Caxton FX Currency Blog

Richard Driver, Analyst Happy New Year! The team here at Caxton FX would like to wish you the very best of luck for 2012, we hope the exchange rates go your way! The outlook for early 2012 remains unchanged as far as we are concerned, we continue to favour safer currencies in anticipation of further alarm bells from the eurozone. The week ahead brings the monthly growth updates from the UK construction and services sectors, in addition to this morning’s improved UK manufacturing figure. Expectations are not high, but sterling has been fairly resistant to poor data in recent weeks.
STERLING/EURO: Sterling continues to trade at the lofty heights of €1.20, as investors turn the heads towards a tough start to the year for the euro. Key events this month are a Jan 9th meeting between Mekrel and Sarkozy which is likely to focus on budget discipline rules, and an EU Summit on Jan 23rd. The threat of wide scale debt downgrades throughout the eurozone will continue to weigh on appetite for the single currency until major progress is reached. UK debt has found favour in recent months, as investors look for alternatives to risky European bonds. However, if UK growth continues to deteriorate, it could lose its AAA credit rating and this pillar of sterling-support will be removed. It is crucial that the UK maintains its AAA credit rating. How likely this is depends on growth figures like this morning’s monthly manufacturing update. Sterling actually benefited from a welcome upside surprise, though the sector still remains marginally in contraction.	FORECAST
STERLING/US DOLLAR: The dollar has made a poor start to the week as some positive news emerged out of the global growth story. Chinese manufacturing improved significantly last month, and data this afternoon is expected to show that US growth did the same. US figures have been on a clear uptrend in recent weeks, but other giants such as China will have to follow suit if market confidence in the global recovery is going to make a truly sustained resurgence. Sterling is trading at $1.5550, a weak level that reflects the ongoing demand for the safe-haven US dollar.	FORECAST
EURO/US DOLLAR: The euro is trading at a 12-month low against the US dollar and we are betting on further declines. The eurozone’s high debt and low growth dynamics should see the US dollar make further gains over a vulnerable-looking euro. For today though, the euro may benefit from gains in European stocks. The FTSE 100 is already up by over 1.0%, and with US manufacturing growth expected to tick up this afternoon, euro losses may be avoided for today. Eurozone bond yields are still being watched carefully, Italy remains close to the dreaded 7.0% mark, though the pressure on Spanish debt has eased somewhat for the time being. The euro is trading at $1.30 this morning.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling is posting losses against the aussie dollar amid strong gains in Asian stocks. The improved Chinese manufacturing growth headline is complimenting an already upbeat mood in Asia, from which the aussie dollar is naturally benefitting. There is some early positivity in the market at present, but this is likely to be short-lived. Sterling is trading at 1.51, and there is some further downside potential until some key support levels kick in at 1.50. Beyond this, we could well see sterling head significantly higher.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is suffering a downward correction against the kiwi dollar, but a return to levels well above 2.00 should come this month.    The positivity surrounding the Chinese manufacturing figure has fed into demand for the kiwi dollar as well. However, nerves over the eurozone debt situation will surely come back to haunt riskier currencies, and will continue to do so for at least the first half of this year. With this in mind, we see sterling heading back up above the 2.00 mark before long. For today though, sterling is trading down at 1.98 and this rally in risk could have some more legs by the look of European equities this morning.	FORECAST
STERLING/CANADIAN DOLLAR: This pair is still under pressure as sentiment towards the US economy continues to warm up to the benefit of the loonie. A good start to the year for risk appetite sees the Canadian dollar on the front foot against safer currencies like the pound. If US manufacturing data shows the improvements that are expected, we should see the loonie make further advances. Sterling is trading down at 1.58 this morning, which is not too far off a three month low. Oil prices are also making hefty gains, brent is up at $110 per barrel. This pair may head lower today.	FORECAST