuts will cease to be voluntary and ISDA will consequently decide this represents a credit event. These are the fears, but as yet there are several scenarios still on the table.
Today’s session brings some German factory orders data and an important US labour market indicator, whilst this evening brings the NZ interest rate decision.
STERLING/EURO: Sterling has dipped marginally below €1.20 but Greek nerves could bring this level back into view.
STERLING/US DOLLAR: Sterling is really suffering against the US dollar, which is benefitting from huge losses in global equities.
EURO/US DOLLAR: With $1.35 seemingly off the table, $1.30 is now very much attainable in this risk averse trading environment.
STERLING/AUSTRALIAN DOLLAR: A poor Australian GDP figure and more dovish comments from the RBA add more pain to the aussie dollar.
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar actually strengthened last night as the market saw fit to take profit on its recent sell-off.
STERLING/CANADIAN DOLLAR: An excellent Canadian growth figure came in yesterday afternoon to give the loonie some support.
Tuesday 6 March 2012
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It was a quiet start to the week yesterday with the major pairings lacking any real direction. The markets received some more concerning news regarding the eurozone growth situation, as the final services growth figure for February was revised downwards. The UK services sector growth figure also disappointed yesterday, but sterling was unaffected.
Today’s calendar is pretty empty and the market is likely to be increasingly preoccupied with rumours out of the Greek debt swap talks as Thursday’s deadline draws closer.
It was a quiet start to the week yesterday with the major pairings lacking any real direction. The markets received some more concerning news regarding the eurozone growth situation, as the final services growth figure for February was revised downwards. The UK services sector growth figure also disappointed yesterday, but sterling was unaffected.
Today’s calendar is pretty empty and the market is likely to be increasingly preoccupied with rumours out of the Greek debt swap talks as Thursday’s deadline draws closer.
STERLING/EURO: A poor UK services figure fails to dent the pound with sentiment towards the UK economy a little firmer now.
STERLING/US DOLLAR: Sterling is trading sideways against the US dollar, though risks remain to the downside.
STERLING/US DOLLAR: Sterling is trading sideways against the US dollar, though risks remain to the downside.
EURO/US DOLLAR: The euro is looking vulnerable this week, all signs are pointing to a decline as far as we are concerned.
STERLING/AUSTRALIAN DOLLAR: This pair is trading at its highest point since early January thanks to dovish comments from PM Gillard.
STERLING/NEW ZEALAND DOLLAR: Sterling enjoyed a three cent climb against the kiwi dollar as the lowered Chinese growth targets continue to weigh on sentiment.
STERLING/NEW ZEALAND DOLLAR: Sterling enjoyed a three cent climb against the kiwi dollar as the lowered Chinese growth targets continue to weigh on sentiment.
STERLING/CANADIAN DOLLAR: Sterling is on an uptrend against the Canadian dollar, though progress is likely to be slow.
Monday 5 March 2012
Caxton FX Weekly Round-Up: GBP/EUR/USD
ECB loans fail to deter euro reversal
The European Central Bank’s second LTRO, in which it offered more three-year loans at 1.00% to the eurozone’s struggling banking sector, failed to give the euro the impetus to build on gains it has made in the year to date. The cheap loans have been crucial in avoiding a credit crunch and bringing down peripheral bond yields in recent weeks. Risk appetite has been booming in as a result but it seems unlikely that this second LTRO, of which demand was similar to last December’s, will have the same impact. The market saw fit to use the event as an opportunity to take profit on the euro’s strong start to 2012 and the single currency sold off across board.
The Greek issue continues to peg the euro back. A debt-swap deal must emerge by Thursday evening. Failure to persuade enough private bondholders to accept losses of at least 53.5% on their holdings could result in credit default swaps being triggered and a whole wave of financial turmoil. In addition, Greece’s second bailout still hasn’t been signed off and a U-turn remains possible. Greek nerves are likely to steadily build this week.
Concerns outside of Greece have also added to the weight being felt by the euro. Spain has defied the EU by setting a softer deficit target than that agreed under the recent fiscal compact (5.8% rather than 4.4% of GDP).
Economic growth is at the heart of this problem – these countries are struggling to cut their debt because austerity measures are strangling output. Recent data revealed that the pace of contraction in the eurozone services sector quickened in February, while unemployment increased.
February’s growth data suggests firm Q1
The pace of growth in the UK manufacturing sector slowed in February. The same is true of the UK services sector, while in the construction sector we saw the best monthly posting since April 2011. Still, the market’s key concerns focus on whether the UK will head back into recession, whether the MPC will announce further quantitative easing, and whether the UK will lose its AAA credit rating. The growth data from January and February has balanced the risks in favour of a ‘no’ to all of these questions. As such they should give sterling some underlying support in the coming weeks.
Ben Bernanke indicates QE3 is off the table
A speech from US Federal Reserve Chairman brightened the prospects of the US dollar last week. Bernanke failed to a make any reference to “QE3” – a third programme of quantitative easing. The market took this as a ‘clear’ indication that the upturn in the US economy in recent months has caused the Fed to step away from the option of more QE. Bernanke’s ‘signal’ could well turn out to be the catalyst for the US dollar to reverse the weakness we have seen in the greenback in the first couple of months of this year. Data last week confirmed the reason for optimism with regard to the US, revealing that its economy grew at an impressive annualized pace of 3.0% in Q4 2011.
Sterling is trading back up at €1.20 now, thanks to the euro’s poor end to last week. Risks remain to upside ahead of the tensions that will inevitably build as a result of the ongoing Greek debt-swap negotiations. We continue to hold the view that with GBP/USD up at $1.5850, this is a strong level at which to sell sterling and buy USD.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.58
EUR / USD 1.31
GBP / AUD 1.49
Richard Driver
Analyst – Caxton FX
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The European Central Bank’s second LTRO, in which it offered more three-year loans at 1.00% to the eurozone’s struggling banking sector, failed to give the euro the impetus to build on gains it has made in the year to date. The cheap loans have been crucial in avoiding a credit crunch and bringing down peripheral bond yields in recent weeks. Risk appetite has been booming in as a result but it seems unlikely that this second LTRO, of which demand was similar to last December’s, will have the same impact. The market saw fit to use the event as an opportunity to take profit on the euro’s strong start to 2012 and the single currency sold off across board.
The Greek issue continues to peg the euro back. A debt-swap deal must emerge by Thursday evening. Failure to persuade enough private bondholders to accept losses of at least 53.5% on their holdings could result in credit default swaps being triggered and a whole wave of financial turmoil. In addition, Greece’s second bailout still hasn’t been signed off and a U-turn remains possible. Greek nerves are likely to steadily build this week.
Concerns outside of Greece have also added to the weight being felt by the euro. Spain has defied the EU by setting a softer deficit target than that agreed under the recent fiscal compact (5.8% rather than 4.4% of GDP).
Economic growth is at the heart of this problem – these countries are struggling to cut their debt because austerity measures are strangling output. Recent data revealed that the pace of contraction in the eurozone services sector quickened in February, while unemployment increased.
February’s growth data suggests firm Q1
The pace of growth in the UK manufacturing sector slowed in February. The same is true of the UK services sector, while in the construction sector we saw the best monthly posting since April 2011. Still, the market’s key concerns focus on whether the UK will head back into recession, whether the MPC will announce further quantitative easing, and whether the UK will lose its AAA credit rating. The growth data from January and February has balanced the risks in favour of a ‘no’ to all of these questions. As such they should give sterling some underlying support in the coming weeks.
Ben Bernanke indicates QE3 is off the table
A speech from US Federal Reserve Chairman brightened the prospects of the US dollar last week. Bernanke failed to a make any reference to “QE3” – a third programme of quantitative easing. The market took this as a ‘clear’ indication that the upturn in the US economy in recent months has caused the Fed to step away from the option of more QE. Bernanke’s ‘signal’ could well turn out to be the catalyst for the US dollar to reverse the weakness we have seen in the greenback in the first couple of months of this year. Data last week confirmed the reason for optimism with regard to the US, revealing that its economy grew at an impressive annualized pace of 3.0% in Q4 2011.
Sterling is trading back up at €1.20 now, thanks to the euro’s poor end to last week. Risks remain to upside ahead of the tensions that will inevitably build as a result of the ongoing Greek debt-swap negotiations. We continue to hold the view that with GBP/USD up at $1.5850, this is a strong level at which to sell sterling and buy USD.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.58
EUR / USD 1.31
GBP / AUD 1.49
Richard Driver
Analyst – Caxton FX
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Friday 2 March 2012
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Thursday’s session was one of consolidation after Wednesday’s big moves. There was the welcome news that the International Swaps and Derivatives Association (ISDA) has decided that the Greek situation does not constitute a credit event (in which credit default swaps will be triggered). Clearly though, the situation is very fluid.
There is nothing on the data calendar today that is likely to trigger any serious direction, though the monthly UK construction growth figure will be watched by some this morning.
Thursday’s session was one of consolidation after Wednesday’s big moves. There was the welcome news that the International Swaps and Derivatives Association (ISDA) has decided that the Greek situation does not constitute a credit event (in which credit default swaps will be triggered). Clearly though, the situation is very fluid.
There is nothing on the data calendar today that is likely to trigger any serious direction, though the monthly UK construction growth figure will be watched by some this morning.
STERLING/EURO: The €1.20 level returns as the euro continues to struggle, despite a poor UK manufacturing figure.
STERLING/US DOLLAR: Sterling is still struggling to make a real challenge at the $1.60 level and US manufacturing provides rare disappointment.
EURO/US DOLLAR: Comments from former ECB boss suggest a weaker euro, though there are clearly no guarantees.
STERLING/AUSTRALIAN DOLLAR: Sterling remains in range against the aussie dollar, which may suffer from a poor Australian GDP figure next week.
STERLING/NEW ZEALAND DOLLAR: Sterling is making another attempt to breach the 1.91 level this morning, though resistance may prove too tough.
STERLING/CANADIAN DOLLAR: Sterling is trading sideways against the loonie but we may see this pair bounce today.
Thursday 1 March 2012
Monthly Report: Euro verging on a sharp decline
The euro and other risky currencies continued on their uptrend in February, spurred on by the ongoing impact of the European Central Bank’s (ECB) mid-December LTRO (cheap loan offering), further improvements to the US economic recovery and the emergence of a Greek bailout agreement.
The ECB’s cheap loans have ensured that credit conditions in Europe have eased this year and have fuelled a rally in eurozone bonds. A long-awaited Greek bailout agreement finally arrived in February, quelling fears of a messy Greek default in mid-March.
However, huge uncertainties surround both the Greek and wider eurozone debt situation. In addition, data this year clearly points to the onset of a recession in the euro-area. Asian and Middle-East sovereigns are nonetheless sticking by the euro and persisting with their project of diversifying their FX reserves away from the US dollar.
UK growth data continued on its uptrend in February, with the UK services, manufacturing and in particular, the retail sector, finding some much-needed traction. The Bank of England’s (BoE) Quarterly Inflation Report gave sterling a lift by increasing its long-term forecasts for UK inflation.
A UK interest rate rise remains a long way off- probably at least two years - but a higher inflation projection reduces the Monetary Policy Committee’s (MPC) incentive to introduce further UK quantitative easing (QE). However, this was not enough to stop two MPC policymakers from voting for £75bn, rather than the £50bn that was decided, of additional QE in February, a factor which hurt the GBP/EUR rate in particular last month.
GBP/EUR
Sterling has found it hard going against the euro in recent weeks, stalling at the €1.21 level and subsequently falling three cents (though it has since recovered to trade at €1.1950). The relief that Greece finally managed to break the deadlock and reach a bailout agreement helped the euro.
Consequently, leading stock indices such as the S&P 500 and the FTSE 100 are not far off four-year highs. 10-year bond yields in key eurozone states like Italy and Spain have come back down to a far more comfortable level of 5.0%, thanks largely to the ECB’s LTRO action, and confidence and risk appetite has largely been on the up, which rarely benefits the pound against the riskier euro.
Still, we are confident that the euro will continue to be dogged by negative eurozone headlines throughout this year. The fact that Ireland recently announced it will hold a referendum on the EU fiscal compact agreed in January highlights the scope for delay, market nerves and potential U-turns with regard to long-term political progress on the eurozone debt issue.
Another eurozone frustration is the ongoing wrangling over the expansion of the eurozone’s bailout resources. The current firewall is inadequate to deal with crises in Spain and Italy and it has been made clear that eurozone members must stump up more cash before the IMF makes more funds available. A lack of leadership in the EU will inevitably filter into diminished appetite for the euro.
Furthermore, the Greek situation is far from resolved, despite its recent bailout agreement. In the short-term, Greece still hasn’t reached a firm deal with its private sector creditors on a debt-swap. If the Greek collective-action clause is activated, which will occur if 90% of Greece’s creditors fail to participate in the proposed debt-swap, then the deal would cease to be classed as voluntary and credit default swaps would be triggered, which would likely result in another wave of financial turmoil.
Debt issues aside, the eurozone’s growth outlook also points to weaker sentiment towards the single currency. Whilst the ECB seems satisfied with leaving the eurozone interest rate at 1.00%, instead focusing on monetary easing via the €1trn of cheap loans it has granted in the past three months, the likelihood is that the eurozone as a whole is set to enter a prolonged recession. Data has revealed that the eurozone economy contracted by 0.3% last quarter and PMI data from February suggests Q1 will be little better. That said, one bright spot for the euro has been some improved forward-looking German business and consumer confidence surveys but risks remain to the downside.
As far as the UK economy is concerned, growth data has continued to pick up in the past month, best demonstrated by the strongest monthly retail figure since last April’s Royal Wedding. Despite the familiar and ongoing risks coming from the eurozone, the UK is looking increasingly likely to avoid another quarter of negative growth, which would take it into a technical recession. The BoE added another £50bn to its QE programme last month but the move was fully priced in and sterling weathered the announcement pretty well.
Judging by less dovish comments from Mervyn King of late and the BoE’s recent Quarterly Inflation Report, February’s QE move should be the last of its kind this year, even though MPC policymakers, Posen and Miles, put the market on edge with votes for £75bn.
The most significant risk to sterling continues to be posed by the credit rating agencies. Moody’s put the UK on a negative outlook in February; a loss of the UK’s prized AAA rating is a major pillar of support for the pound and its loss would be very damaging indeed.
Growth will not continue on its current trajectory this year, but the most important thing is that the UK doesn’t slip back into recession. Government borrowing figures improved last month, which should keep debt downgrade fears at bay for now. On balance, we are still betting a double-dip will be avoided in the UK.
€1.18 provided ample support in late February and sterling has since rallied to €1.1950. Largely due to the plethora of risk events that lie ahead in the eurozone, as well as the euro’s rally running out of steam of late, we are looking for a stronger GBP/EUR pairing in the coming weeks and months, which should see it revisit January’s multi month highs above €1.21 in March.
GBP/USD
After a couple of dips below $1.57, sterling has gone from strength to strength in the past week or so. In contrast, the US dollar has seen weak demand this year, amid pretty positive trading conditions; the dollar is always likely to struggle amid rising equity prices. Data from the US economy has played a key role in the improved sentiment within the financial markets.
February’s key monthly US unemployment figure improved for the fourth consecutive month to post a nine-month high. The US manufacturing and services sectors also provided further scope for optimism, as has the recent upward revision of US GDP for Q4 of 2011, which revealed an annualised growth rate of 3.0%.
The steady flow of improved US figures seems to have taken the US Federal Reserve by surprise. Fed Chairman, Ben Bernanke, caused a major stir in the currency markets this week by omitting any references to QE3 in his speech. Instead, he cited improvements to the US economic performance, particularly within the US labour sector. Whilst the Fed has made it clear that it doesn’t anticipate raising interest rates until late 2014, a US outlook with no more quantitative easing is a distinct positive for the US dollar.
It has certainly been a relief to see UK growth pick up in the past few weeks. Whilst it is outperforming its eurozone counterparts, the US economy is the frontrunner and its 2012 outlook is significantly brighter. The UK’s vulnerability to a sharp eurozone downturn outweighs that of the US, which should again favour the dollar as investors assess their options.
In the event that UK growth does run out of steam, QE and debt downgrade speculation will certainly resurface to the detriment of sterling. QE will not be a concern with regard to the US dollar any more, while it has already demonstrated it can withstand a debt downgrade as it did last summer (when S&P cut United States’ AAA rating). These are perhaps longer-term considerations but will doubtless come to the fore in coming months.
We see downside risks to the eurozone situation resulting in a downward correction in global stocks and increased safe-haven flows into the US dollar soon. Asian and Middle Eastern sovereigns are continuing to diversify out of the US dollar into the euro but even this should not be enough to prop the euro up at these levels this year.
We are looking for a major reversal in the EUR/USD pairing, which points to a firmer USD moving forward. This will inevitably weigh on the GBP/USD pairing. In the short-term, we may see sterling make one last charge at $1.60 (which it currently trades marginally below) and beyond, an attempt at $1.61. However, we are looking for GBP/USD to reverse most of its recent gains in the medium term, correcting back down towards $1.57.
Caxton FX one month forecast:
GBP / EUR 1.2150
GBP / USD 1.57
EUR / USD 1.2950
Richard Driver
Analyst – Caxton FX
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The ECB’s cheap loans have ensured that credit conditions in Europe have eased this year and have fuelled a rally in eurozone bonds. A long-awaited Greek bailout agreement finally arrived in February, quelling fears of a messy Greek default in mid-March.
However, huge uncertainties surround both the Greek and wider eurozone debt situation. In addition, data this year clearly points to the onset of a recession in the euro-area. Asian and Middle-East sovereigns are nonetheless sticking by the euro and persisting with their project of diversifying their FX reserves away from the US dollar.
UK growth data continued on its uptrend in February, with the UK services, manufacturing and in particular, the retail sector, finding some much-needed traction. The Bank of England’s (BoE) Quarterly Inflation Report gave sterling a lift by increasing its long-term forecasts for UK inflation.
A UK interest rate rise remains a long way off- probably at least two years - but a higher inflation projection reduces the Monetary Policy Committee’s (MPC) incentive to introduce further UK quantitative easing (QE). However, this was not enough to stop two MPC policymakers from voting for £75bn, rather than the £50bn that was decided, of additional QE in February, a factor which hurt the GBP/EUR rate in particular last month.
GBP/EUR
Sterling has found it hard going against the euro in recent weeks, stalling at the €1.21 level and subsequently falling three cents (though it has since recovered to trade at €1.1950). The relief that Greece finally managed to break the deadlock and reach a bailout agreement helped the euro.
Consequently, leading stock indices such as the S&P 500 and the FTSE 100 are not far off four-year highs. 10-year bond yields in key eurozone states like Italy and Spain have come back down to a far more comfortable level of 5.0%, thanks largely to the ECB’s LTRO action, and confidence and risk appetite has largely been on the up, which rarely benefits the pound against the riskier euro.
Still, we are confident that the euro will continue to be dogged by negative eurozone headlines throughout this year. The fact that Ireland recently announced it will hold a referendum on the EU fiscal compact agreed in January highlights the scope for delay, market nerves and potential U-turns with regard to long-term political progress on the eurozone debt issue.
Another eurozone frustration is the ongoing wrangling over the expansion of the eurozone’s bailout resources. The current firewall is inadequate to deal with crises in Spain and Italy and it has been made clear that eurozone members must stump up more cash before the IMF makes more funds available. A lack of leadership in the EU will inevitably filter into diminished appetite for the euro.
Furthermore, the Greek situation is far from resolved, despite its recent bailout agreement. In the short-term, Greece still hasn’t reached a firm deal with its private sector creditors on a debt-swap. If the Greek collective-action clause is activated, which will occur if 90% of Greece’s creditors fail to participate in the proposed debt-swap, then the deal would cease to be classed as voluntary and credit default swaps would be triggered, which would likely result in another wave of financial turmoil.
Debt issues aside, the eurozone’s growth outlook also points to weaker sentiment towards the single currency. Whilst the ECB seems satisfied with leaving the eurozone interest rate at 1.00%, instead focusing on monetary easing via the €1trn of cheap loans it has granted in the past three months, the likelihood is that the eurozone as a whole is set to enter a prolonged recession. Data has revealed that the eurozone economy contracted by 0.3% last quarter and PMI data from February suggests Q1 will be little better. That said, one bright spot for the euro has been some improved forward-looking German business and consumer confidence surveys but risks remain to the downside.
As far as the UK economy is concerned, growth data has continued to pick up in the past month, best demonstrated by the strongest monthly retail figure since last April’s Royal Wedding. Despite the familiar and ongoing risks coming from the eurozone, the UK is looking increasingly likely to avoid another quarter of negative growth, which would take it into a technical recession. The BoE added another £50bn to its QE programme last month but the move was fully priced in and sterling weathered the announcement pretty well.
Judging by less dovish comments from Mervyn King of late and the BoE’s recent Quarterly Inflation Report, February’s QE move should be the last of its kind this year, even though MPC policymakers, Posen and Miles, put the market on edge with votes for £75bn.
The most significant risk to sterling continues to be posed by the credit rating agencies. Moody’s put the UK on a negative outlook in February; a loss of the UK’s prized AAA rating is a major pillar of support for the pound and its loss would be very damaging indeed.
Growth will not continue on its current trajectory this year, but the most important thing is that the UK doesn’t slip back into recession. Government borrowing figures improved last month, which should keep debt downgrade fears at bay for now. On balance, we are still betting a double-dip will be avoided in the UK.
€1.18 provided ample support in late February and sterling has since rallied to €1.1950. Largely due to the plethora of risk events that lie ahead in the eurozone, as well as the euro’s rally running out of steam of late, we are looking for a stronger GBP/EUR pairing in the coming weeks and months, which should see it revisit January’s multi month highs above €1.21 in March.
GBP/USD
After a couple of dips below $1.57, sterling has gone from strength to strength in the past week or so. In contrast, the US dollar has seen weak demand this year, amid pretty positive trading conditions; the dollar is always likely to struggle amid rising equity prices. Data from the US economy has played a key role in the improved sentiment within the financial markets.
February’s key monthly US unemployment figure improved for the fourth consecutive month to post a nine-month high. The US manufacturing and services sectors also provided further scope for optimism, as has the recent upward revision of US GDP for Q4 of 2011, which revealed an annualised growth rate of 3.0%.
The steady flow of improved US figures seems to have taken the US Federal Reserve by surprise. Fed Chairman, Ben Bernanke, caused a major stir in the currency markets this week by omitting any references to QE3 in his speech. Instead, he cited improvements to the US economic performance, particularly within the US labour sector. Whilst the Fed has made it clear that it doesn’t anticipate raising interest rates until late 2014, a US outlook with no more quantitative easing is a distinct positive for the US dollar.
It has certainly been a relief to see UK growth pick up in the past few weeks. Whilst it is outperforming its eurozone counterparts, the US economy is the frontrunner and its 2012 outlook is significantly brighter. The UK’s vulnerability to a sharp eurozone downturn outweighs that of the US, which should again favour the dollar as investors assess their options.
In the event that UK growth does run out of steam, QE and debt downgrade speculation will certainly resurface to the detriment of sterling. QE will not be a concern with regard to the US dollar any more, while it has already demonstrated it can withstand a debt downgrade as it did last summer (when S&P cut United States’ AAA rating). These are perhaps longer-term considerations but will doubtless come to the fore in coming months.
We see downside risks to the eurozone situation resulting in a downward correction in global stocks and increased safe-haven flows into the US dollar soon. Asian and Middle Eastern sovereigns are continuing to diversify out of the US dollar into the euro but even this should not be enough to prop the euro up at these levels this year.
We are looking for a major reversal in the EUR/USD pairing, which points to a firmer USD moving forward. This will inevitably weigh on the GBP/USD pairing. In the short-term, we may see sterling make one last charge at $1.60 (which it currently trades marginally below) and beyond, an attempt at $1.61. However, we are looking for GBP/USD to reverse most of its recent gains in the medium term, correcting back down towards $1.57.
Caxton FX one month forecast:
GBP / EUR 1.2150
GBP / USD 1.57
EUR / USD 1.2950
Richard Driver
Analyst – Caxton FX
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