Will the Reserve Bank of Australia cut interest rates in December?

We expected the Reserve Bank of Australia to cut interest rates at the start of November but Governor Stevens & Co decided to stay put with the 3.25% base rate. In our defence, this was pretty close to a 50:50 call. We still view the RBA as more likely than not to cut the rate by 0.25% in the early hours of next 

Tuesday morning (December 4^th). Of course, there are still clearly risks of another non-event, but in the last few days, the market appears to have come around to our way of thinking.

The minutes from the last RBA meeting were noticeably dovish, despite electing not to cut the interest rate, as indicated by the phrase “members considered that further easing may be appropriate in the period ahead.”

There have been mixed signs in terms of aussie data in the past month. Wage price growth data slowed right down, as did consumer inflation expectations, which both point to monetary easing. However, China’s manufacturing sector grew for the first in 13 months, which has made things a little more complicated.

The slowdown within the recent quarterly private capital expenditure figure has once again strengthened the case for a rate cut, as has this morning’s weak Australian private sector credit data. The decision last time was a close call; these figures should have tipped the balance in favour of a cut.

The peak in the mining boom is fast approaching, while the aussie government remains committed to fiscal tightening. The Australian economy should be in for an early Christmas present next week!

Richard Driver

Currency Analyst 

Caxton FX

Weekly round-up: Greek talks in focus

Markets are nervy ahead of Greek talks

There is a distinctive air of déjà-vu surrounding today’s meeting of the eurozone finance ministers, who for the third meeting in the space of two weeks are grappling with the IMF over Greece’s debt-reduction package, which should unlock the country’s next aid tranche. Talk has emerged this morning that a deal could be delayed until December 3, which would surely weaken the euro. There has been plenty of comment today from eurozone officials, from assertions that a deal today is “probable” to the less convincing “fully possible.” If an agreement does emerge, we expect the euro to benefit further but as it stands the situation remains highly uncertain.

Market confidence that EU officials will do what is necessary to avert a Greek disaster has helped the euro in the past week. Eurozone growth figures were also improved last week, whilst a key gauge of German business climate also impressed and lifted sentiment towards the single currency.

The weekend brought some mixed news from Spain, where in the Catalonian regional elections the separatist parties won but none failed to secure a majority. On balance, PM Rajoy will be relieved that Catalan President Mas’ party failed to secure the mandate to drive for a referendum on independence in the near-term, though with so much support for independence across separatist parties, the story will drag on.

US dollar hurt by positive headlines from across the world

As well as broadly encouraging news from the eurozone (Spain aside), there has been plenty to cheer about globally. A ceasefire in Israel has relieved geopolitical tensions, while the latest positive figures from the US and China have also improved trading conditions. This has seen global equities rally, an environment in which the greenback never trades positively.

The market will surely refocus on the issue of the US fiscal cliff once we can put the Greek negotiations behind us. The latest reports from the fiscal cliff talks have not been positive, so the uncertainty related to this is likely to be the trigger if the USD is to bounce back before the end of the year.   

GBP out of favour as fears of a UK ratings downgrade build

Last week’s public sector net borrowing figure was very disappointing. This, combined with ongoing indications from members of the MPC that we can expect a weak end to the year in terms of GDP, has sparked speculation that the UK’s prized AAA credit rating could fall foul of a cut from the likes of Moody’s. Much of sterling’ demand is down to its safe-haven profile, which is reliant on the UK’s top credit rating. However, the UK deficit is growing, despite ongoing austerity measures and UK growth remains extremely flimsy. Tuesday’s revised UK GDP number for Q3 will be closely watched.

There has been some rather better news for sterling in the form of the MPC minutes, which revealed only one policymaker voted in favour of more QE, whilst a cut to the BoE’s 0.5% base rate was viewed as unlikely in the foreseeable future.

End of week forecast

GBP / EUR	1.2300
GBP / USD	1.6050
EUR / USD	1.3050
GBP / AUD	1.5225

At €1.2350, GBP/EUR is trading at one-month low and we could see further weakness in the short-term. Losses should be limited to around a further cent however. Longer term, we remain confident of a bounce. Sterling has regained the $1.60 level but we do still favour the US dollar moving forward and would view the current level as a strong opportunity to sell the pound.

Why is the South African Rand so weak?

The rand has been on a downtrend for a while now; it was overvalued for a start but political uncertainty has really triggered quite an aggressive depreciation in recent months. Uprisings have sprung up across the country, with the death toll reaching fifty. Mineworkers are particularly prominent within the uprisings, with demands for wage increases the key driver of national anger.

President Zuma is under huge amounts of pressure and will struggle to be re-elected; latest approval rating suggests only 32% support the man in charge. Zuma has given himself a 5.5% pay increase recently – so it’s no surprise that he is under the cosh.

Naturally, this has limited the productivity of the country’s key economic growth contributors, such as its iron ore, platinum, trucking, wine and fruit industries. This is having a material impact on South African growth, GDP expectations have been repeatedly downgraded by the South African Reserve Bank. The outlook is pretty bleak too, with inflation high, unemployment likely to rise and global demand for South African exports likely to decline (particularly from the eurozone).

Unsurprisingly, investor confidence has taken a major hit; the use of armoured vehicles, rubber bullets and tear gas is not conducive to rampant commerce. With investors making for the exit, the rand has plumbed fresh multi-year lows across the exchange rates and with no real sign of the social and political unrest easing up, the rand is likely to remain on its downtrend for at least the next six months to a year. 

Richard Driver

Currency Analyst 

Caxton FX

King's "gloomy" outlook for UK growth hurts sterling

Sterling has had a tough session today on the back of this morning’s Bank of England Quarterly Inflation Report and subsequent press conference with Governor Mervyn King. King and his MPC colleagues were surprisingly pessimistic with respect to near-term UK growth. 

The Q3 UK GDP figure was very impressive - driven by temporary factors like Olympics - but it has been disappointing to see Mervyn King admit today that GDP is likely to contract again in Q4. We knew it would be weaker, significantly so, but we weren't expecting contraction. Beyond this and looking at next year, he expects growth to remain very sluggish, though he does foresee a gradual recovery. Unsurprisingly, the BoE views the eurozone downturn to be the biggest threat to UK growth.  

He does see UK inflation heading higher, which you might think would be positive for the pound given that it would make the Bank of England less inclined to add to its quantitative easing programme. However, when paired with weak growth, market nerves are jangling with respect to the dreaded ‘stagflation’ scenario. 

King said that he “has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.” This is hardly music to the markets ears and explains to a large degree why sterling has had such a rough session, more QE is not officially off the table as a policy option. However, we remain sceptical that we will see any more QE, at least in the coming months. What the market may have overlooked was King’s warning of the limits to what monetary policy can do to spur growth. We place more weight on this and accordingly, we see GBP/EUR recouping today's lost ground. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD.

GBP/EUR recovers the €1.25 level and should head higher

This week’s quarterly inflation report will be very closely watched for an insight into where the MPC is standing with respect to the option of introducing further quantitative easing. Much to the relief of the pound, the committee declined the opportunity to take this measure at its monthly meeting last week. The UK services growth figure for October was disappointing and triggered some speculation that the BoE would take a safety-first approach, but it seems they placed greater weight on the recent positive Q3 UK GDP figure (1.0%).

We think the MPC will be too concerned with upside risks to inflation (which should be highlighted by a tick higher in Tuesday’s monthly CPI figure), backed by an underlying faith that the UK economy is genuinely in recovery mode now. More clarity on this issue will be provided by this week’s major UK data releases; Wednesday brings what is likely to be yet another positive UK labour update, while Thursday’s retail sales figure may provide a little more cause for concern.

A retreat in BoE QE bets has helped sterling to regain a grip on the €1.25 level in recent sessions. Whilst this rate has headed lower than we expected in the aftermath of the ECB’s bond-buying pledge and subsequent period of market relief, we do maintain significantly higher targets for sterling over the coming weeks and months.

US fiscal cliff worries underline positive US dollar outlook

The fiscal cliff issue is really weighing on market sentiment at present. The recent elections maintained the political status quo in the US, which means we are no closer to breaking the deadlock that could deal a major blow to the global economy. Combined with nervousness surrounding Greece and the risks of default, the fiscal cliff issue has boosted the safe-haven US dollar, helping it to rally against both the euro and the dollar in recent sessions. We expect sterling’s downtrend against the greenback to persist in the coming weeks.

Eurozone growth and Greece combine to weaken the euro

The flow of below-par eurozone growth data has been ominously steady this month. Germany appears to be in some real trouble, which is likely to once again be highlighted by Tuesday’s key German economic sentiment survey. Thursday brings a whole raft of eurozone GDP data, which will further highlight the downturn seen in France and Germany in the third quarter, as well as revealing another quarterly contraction for the currency bloc as a whole.

Weak eurozone growth has been put to the bottom of the agenda throughout this year but it is definitely starting to hurt the single currency now, particularly with Germany seemingly being dragged into the quagmire.

Greece is the key eurozone issue hurting the euro at present. We have had some relieving developments in the past week with Greece’s parliament approving major austerity measures as well as more belt-tightening within PM Samaras’ budget for next year.  However, there is still a distinct air of uncertainty in the financial markets over the country’s debt situation and its future within the euro. Realistically, it will take the release of the next €31.5 aid tranche to really ease investor concerns of an imminent disaster. A bond repayment is due on Friday, one which Greece cannot at present afford, so market tensions will remain elevated in the coming sessions.

End of week forecast

GBP / EUR	1.2550
GBP / USD	1.5800
EUR / USD	1.26
GBP / AUD	1.5150

Richard Driver
Currency Analyst
CaxtonFX

Reserve Bank of Australia cuts growth prospects

The news as far as the aussie dollar has been concerned this week has been remarkably positive. We have to hold our hands up and say that we were expecting the RBA to cut its 3.25% interest rate again at its meeting this week, though we did warn that it was an incredibly close call. On top of this, data revealed that 10.7 thousand jobs were added to the Australian labour market, which was away ahead of expectation. The aussie unemployment rate also unexpectedly remained 5.4%.

What followed all this was last night’s RBA monetary policy statement. In it, the RBA warned that the aussie mining boom will peak earlier and at a lower level than has previously been thought. It was previously thought that the mining boom would peak at 9.0% of GDP, expectations are that it will now peak at 8.0%. The central bank also complained further about the strength of the Australian dollar (change the record!)and proceeded to downgrade aussie GDP projections for this year from around 3.00% to around 2.75%, though admittedly we might have expected this downgrade to be more drastic.

The RBA stated that the current interest rate is appropriate and that past rate cuts are still filtering through and benefiting the Australian economy. The statement also sounded confident that the Chinese economy has stabilised, anticipating a gradual recovery in growth from here.

We suspect that Governor Stevens may be getting ahead of himself with respect to Chinese growth and Australian growth. While this week’s strong aussie jobs data may see the RBA delay a rate cut in December, we’d be surprised if we had to wait past January for another cut. 

Richard Driver,

Currency Analyst

Caxton FX

Sterling rallies on BoE's "no QE" decision

The Bank of England has today decided against adding to its asset purchase facility (quantitative easing programme), which remains at £375 billion. The result has been some further support for the pound, so cleary there were some lingering suspicions that the MPC doves would do enough to persuade a majority to vote in favour of QE. The BoE base rate also remains at 0.50%, though this was universally expected.

Despite disappointing updates from the UK services and manufacturing sectors in the past week, the MPC was always likely to hold fire on the issue of further QE this month. The UK GDP figure for Q3 would have firmed up several MPC members’ positions and from the comments emanating from the committee, several members doubt not only the need for further QE but the capacity of the measure to actually make a material impact. In addition the BoE thinks that the 2.0% inflation target will be hit regardless of more QE, due to persistently high inflation.

Whether or not the BoE will decide that further QE is necessary in the coming months really depends on whether the recovery that was indicated in Q3 materialises. QE should be seen as an emergency measure and UK data has revealed a slight uptrend of late, so it really wasn’t necessary in the absence of any fresh shockwaves. If the debt crisis or the eurozone downturn drags the UK back into a triple-dip recession then there is little doubt that the BoE will once again come to the rescue. As it stands though, its case of wait and see how this recovery progresses. 

Richard Driver

Currency Analyst

Caxton FX

Weak growth outlook hurting the euro today

How quickly the market has moved on from President Obama’s re-election! Focus is back squarely on the eurozone and sterling has enjoyed another nudge higher against the euro as the latter has been sold-off quite aggressively.

What’s behind this fresh euro-weakness? German industrial production data for the month of September has come in at an alarming -1.8% this morning, which represents a five-month low. To make things worse, eurozone retail sales data also revealed an unexpected contraction this morning.

The EU Commission has also added extra weight to the single currency, by releasing pessimistic growth forecasts for the eurozone.  It sees eurozone GDP shrinking by 0.4% this year, before growing by just 0.1% next year. Greece is to contract by a staggering 6.0% this year and by another 4.2% next year. EU Commissioner Rehn sounded distinctly downbeat in his press conference today, citing tightening credit conditions and weakening demand.

GBP/EUR climbed to a five-week high of €1.2530, whilst EUR/USD fell to nearly a two-month low of $1.2735. We have been citing downside risks to the euro on the basis of the eurozone’s dire economic outlook for some time now. The increasing evidence of Germany’s decline is making the market stand up and take notice. Watch out for tonight’s Greek austerity vote, as the euro could get some relief if, as it should do (though only just), the Greek parliament approves the latest austerity proposals. 

Richard Driver,

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX