Cyprus has become the fifth Eurozone country to apply to Brussels for an emergency bailout, after similar calls for help from Portugal, Ireland, Greece and Spain. Heavy dependence on the Greek economy has pushed Cyprus into this corner. The Cypriot banking sector is oversized for a country with only one million residents and it suffered badly from significant write-downs on Greek sovereign bonds. Cyprus hasn’t been able to access the debt markets since 2011 since being downgraded to ‘junk’ status by Moody’s and S&P, Fitch’s move to follow suit yesterday provided the final push to force the country into a bailout request.
In the very short-term, €1.8bn (around 10% of its domestic output) is required to recapitalise its second largest bank, Cyprus Popular Bank, while its largest bank, Bank of Cyprus has reportedly called for aid of around €500 million. Plenty more will be required for state financing and the country really requires a buffer from any further spillover effects from Greece.
The bailout is expected to amount to approximately €10 billion, which is equal to over half of the Cypriot GDP, currently standing at €17.3 billion. Along with the Spanish application for bailout funds for its banks, Cyprus’ bailout application has today been formally accepted by the Eurogroup. The funds will come from either the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) when it becomes active. This comes after controversial but ultimately unsuccessful bailout negotiations with Russia and China. Dimitris Christofias, the Cypriot president, had expressed his wariness of the strict conditions that would come with an EU bailout. In particular, Cyprus’ rock bottom (10%) corporate tax threshold may be a cost of the bailout request. The terms of the bailout will surface in the coming weeks.
In terms of the impact on overall sentiment towards the eurozone, the Cypriot request for a bailout will not in itself weigh too heavily. Whilst it is another worrying example of debt contagion and does build on increasingly negative eurozone sentiment, Cyprus is the eurozone’s third smallest economy and this bailout request been a long time coming. Market nerves at the moment are more firmly fixed on the eurozone’s fourth-largest economy- Spain. The euro is posting significant losses across the board; the key EUR/USD pair looks likely to retest its multi-month lows of $1.2285 in the near future.
Adam Highfield
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday 27 June 2012
Tuesday 26 June 2012
Spain requests bailout and adds to the euro’s woes
Spain formally requested assistance from its Eurozone partners on Monday, in light of the continued deterioration of its domestic banks. Luis de Guindos, the Spanish Economy Minister, sent the letter to Jean-Claude Juncker, who heads the group of Eurozone finance ministers, in the hope of obtaining a bailout loan thought to be in the region of €100bn. However, a lack of detail over the size of the bailout is a source of considerable market uncertainty. The news was fully expected following weeks of speculation over the condition of Spanish banks, and following the first call for help on 9th June.
What is also a source of nerves is where the bailout funds will come from. The recent bank restructuring in Ireland could be used as a precedent, in which case the loans would be channeled from the existing bailout fund, the European Financial Stability Mechanism, into Spain’s Fund for Orderly Bank Restructuring (Frob), which in turn will direct the money to those banks that need it. In this model, the loans would rank equally with private bondholders. If the loans come from the European Stability Mechanism, the new bailout fund, they will rank as senior debt and with the Greek haircuts fresh in the memory, the result would be investors hitting Spain will higher borrowing costs. The former option looks to be the likely choice. Another key concern is that as the bailout loans are likely to be channeled through Spain’s government, this means adding billions to Spain’s sovereign debt and increasing the country’s debt-to-GDP ratio considerably (from 70% to 80%). Again, this will have implications in Spain’s credit rating and borrowing costs.
These two factors are already an issue; Moody’s has downgraded Spanish debt to Baa3 (one higher than ‘speculative’), as well as issuing 28 fresh downgrades to Spain’s banks yesterday. This has resulted in a rise in the yield on Spanish 10-year debt to 7%, the government appears to be edging towards a sovereign bailout. Whilst in the short-term a bailout of the eurozone’s fourth largest economy would be a huge source of huge panic, a Spanish bailout may be the kick that EU leaders need to finally break ground on a long-term path to solving the debt crisis. Only time will tell.
So how has the euro responded? The Greek election result provided only a temporary respite and with the ongoing issue of the Greek bailout renegotiation ahead Spain edging closer to disaster, market tensions are rising. The euro has suffered a downwards correction in the past few sessions, dipping from $1.27 to $1.25, and allowing GBP/EUR to climb from €1.24 to €1.25. We maintain a negative outlook for the euro.
The EU Summit at the end of this week provides ample opportunity to calm market nerves, though the track record of these crisis meetings producing major progress is not a good one. Merkel has been typically stubborn on issues such as mutualised debt (Eurobonds) and with the Greek PM ill, no progress is likely to be made on the Greek bailout issue. Decisions with regard to Spain will be crucial if stocks are to avoid a further sell-off and if building pressures in the bond markets are to ease. The euro could be poised for a move lower.
Adam Highfield
Caxton FX
What is also a source of nerves is where the bailout funds will come from. The recent bank restructuring in Ireland could be used as a precedent, in which case the loans would be channeled from the existing bailout fund, the European Financial Stability Mechanism, into Spain’s Fund for Orderly Bank Restructuring (Frob), which in turn will direct the money to those banks that need it. In this model, the loans would rank equally with private bondholders. If the loans come from the European Stability Mechanism, the new bailout fund, they will rank as senior debt and with the Greek haircuts fresh in the memory, the result would be investors hitting Spain will higher borrowing costs. The former option looks to be the likely choice. Another key concern is that as the bailout loans are likely to be channeled through Spain’s government, this means adding billions to Spain’s sovereign debt and increasing the country’s debt-to-GDP ratio considerably (from 70% to 80%). Again, this will have implications in Spain’s credit rating and borrowing costs.
These two factors are already an issue; Moody’s has downgraded Spanish debt to Baa3 (one higher than ‘speculative’), as well as issuing 28 fresh downgrades to Spain’s banks yesterday. This has resulted in a rise in the yield on Spanish 10-year debt to 7%, the government appears to be edging towards a sovereign bailout. Whilst in the short-term a bailout of the eurozone’s fourth largest economy would be a huge source of huge panic, a Spanish bailout may be the kick that EU leaders need to finally break ground on a long-term path to solving the debt crisis. Only time will tell.
So how has the euro responded? The Greek election result provided only a temporary respite and with the ongoing issue of the Greek bailout renegotiation ahead Spain edging closer to disaster, market tensions are rising. The euro has suffered a downwards correction in the past few sessions, dipping from $1.27 to $1.25, and allowing GBP/EUR to climb from €1.24 to €1.25. We maintain a negative outlook for the euro.
The EU Summit at the end of this week provides ample opportunity to calm market nerves, though the track record of these crisis meetings producing major progress is not a good one. Merkel has been typically stubborn on issues such as mutualised debt (Eurobonds) and with the Greek PM ill, no progress is likely to be made on the Greek bailout issue. Decisions with regard to Spain will be crucial if stocks are to avoid a further sell-off and if building pressures in the bond markets are to ease. The euro could be poised for a move lower.
Adam Highfield
Caxton FX
Monday 25 June 2012
Spain confirms bailout request and the euro heads lower
The euro’s recovery shows signs of topping out in absence of QE3
The first three weeks of June were excellent ones for the euro but the past three sessions have punishing ones for the single currency. The Fed’s decision last Wednesday night not to pull the trigger on QE3, much to the disappointment of many market players, has seen the dollar strengthen significantly.
We also saw some awful economic data out of the eurozone at the end of last week. Monthly German manufacturing growth hit almost a three year-low, a German business climate survey hit a two-year low and growth data from the eurozone as a whole was distinctly poor as you might expect.
The Spanish Economy Minister has today formally requested a bailout to recapitalize its ailing banking sector, though the details as to the size of this bailout have not yet emerged. Unless funds well in excess of the €100bn bailout (which has been assumed) are offered, then market fears of an insufficient bailout are likely to persist. What we also do not know is whether the bailout will be granted via the Spanish government or whether the sovereign will be bypassed. The likelihood is that Spain will shoulder the loans, which will add to the country’s mounting debt. It is hard for the market to respond positively to this bailout, as it is just a liquidity solution; the fundamental issue of rising debt remains unaddressed. To add to the negative sentiment towards Spain, Moody’s is expected to downgrade Spain’s credit rating once again this week.
EU leaders meet at a summit at the end of this week to tackle issues relating to Greece, Spain, a banking union, Eurobonds and much more. The market has today demonstrated its lack of faith that any groundbreaking progress will emerge from the EU Summit, with the euro declining sharply, Spanish and Italian bond yields rising and global stocks tumbling. Market confidence is very much on the wane, which is all good news for the US dollar.
MPC minutes point to QE call in July
Last week’s MPC minutes provided a surprise in revealing a 5-4 split (against QE) in the vote on whether to introduce more QE in June, after a voting pattern of 8-1 against in May. Posen had made it clear that he had jumped ship from the dovish camp prematurely, so his QE vote was expected. However, the additional voting shifts from BoE Governor Mervyn King and Paul Fisher were a genuine surprise. In light of the surprise decline in UK inflation from 3.0% to 2.8% in May, as well as the overtly dovish language expressed in last week’s minutes, we fully expect the doves to gain a majority in the quest for more QE in July. This should not weigh on the pound though, as a July move is fully priced in.
The week ahead brings familiarly high levels of risk, with Spain and Italy both having to auction off some debt. The EU Summit is the main event and the potential for disappointment is all too clear. Because of this, sterling is trading at €1.2450 – a strong rate, which could well get even better by the end of the week. With BoE monetary easing now fully expected next month, the downside risks posed by UK data releases look rather limited. As ever, EU leaders have the capacity to trigger a major relief rally for the euro, though we remain sceptical.
Sterling has lost ground to the US dollar in recent sessions, hurt by a significant shift down in the EUR/USD pair. GBP/USD is now trading below $1.56 and we expect to see the dollar strengthen further this week.
End of week forecast
GBP / EUR 1.2475
GBP / USD 1.55
EUR / USD 1.2425
GBP / AUD 1.57
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The first three weeks of June were excellent ones for the euro but the past three sessions have punishing ones for the single currency. The Fed’s decision last Wednesday night not to pull the trigger on QE3, much to the disappointment of many market players, has seen the dollar strengthen significantly.
We also saw some awful economic data out of the eurozone at the end of last week. Monthly German manufacturing growth hit almost a three year-low, a German business climate survey hit a two-year low and growth data from the eurozone as a whole was distinctly poor as you might expect.
The Spanish Economy Minister has today formally requested a bailout to recapitalize its ailing banking sector, though the details as to the size of this bailout have not yet emerged. Unless funds well in excess of the €100bn bailout (which has been assumed) are offered, then market fears of an insufficient bailout are likely to persist. What we also do not know is whether the bailout will be granted via the Spanish government or whether the sovereign will be bypassed. The likelihood is that Spain will shoulder the loans, which will add to the country’s mounting debt. It is hard for the market to respond positively to this bailout, as it is just a liquidity solution; the fundamental issue of rising debt remains unaddressed. To add to the negative sentiment towards Spain, Moody’s is expected to downgrade Spain’s credit rating once again this week.
EU leaders meet at a summit at the end of this week to tackle issues relating to Greece, Spain, a banking union, Eurobonds and much more. The market has today demonstrated its lack of faith that any groundbreaking progress will emerge from the EU Summit, with the euro declining sharply, Spanish and Italian bond yields rising and global stocks tumbling. Market confidence is very much on the wane, which is all good news for the US dollar.
MPC minutes point to QE call in July
Last week’s MPC minutes provided a surprise in revealing a 5-4 split (against QE) in the vote on whether to introduce more QE in June, after a voting pattern of 8-1 against in May. Posen had made it clear that he had jumped ship from the dovish camp prematurely, so his QE vote was expected. However, the additional voting shifts from BoE Governor Mervyn King and Paul Fisher were a genuine surprise. In light of the surprise decline in UK inflation from 3.0% to 2.8% in May, as well as the overtly dovish language expressed in last week’s minutes, we fully expect the doves to gain a majority in the quest for more QE in July. This should not weigh on the pound though, as a July move is fully priced in.
The week ahead brings familiarly high levels of risk, with Spain and Italy both having to auction off some debt. The EU Summit is the main event and the potential for disappointment is all too clear. Because of this, sterling is trading at €1.2450 – a strong rate, which could well get even better by the end of the week. With BoE monetary easing now fully expected next month, the downside risks posed by UK data releases look rather limited. As ever, EU leaders have the capacity to trigger a major relief rally for the euro, though we remain sceptical.
Sterling has lost ground to the US dollar in recent sessions, hurt by a significant shift down in the EUR/USD pair. GBP/USD is now trading below $1.56 and we expect to see the dollar strengthen further this week.
End of week forecast
GBP / EUR 1.2475
GBP / USD 1.55
EUR / USD 1.2425
GBP / AUD 1.57
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 21 June 2012
MPC minutes point to July QE call, but it's fully priced in
Yesterday’s MPC minutes dropped a bit of a bomb as far as we are concerned. They revealed that three MPC members (Posen, Fisher and King) have joined David Miles in voting for another round of quantitative easing. Posen was bound to vote for more QE after backtracking in light of weak recent UK growth data. That was as far as we saw the voting pattern shifting really, so the extra two votes came as a surprise.
The language of the MPC minutes were decidedly dovish and given that the UK inflation rate has surprisingly eased to 2.8% (from 3.0%) since the last meeting, we expect at least one other MPC policymaker to join the dovish ranks in July, and that is all that will be needed. The fact that BoE Governor King will be there to lead the doves makes a QE majority all the more likely, as will the intensifying risks out of the eurozone.
The following quote tells you that more QE in July is pretty much nailed on: “most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target.”
Amid plenty of speculation that the Bank of England could cut the base rate from the current record low of 0.5% for the first time since March 2009, it is interesting to note from the minutes that whilst the MPC did discuss the merits of a rate cut, they saw no advantage in doing so at the present time.
Sterling has weathered this week’s QE storm very well, not least because, thanks to the global economic downturn, there are very few currencies without risk-factors surrounding them. The dollar has suffered considerably from QE3 speculation, which the Fed has made clear it could opt for this year, whilst the euro has more problems than this blogger has time to allude to. All in all, sterling actually held up pretty well during the last round of QE and given that another round of QE will by now have been fully priced in, it shouldn’t be too much of weight on sterling moving forward. Fortunately for GBP, the market is rather more concerned with the Grecians.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The language of the MPC minutes were decidedly dovish and given that the UK inflation rate has surprisingly eased to 2.8% (from 3.0%) since the last meeting, we expect at least one other MPC policymaker to join the dovish ranks in July, and that is all that will be needed. The fact that BoE Governor King will be there to lead the doves makes a QE majority all the more likely, as will the intensifying risks out of the eurozone.
The following quote tells you that more QE in July is pretty much nailed on: “most members judged that some further economic stimulus was either warranted immediately or would probably become warranted in order to meet the inflation target.”
Amid plenty of speculation that the Bank of England could cut the base rate from the current record low of 0.5% for the first time since March 2009, it is interesting to note from the minutes that whilst the MPC did discuss the merits of a rate cut, they saw no advantage in doing so at the present time.
Sterling has weathered this week’s QE storm very well, not least because, thanks to the global economic downturn, there are very few currencies without risk-factors surrounding them. The dollar has suffered considerably from QE3 speculation, which the Fed has made clear it could opt for this year, whilst the euro has more problems than this blogger has time to allude to. All in all, sterling actually held up pretty well during the last round of QE and given that another round of QE will by now have been fully priced in, it shouldn’t be too much of weight on sterling moving forward. Fortunately for GBP, the market is rather more concerned with the Grecians.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday 19 June 2012
Greek election out the way but euro remains vulnerable
Greece votes in favour of the euro but market relief short-lived
The long-awaited Greek elections last Sunday produced the result the market wanted, but only to an extent. New Democracy - the main pro-bailout, pro-euro party – won the election, but by only the smallest of margins, so the uncertainty of coalition-forming remained. What also remains are the inevitable attempts to renegotiate Greece’s bailout terms by any coalition that does form. With Merkel sounding as tough as ever on Greece this week, negotiations are likely to be tense and drawn out.
The market has been to the brink several times before in the case of Greece and the euphoria in response to the Greek election result was understandably short-lived. Certainly the worst-case scenario – a victory for the leftist Syriza and a potential euro-exit- was avoided but investors know full well that Greece’s second bailout will not buy sufficient time for Greece to get its house in order in a permanent sense, so the country’s painful saga continues.
Spain is very much in the headlines at present, as the country’s 10-year bond yields have broken through the dreaded 7.0% level which has forced other eurozone nations into bailout requests. Spain has already reached an agreement for a €100bn bailout of its banking sector, but these borrowing costs could ensure the sovereign itself will be requesting a bailout before long. The delay to the second part of the audit of Spain’s banks until September has not helped sentiment one bit, with suggestions being made that Spain’s bank could need more than €100bn.
Germany is likely to be the next country to dominate the headlines, though unsurprisingly not due to economic weakness or high debt levels. June 29th will see the German parliament vote on the EU fiscal treaty and the creation of the permanent eurozone rescue fund. Any indications that Angela Merkel is losing her grip on power domestically are likely to weigh on the euro significantly. Nonetheless, Merkel is widely expected to prevail in the vote.
Sterling firm ahead of MPC minutes release
Tomorrow’s MPC minutes will reveal the voting pattern with respect to the introduction of further UK quantitative easing at the MPC’s June meeting. Today’s weak inflation data has already made the domestic environment a more QE-friendly one, though we look back to last week’s Mansion House for indicators that the majority of the MPC will have different ideas. King announced an £80bn ‘funding for lending’ speech, which suggests the BoE are looking at alternative ways of boosting UK growth.
This week also brings US Federal Reserve monetary policy into sharp focus, with the central bank meeting and giving its statement and economic projections on Wednesday. Increasingly weak US growth data has pressurised the dollar of late but we continue to bet that the Fed will hold fire for now.
Having dipped as low as €1.2270 last week, GBP/EUR is now trading at €1.24, which is a reflection of the market’s muted response to the Greek election. We remain confident that we will see May’s highs just below €1.26 before long, though developments in Greece and Spain could have the final say about just how soon this will be.
Sterling is trading at $1.57, thanks to fears that the Fed is edging towards QE3. The current retracement in the EUR/USD pair is not something we see being sustained much past $1.28, which leaves upside potential from the current $1.2660 level as pretty limited.
End of week forecast
GBP / EUR 1.25
GBP / USD 1.5650
EUR / USD 1.25
GBP / AUD 1.53
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The long-awaited Greek elections last Sunday produced the result the market wanted, but only to an extent. New Democracy - the main pro-bailout, pro-euro party – won the election, but by only the smallest of margins, so the uncertainty of coalition-forming remained. What also remains are the inevitable attempts to renegotiate Greece’s bailout terms by any coalition that does form. With Merkel sounding as tough as ever on Greece this week, negotiations are likely to be tense and drawn out.
The market has been to the brink several times before in the case of Greece and the euphoria in response to the Greek election result was understandably short-lived. Certainly the worst-case scenario – a victory for the leftist Syriza and a potential euro-exit- was avoided but investors know full well that Greece’s second bailout will not buy sufficient time for Greece to get its house in order in a permanent sense, so the country’s painful saga continues.
Spain is very much in the headlines at present, as the country’s 10-year bond yields have broken through the dreaded 7.0% level which has forced other eurozone nations into bailout requests. Spain has already reached an agreement for a €100bn bailout of its banking sector, but these borrowing costs could ensure the sovereign itself will be requesting a bailout before long. The delay to the second part of the audit of Spain’s banks until September has not helped sentiment one bit, with suggestions being made that Spain’s bank could need more than €100bn.
Germany is likely to be the next country to dominate the headlines, though unsurprisingly not due to economic weakness or high debt levels. June 29th will see the German parliament vote on the EU fiscal treaty and the creation of the permanent eurozone rescue fund. Any indications that Angela Merkel is losing her grip on power domestically are likely to weigh on the euro significantly. Nonetheless, Merkel is widely expected to prevail in the vote.
Sterling firm ahead of MPC minutes release
Tomorrow’s MPC minutes will reveal the voting pattern with respect to the introduction of further UK quantitative easing at the MPC’s June meeting. Today’s weak inflation data has already made the domestic environment a more QE-friendly one, though we look back to last week’s Mansion House for indicators that the majority of the MPC will have different ideas. King announced an £80bn ‘funding for lending’ speech, which suggests the BoE are looking at alternative ways of boosting UK growth.
This week also brings US Federal Reserve monetary policy into sharp focus, with the central bank meeting and giving its statement and economic projections on Wednesday. Increasingly weak US growth data has pressurised the dollar of late but we continue to bet that the Fed will hold fire for now.
Having dipped as low as €1.2270 last week, GBP/EUR is now trading at €1.24, which is a reflection of the market’s muted response to the Greek election. We remain confident that we will see May’s highs just below €1.26 before long, though developments in Greece and Spain could have the final say about just how soon this will be.
Sterling is trading at $1.57, thanks to fears that the Fed is edging towards QE3. The current retracement in the EUR/USD pair is not something we see being sustained much past $1.28, which leaves upside potential from the current $1.2660 level as pretty limited.
End of week forecast
GBP / EUR 1.25
GBP / USD 1.5650
EUR / USD 1.25
GBP / AUD 1.53
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 14 June 2012
Scottish Independence - the Currency Dilemma
The ‘Yes Scotland’ campaign – the campaign for Scottish independence - is gathering pace and it brings with it some interesting currency-related questions.
Scottish independence is by no means imminent - the referendum is not scheduled until the autumn of 2014 - but there is plenty of debate to be had. Scotland’s First Minister Alex Salmond has certainly put his and the weight of his Scottish Nationalist Party firmly behind the cause. However, there is plenty of support for keeping Scotland within the UK; a pro-union campaign is expected to be launched in the coming months. Indeed, a recent poll commissioned by Scottish MP Alistair Darling revealed that only 33% of those surveyed were in favour of independence, whilst 57% opposed it and 10% were undecided.
In 2006, Salmond endorsed the idea of the “arc of prosperity,” where Scotland joined a Nordic Union made up of wealthy smaller Northern European nations of Iceland, Ireland and Norway. Joining the euro seems a little more likely.
Salmond has said that Scotland could eventually join the euro, after a referendum was held on the issue. However, this is becoming a decreasingly attractive prospect given the escalation of the debt crisis over the past year or so.
Leading economist Professor Garelli, former MD of the World Economic Forum, has argued that an independent Scotland will have no choice but to join the euro. Garelli cited the euro’s world reserve currency status and the benefits this brings with commodity trading and making the most of North Sea oil.
There are some interesting arguments suggesting that Scottish independence would require a reapplication to become a member of the EU, and new members of the EU are expected to join the euro as a matter of course. Interpretation of the European Community Treaty may well have to be played out in the courts- it comes down to whether Scotland would continue to benefit from the UK’s special dispensation to opt out of the euro whilst remaining in the EU.
The development of the eurozone debt crisis makes it quite hard to believe that the Scottish population will want to join that particular party. Certainly, 2014 leaves plenty of time for conditions to change, but progress in the debt crisis has proved remarkably slow. Joining the euro would seem to be a long-term plan, very long-term. SNP Finance Minister Swinney has cited the mid-2020s as a possible euro-entry date. By this point, EU integration is likely to be so far down the line that the notion of any genuine Scottish independence within the euro could be laughable.
The SNP has made it clear that its current position is for Scotland to keep the pound in the short-term, and importantly, retaining the backing of the Bank of England. It goes without saying that Scotland would want to maintain access to the Bank of England as a lender of last-resort (a backstop), should any of its financial institutions hit panic-stations. Scotland would like to combine this with fiscal independence, but this would equate to the BoE signing blank cheques. It is impossible to believe that Scotland will be allowed to pick and chose in such a way. So this raises the question of just how independent Scotland can be if it retains the pound. This is a question which the SNP are struggling to cope with.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Scottish independence is by no means imminent - the referendum is not scheduled until the autumn of 2014 - but there is plenty of debate to be had. Scotland’s First Minister Alex Salmond has certainly put his and the weight of his Scottish Nationalist Party firmly behind the cause. However, there is plenty of support for keeping Scotland within the UK; a pro-union campaign is expected to be launched in the coming months. Indeed, a recent poll commissioned by Scottish MP Alistair Darling revealed that only 33% of those surveyed were in favour of independence, whilst 57% opposed it and 10% were undecided.
In 2006, Salmond endorsed the idea of the “arc of prosperity,” where Scotland joined a Nordic Union made up of wealthy smaller Northern European nations of Iceland, Ireland and Norway. Joining the euro seems a little more likely.
Salmond has said that Scotland could eventually join the euro, after a referendum was held on the issue. However, this is becoming a decreasingly attractive prospect given the escalation of the debt crisis over the past year or so.
Leading economist Professor Garelli, former MD of the World Economic Forum, has argued that an independent Scotland will have no choice but to join the euro. Garelli cited the euro’s world reserve currency status and the benefits this brings with commodity trading and making the most of North Sea oil.
There are some interesting arguments suggesting that Scottish independence would require a reapplication to become a member of the EU, and new members of the EU are expected to join the euro as a matter of course. Interpretation of the European Community Treaty may well have to be played out in the courts- it comes down to whether Scotland would continue to benefit from the UK’s special dispensation to opt out of the euro whilst remaining in the EU.
The development of the eurozone debt crisis makes it quite hard to believe that the Scottish population will want to join that particular party. Certainly, 2014 leaves plenty of time for conditions to change, but progress in the debt crisis has proved remarkably slow. Joining the euro would seem to be a long-term plan, very long-term. SNP Finance Minister Swinney has cited the mid-2020s as a possible euro-entry date. By this point, EU integration is likely to be so far down the line that the notion of any genuine Scottish independence within the euro could be laughable.
The SNP has made it clear that its current position is for Scotland to keep the pound in the short-term, and importantly, retaining the backing of the Bank of England. It goes without saying that Scotland would want to maintain access to the Bank of England as a lender of last-resort (a backstop), should any of its financial institutions hit panic-stations. Scotland would like to combine this with fiscal independence, but this would equate to the BoE signing blank cheques. It is impossible to believe that Scotland will be allowed to pick and chose in such a way. So this raises the question of just how independent Scotland can be if it retains the pound. This is a question which the SNP are struggling to cope with.
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 11 June 2012
Spanish banks get some help but Greek elections loom
Pressures ease somewhat as Spanish banks receive €100bn bailout
The weekend headlines have revealed that Spain’s banks will be given the support they desperately need through €100bn of emergency EU funding. This is a decent signal of intent from the EU’s leaders; it buys Spain some time and eases concerns surrounding spiraling debt contagion in the eurozone, but it is far from a solution for Spain, never mind the eurozone as a whole. Indeed, the enthusiasm following the weekend’s bailout agreement already appears to have waned.
Growth-wise, eurozone data over the past fortnight has pointed evermore towards a dip back into negative territory in Q2 of 2012. Pressures are still very much being felt in the bond markets, with Spanish 10-year notes yielding almost 6.50% and Italy’s equivalent debt yielding almost 6.00%. Last week’s policy announcement from the ECB was notable in revealing that the central bank is reluctant to cut interest rates from the current 1.00% level. Perhaps more importantly ECB President Draghi is unwilling to step in and buy bonds on the secondary market. The ECB has made it clear that it will not fill the void left by the EU’s dithering leaders.
With Spain’s short-term pressures easing somewhat, the Greek saga comes back into view. This Sunday (June 17th) brings the Greek parliamentary elections, where there remains a significant risk of an anti-bailout coalition emerging. Feasibly, we could see another stalemate and another election called. The situation is incredibly uncertain and looks set to put the market on edge as the event draws closer.
Bank of England decides against QE, for now
Last week saw the Bank of England’s MPC decide against introducing another round of quantitative easing in June. The threat of more QE has been weighing on sterling of late, particularly amid a slew of weak UK growth figures. However, a surprisingly solid UK services figure may well have given some of the MPC policymakers the resolve to hold off on voting for more QE last Thursday. The minutes from the meeting, released next Wednesday, will clearly be very revealing on just how close the MPC’s call on QE was. For now though, sterling looks set to find some favour - it’s safe-haven status should be able to return to the fore as the Greek elections close in.
Elsewhere, US data has continued to point to a slowdown in recent weeks, though Ben Bernanke was unwilling to provide any clues as to the introduction of QE3 any time soon, which is dollar-supportive. He stressed the risks posed by the eurozone debt crisis to the US economy but his rhetoric smacked of a willingness to ‘wait and see.’
Sterling is trading at €1.24, with the euro having totally given back the gains it made on Sunday night as a result of the Spanish bailout progress. Nerves look likely to intensify ahead of the weekend’s Greek elections and as investors contemplate the possibility of a Greek exit from the eurozone once again, we are looking for sterling to climb back up towards €1.25 in the coming sessions.
Likewise we are looking for lower levels for EUR/USD. The euro’s relief rallies are proving more and more flimsy now as the debt crisis goes on. Another look at $1.24 is a distinct possibility, but for now it trades a cent and a half higher. A weaker EUR/USD pair will inevitably weigh on the GBP/USD pair, which currently trades at $1.5530. Whilst we believe sterling should be able to take a decent share of the safe-haven flows this month, we still view anything above $1.55 as a bit lofty.
End of week forecast
GBP / EUR 1.25
GBP / USD 1.5450
EUR / USD 1.2450
GBP / AUD 1.5800
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The weekend headlines have revealed that Spain’s banks will be given the support they desperately need through €100bn of emergency EU funding. This is a decent signal of intent from the EU’s leaders; it buys Spain some time and eases concerns surrounding spiraling debt contagion in the eurozone, but it is far from a solution for Spain, never mind the eurozone as a whole. Indeed, the enthusiasm following the weekend’s bailout agreement already appears to have waned.
Growth-wise, eurozone data over the past fortnight has pointed evermore towards a dip back into negative territory in Q2 of 2012. Pressures are still very much being felt in the bond markets, with Spanish 10-year notes yielding almost 6.50% and Italy’s equivalent debt yielding almost 6.00%. Last week’s policy announcement from the ECB was notable in revealing that the central bank is reluctant to cut interest rates from the current 1.00% level. Perhaps more importantly ECB President Draghi is unwilling to step in and buy bonds on the secondary market. The ECB has made it clear that it will not fill the void left by the EU’s dithering leaders.
With Spain’s short-term pressures easing somewhat, the Greek saga comes back into view. This Sunday (June 17th) brings the Greek parliamentary elections, where there remains a significant risk of an anti-bailout coalition emerging. Feasibly, we could see another stalemate and another election called. The situation is incredibly uncertain and looks set to put the market on edge as the event draws closer.
Bank of England decides against QE, for now
Last week saw the Bank of England’s MPC decide against introducing another round of quantitative easing in June. The threat of more QE has been weighing on sterling of late, particularly amid a slew of weak UK growth figures. However, a surprisingly solid UK services figure may well have given some of the MPC policymakers the resolve to hold off on voting for more QE last Thursday. The minutes from the meeting, released next Wednesday, will clearly be very revealing on just how close the MPC’s call on QE was. For now though, sterling looks set to find some favour - it’s safe-haven status should be able to return to the fore as the Greek elections close in.
Elsewhere, US data has continued to point to a slowdown in recent weeks, though Ben Bernanke was unwilling to provide any clues as to the introduction of QE3 any time soon, which is dollar-supportive. He stressed the risks posed by the eurozone debt crisis to the US economy but his rhetoric smacked of a willingness to ‘wait and see.’
Sterling is trading at €1.24, with the euro having totally given back the gains it made on Sunday night as a result of the Spanish bailout progress. Nerves look likely to intensify ahead of the weekend’s Greek elections and as investors contemplate the possibility of a Greek exit from the eurozone once again, we are looking for sterling to climb back up towards €1.25 in the coming sessions.
Likewise we are looking for lower levels for EUR/USD. The euro’s relief rallies are proving more and more flimsy now as the debt crisis goes on. Another look at $1.24 is a distinct possibility, but for now it trades a cent and a half higher. A weaker EUR/USD pair will inevitably weigh on the GBP/USD pair, which currently trades at $1.5530. Whilst we believe sterling should be able to take a decent share of the safe-haven flows this month, we still view anything above $1.55 as a bit lofty.
End of week forecast
GBP / EUR 1.25
GBP / USD 1.5450
EUR / USD 1.2450
GBP / AUD 1.5800
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday 7 June 2012
UK services sector growth solid and BoE holds fire on QE
This morning’s figure from the UK services sector was solid, coming in at 53.3, the same as in May but well above expectations. The figure is nothing to get too excited about but it is certainly a relief to see that the UK services sector remains firmly in expansion territory, even if the UK economy as a whole is contracting slightly.
One point to consider here is that these PMI surveys have lost a little bit of credibility given the positive surveys that characterised Q1, only for a -0.3% GDP figure to be announced. Nonetheless, the PMI surveys will remain significant as long as the MPC places such emphasis upon them.
Warmer weather and expectations for increased activity relating to the Jubilee and the Olympics helped stave off a services sector decline in May but weakness in the UK manufacturing sector remains the major concern with respect to the UK economy at present. Last week’s manufacturing PMI figure was very poor indeed.
The Bank of England’s monetary policy decision for June was announced at noon today, revealing a ‘no’ vote on further quantitative easing, for now. This morning’s UK services figure will have eased some of the pressure being felt by some of the MPC members to vote in favour of QE. Today’s monetary policy decision is likely to have been a closer call than in previous meetings. Judging by sterling’s rally in the aftermath of the decision, many market players had been suspicious of a June QE call over the past week or so. Nonetheless, we were not expecting them to pull the trigger again today.
The sounds out of the MPC just haven’t been dovish enough to indicate another round of easing was imminent, though the weak UK data over recent weeks arguably would have justified it. The MPC is probably holding more QE back as a fire extinguisher if the worst case scenario emerges from the eurozone debt crisis. The majority of the MPC seems content that the last round of QE is still feeding through and providing stimulus, they look happy to wait and see for now. In terms of inflation, the balances of risks on the medium term outlook remain equal, thus making any fine-tuning less attractive.
As ever, the minutes in a fortnight will be all-important – David Miles will clearly have voted for more QE and Posen is likely to have joined him, all eyes will be on the rest of the voters.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
One point to consider here is that these PMI surveys have lost a little bit of credibility given the positive surveys that characterised Q1, only for a -0.3% GDP figure to be announced. Nonetheless, the PMI surveys will remain significant as long as the MPC places such emphasis upon them.
Warmer weather and expectations for increased activity relating to the Jubilee and the Olympics helped stave off a services sector decline in May but weakness in the UK manufacturing sector remains the major concern with respect to the UK economy at present. Last week’s manufacturing PMI figure was very poor indeed.
The Bank of England’s monetary policy decision for June was announced at noon today, revealing a ‘no’ vote on further quantitative easing, for now. This morning’s UK services figure will have eased some of the pressure being felt by some of the MPC members to vote in favour of QE. Today’s monetary policy decision is likely to have been a closer call than in previous meetings. Judging by sterling’s rally in the aftermath of the decision, many market players had been suspicious of a June QE call over the past week or so. Nonetheless, we were not expecting them to pull the trigger again today.
The sounds out of the MPC just haven’t been dovish enough to indicate another round of easing was imminent, though the weak UK data over recent weeks arguably would have justified it. The MPC is probably holding more QE back as a fire extinguisher if the worst case scenario emerges from the eurozone debt crisis. The majority of the MPC seems content that the last round of QE is still feeding through and providing stimulus, they look happy to wait and see for now. In terms of inflation, the balances of risks on the medium term outlook remain equal, thus making any fine-tuning less attractive.
As ever, the minutes in a fortnight will be all-important – David Miles will clearly have voted for more QE and Posen is likely to have joined him, all eyes will be on the rest of the voters.
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 6 June 2012
Doom and gloom on the domestic front but GBP remains popular
The perpetual threat to the global financial system that is Greece has dominated the headlines in recent weeks. The country’s May 6th elections saw the ruling pro-bailout coalition fail to secure sufficient support from Greece’s angry electorate. This ushered in a month of huge uncertainty as the market looked ahead to another Greek election on June 17th; with speculation growing that Greece’s anti-bailout parties would curry enough favour to form a coalition. The logical result of a rejection of Greece’s second bailout agreement would be default and an exit from the euro, so it should come as no surprise that the euro suffered further declines.
The pound was a key beneficiary of these euro declines, despite the negative implications that the eurozone debt crisis has on the already dire state of the UK economy. Recent data not only confirmed that the UK entered a double-dip recession in Q1, but it contracted by 0.3% rather than the 0.2% initially estimated. Taken with April and May’s growth figures, which are pointing to a soft start to Q2, this has unsurprisingly triggered fresh speculation that the MPC will edge back towards introducing more quantitative easing in the second half of the year. We are doubtful in this regard, for now.
Sterling is trading at impressive levels against the euro and despite a period of profit-taking in the past week or so, it remains at strong levels against the majority of global currencies thanks to its safe-haven, euro-alternative tag. However, as usual there is one currency sterling can’t outperform in the strongly risk averse trading conditions that characterised most of May – the US dollar. The dollar has helped itself to some easy and significant gains across the board as the eurozone debt crisis forces market players to unwind their riskier positions in favour of the safest of assets.
GBP/EUR
Sterling remains firm and continues to threaten higher climbs against the euro, as conditions in the eurozone go from bad to worse. Uncertainty, as ever, is the buzz word. The pro-bailout New Democracy Party has edged ahead in the Greek opinion polls, which has lifted market hopes that the country can receive the additional funding it needs and remain ‘safely’ within the eurozone. But there is plenty more debate to be had in Greece and few will be truly confident of a positive result ahead of the fresh elections on June 17th. Yet another Greek election is a distinct possibility.
The chances of a messy ending to the Greek saga remain very high. Even if a pro-austerity, pro-bailout coalition does emerge out of this month’s elections, they will still have to find a way to deliver the major reforms and deficit reduction that the country’s €130bn bailout agreement requires – no mean feat. The EU Commission has recently reminded Greece that its bailout payments remain highly contingent but whoever wins this month’s elections, you can expect some desperate efforts to have the bailout terms relaxed to a significant degree.
Spain rings alarm bells
Greek concerns, though likely to return to the fore as the elections draw closer, have been put on the back burner for the time-being. True to form, another struggling eurozone nation has stepped up to fill the void – Spain, or more specifically, Spain’s banking sector. Bankia, Spain’s fourth-largest bank, requires €19bn worth of recapitalisation and it is becoming more and more apparent that Spain will need help to shore up its banking sector as a whole. The issue is having a significant impact on Spain’s government borrowing costs, with 10-year bond yields climbing dangerously towards the unsustainable 7.0% level.
As ever with this debt crisis, market fears build so much that they tend to become a self-fulfilling prophecy. In short, Spain is in very serious trouble and its government has admitted as much – requesting EU help with bank capitalisation. This is no minor development given that Spain is the eurozone’s fourth-largest economy and emergency help for Spain will inevitably turn the market’s gaze towards the third-largest – Italy.
UK economy still looks frail
The UK economy is looking particularly downbeat at present, having been hit with the confirmation that it is firmly in double-dip recession territory. Unsurprisingly, consumer confidence has taken a sharp downturn and weakness in UK growth figures has become alarmingly consistent. The last update from the UK labour market was a little more encouraging but we will need to see more than one good month before hoping for sustained improvements.
Amid all of this bad domestic economic news, as well as the grave threats posed by the eurozone debt crisis, it might be assumed that more quantitative easing is bound to be introduced by the Bank of England in order to drag the UK out of recession. Certainly the IMF has made its views known on the issue, encouraging the BoE to act soon to safeguard the UK economy.
However, the noises out of the MPC have not suggested that such a move is imminent, despite the recent sharp decline UK inflation from 3.5% to 3.0%. A key reason for this is that the BoE sees UK inflation in the medium term as equally likely to exceed its 2.0% target as undershoot it. In addition, Spencer Dale has recently stressed the argument that the recent quantitative easing doses are still feeding through to provide stimulus and that a further round is not appropriate at present. This position is supported by the recent improvement in UK money growth.
With only one MPC policymaker voting in favour of QE at the MPC’s May meeting, in the form of David Miles, there is plenty of dovish recruitment to be done in the coming months if the BoE is to pull the trigger again on further monetary easing. Sterling seems safe in this regard for June at least, though eurozone risks could feasibly escalate sufficiently to prompt BoE action in July or August.
Euro to weaken further
So, despite the UK economy sitting uncomfortably in a double-dip recession and facing a prolonged period of stagnant growth and ultra-low interest rates, sterling looks free to continue taking advantage of an increasingly euro-negative environment. Some major steps towards EU fiscal union will be required to ease market sentiment, and the obstacles to this are all too clear.
Sterling/euro hit heights of €1.2575 in mid-May but has come off those highs to the current level of €1.24. We envisage further gains for the relative safe-haven pound in June, with the Greek elections and rising Spanish bond yields providing plenty of motivation to exit the euro. €1.26 is a realistic target in the coming few weeks.
GBP/USD
Whilst sterling has enjoyed something of an easy ride against the troubled euro, against the US dollar it has been an altogether different story. Again, market uncertainty best explains the US dollar’s stellar performance in May. It’s fair to say that the market is in a state of panic at the moment, concerned with a ‘Grexit’ and most recently a ‘Spexit.’ Amid such monster question marks, there has been widespread flight to the safest assets such as the US dollar. Sterling may be markedly a safer alternative to the single currency, but its safe-haven status cannot compare with that of the greenback.
The rug has finally been pulled from underneath the EUR/USD pair. The scale of the eurozone’s current problems is now being reflected in the price of the euro; EUR/USD has declined by over 5.0% from $1.3150 to $1.25 in the space of just one month. We do see the EUR/USD pair considerably lower in the coming months, which will inevitably weigh on the GBP/USD pair.
The US dollar is not without its own domestic economic concerns, with recent data confirming that the US economy grew at an annualised pace of 1.9% in Q1, down from the initial estimate of 2.2% and well down from Q4 2011’s 3.0% pace of growth. Progress in the US labour market has also slowed right down, which has once again seen speculation that the US Federal Reserve will introduce QE3 step up a gear. Whilst the US economy is stalling as we enter the summer, it is still firmly in recovery mode. We continue to hold the view that the Fed will want to gather more evidence about the US recovery’s direction before pulling the trigger on more quantitative easing, so we view the current QE3 concerns as over-hyped.
Safe-haven dollar to outperform
Sterling has recently revisited January’s lows below $1.53, having suffered a 6.5% drop against the US dollar in the space of just four and a half weeks. Sterling has finally bounced against the US dollar and is currently trading at $1.55, but we think this will prove temporary. A consolidation period was always likely after such a steep drop, but we should see lower levels tested once this current bout of profit-taking on the dollar’s recent rally has run its course. Lower levels in the $1.51-1.52 area could well be seen in June as the negative eurozone headlines once again take their toll.
Caxton FX one month forecast:
GBP / EUR : 1.26
GBP / USD : 1.5150
EUR / USD : 1.2050
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The pound was a key beneficiary of these euro declines, despite the negative implications that the eurozone debt crisis has on the already dire state of the UK economy. Recent data not only confirmed that the UK entered a double-dip recession in Q1, but it contracted by 0.3% rather than the 0.2% initially estimated. Taken with April and May’s growth figures, which are pointing to a soft start to Q2, this has unsurprisingly triggered fresh speculation that the MPC will edge back towards introducing more quantitative easing in the second half of the year. We are doubtful in this regard, for now.
Sterling is trading at impressive levels against the euro and despite a period of profit-taking in the past week or so, it remains at strong levels against the majority of global currencies thanks to its safe-haven, euro-alternative tag. However, as usual there is one currency sterling can’t outperform in the strongly risk averse trading conditions that characterised most of May – the US dollar. The dollar has helped itself to some easy and significant gains across the board as the eurozone debt crisis forces market players to unwind their riskier positions in favour of the safest of assets.
GBP/EUR
Sterling remains firm and continues to threaten higher climbs against the euro, as conditions in the eurozone go from bad to worse. Uncertainty, as ever, is the buzz word. The pro-bailout New Democracy Party has edged ahead in the Greek opinion polls, which has lifted market hopes that the country can receive the additional funding it needs and remain ‘safely’ within the eurozone. But there is plenty more debate to be had in Greece and few will be truly confident of a positive result ahead of the fresh elections on June 17th. Yet another Greek election is a distinct possibility.
The chances of a messy ending to the Greek saga remain very high. Even if a pro-austerity, pro-bailout coalition does emerge out of this month’s elections, they will still have to find a way to deliver the major reforms and deficit reduction that the country’s €130bn bailout agreement requires – no mean feat. The EU Commission has recently reminded Greece that its bailout payments remain highly contingent but whoever wins this month’s elections, you can expect some desperate efforts to have the bailout terms relaxed to a significant degree.
Spain rings alarm bells
Greek concerns, though likely to return to the fore as the elections draw closer, have been put on the back burner for the time-being. True to form, another struggling eurozone nation has stepped up to fill the void – Spain, or more specifically, Spain’s banking sector. Bankia, Spain’s fourth-largest bank, requires €19bn worth of recapitalisation and it is becoming more and more apparent that Spain will need help to shore up its banking sector as a whole. The issue is having a significant impact on Spain’s government borrowing costs, with 10-year bond yields climbing dangerously towards the unsustainable 7.0% level.
As ever with this debt crisis, market fears build so much that they tend to become a self-fulfilling prophecy. In short, Spain is in very serious trouble and its government has admitted as much – requesting EU help with bank capitalisation. This is no minor development given that Spain is the eurozone’s fourth-largest economy and emergency help for Spain will inevitably turn the market’s gaze towards the third-largest – Italy.
UK economy still looks frail
The UK economy is looking particularly downbeat at present, having been hit with the confirmation that it is firmly in double-dip recession territory. Unsurprisingly, consumer confidence has taken a sharp downturn and weakness in UK growth figures has become alarmingly consistent. The last update from the UK labour market was a little more encouraging but we will need to see more than one good month before hoping for sustained improvements.
Amid all of this bad domestic economic news, as well as the grave threats posed by the eurozone debt crisis, it might be assumed that more quantitative easing is bound to be introduced by the Bank of England in order to drag the UK out of recession. Certainly the IMF has made its views known on the issue, encouraging the BoE to act soon to safeguard the UK economy.
However, the noises out of the MPC have not suggested that such a move is imminent, despite the recent sharp decline UK inflation from 3.5% to 3.0%. A key reason for this is that the BoE sees UK inflation in the medium term as equally likely to exceed its 2.0% target as undershoot it. In addition, Spencer Dale has recently stressed the argument that the recent quantitative easing doses are still feeding through to provide stimulus and that a further round is not appropriate at present. This position is supported by the recent improvement in UK money growth.
With only one MPC policymaker voting in favour of QE at the MPC’s May meeting, in the form of David Miles, there is plenty of dovish recruitment to be done in the coming months if the BoE is to pull the trigger again on further monetary easing. Sterling seems safe in this regard for June at least, though eurozone risks could feasibly escalate sufficiently to prompt BoE action in July or August.
Euro to weaken further
So, despite the UK economy sitting uncomfortably in a double-dip recession and facing a prolonged period of stagnant growth and ultra-low interest rates, sterling looks free to continue taking advantage of an increasingly euro-negative environment. Some major steps towards EU fiscal union will be required to ease market sentiment, and the obstacles to this are all too clear.
Sterling/euro hit heights of €1.2575 in mid-May but has come off those highs to the current level of €1.24. We envisage further gains for the relative safe-haven pound in June, with the Greek elections and rising Spanish bond yields providing plenty of motivation to exit the euro. €1.26 is a realistic target in the coming few weeks.
GBP/USD
Whilst sterling has enjoyed something of an easy ride against the troubled euro, against the US dollar it has been an altogether different story. Again, market uncertainty best explains the US dollar’s stellar performance in May. It’s fair to say that the market is in a state of panic at the moment, concerned with a ‘Grexit’ and most recently a ‘Spexit.’ Amid such monster question marks, there has been widespread flight to the safest assets such as the US dollar. Sterling may be markedly a safer alternative to the single currency, but its safe-haven status cannot compare with that of the greenback.
The rug has finally been pulled from underneath the EUR/USD pair. The scale of the eurozone’s current problems is now being reflected in the price of the euro; EUR/USD has declined by over 5.0% from $1.3150 to $1.25 in the space of just one month. We do see the EUR/USD pair considerably lower in the coming months, which will inevitably weigh on the GBP/USD pair.
The US dollar is not without its own domestic economic concerns, with recent data confirming that the US economy grew at an annualised pace of 1.9% in Q1, down from the initial estimate of 2.2% and well down from Q4 2011’s 3.0% pace of growth. Progress in the US labour market has also slowed right down, which has once again seen speculation that the US Federal Reserve will introduce QE3 step up a gear. Whilst the US economy is stalling as we enter the summer, it is still firmly in recovery mode. We continue to hold the view that the Fed will want to gather more evidence about the US recovery’s direction before pulling the trigger on more quantitative easing, so we view the current QE3 concerns as over-hyped.
Safe-haven dollar to outperform
Sterling has recently revisited January’s lows below $1.53, having suffered a 6.5% drop against the US dollar in the space of just four and a half weeks. Sterling has finally bounced against the US dollar and is currently trading at $1.55, but we think this will prove temporary. A consolidation period was always likely after such a steep drop, but we should see lower levels tested once this current bout of profit-taking on the dollar’s recent rally has run its course. Lower levels in the $1.51-1.52 area could well be seen in June as the negative eurozone headlines once again take their toll.
Caxton FX one month forecast:
GBP / EUR : 1.26
GBP / USD : 1.5150
EUR / USD : 1.2050
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 1 June 2012
Sterling/Euro June Report
Sterling has continued to rally against the euro in recent weeks, as conditions in the eurozone go from bad to worse. Uncertainty, as ever, is the buzz word. The pro-bailout New Democracy Party has edged ahead in the Greek opinion polls in the past week or so, which has lifted market hopes that the country can receive the additional funding it needs and remain ‘safely’ within the eurozone. But there is plenty more debate to be had in Greece and few will be truly confident of a positive result ahead of the fresh elections on June 17th.
The chances of a messy ending to the Greek saga remain very high. Even if a pro-austerity, pro-bailout coalition does emerge out of this month’s elections, they will still have to find a way to deliver the major reforms and deficit reduction that the country’s €130bn bailout agreement requires. The EU Commission reminded Greece earlier this week that its bailout payments remain highly contingent but whoever wins this month’s elections, you can expect some desperate efforts to have the bailout terms relaxed to a significant degree.
Greek concerns, though likely to return to the fore as the elections draw closer, have been put on the back burner for the time-being. True to form, another struggling eurozone nation has stepped up to fill the void – Spain, or more specifically, Spain’s banking sector. Bankia, Spain’s fourth-largest bank, requires €19bn worth of recapitalisation and it is becoming more and more apparent that Spain will need help to shore up its banking sector. The issue is having a significant impact on Spain’s government borrowing costs, with 10-year bond yields climbing dangerously towards the unsustainable 7.0% level. As ever with this debt crisis, market fears build so much they become a self-fulfilling prophecy. In short, Spain is in very serious trouble and may have to seek external help, which is no small issue given it is the eurozone’s fourth-largest economy and will inevitably turn the market’s gaze towards the third-largest – Italy.
The UK economy is looking particularly downbeat at present, having been hit with the confirmation that it is firmly in double-dip recession territory. Unsurprisingly, consumer confidence has taken a sharp downturn. April’s growth data from the services and manufacturing sectors was poor and a gauge of UK retail sales showed the worst figure in almost four years. The last update from the UK labour market was a little more encouraging but we will need to see more than one good month before hoping for sustained improvements.
Amid all of this bad domestic economic news, as well as the grave threats posed by the eurozone debt crisis, it might be assumed that more quantitative easing is bound to be introduced by the Bank of England in order to drag the UK out of recession. Certainly the IMF has made its views known on the issue, encouraging the BoE to act soon to safeguard the UK economy.
However, the noises out of the MPC have not suggested that such a move is imminent, despite the recent sharp decline UK inflation from 3.5% to 3.0%. A key reason for this is that the BoE sees UK inflation in the medium term as equally likely to exceed its 2.0% target as undershoot it. In addition, Spencer Dale has recently stressed the argument that the recent quantitative easing doses are still feeding through to provide stimulus and that a further round is not appropriate at present. This position is supported by the recent improvement in UK money growth.
With only one MPC policymaker voting in favour of QE at the MPC’s May meeting, in the form of David Miles, there is plenty of dovish recruitment to be done in the coming months if the BoE is to pull the trigger again on further monetary easing. Sterling seems safe in this regard for June at least, though eurozone risks could feasibly escalate sufficiently to prompt BoE action in July or August.
So, despite the UK economy sitting uncomfortably in a double-dip recession and facing a prolonged period of period of stagnant growth and ultra-low interest rates, sterling looks free to continue taking advantage of an increasingly euro-negative environment. Sterling/Euro climbed a further two cents in May, leaving this pair with gains over 4.0% in the past two months. We envisage further gains for the relative safe-haven pound in June, with the Greek elections and rising Spanish bond yields providing plenty of motivation to exit 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.
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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