2013 set to be another good year for the Norwegian Krone

The Norwegian krone was among the very top performing currencies in 2012 and the currency has started 2013 in similar style. The NOK has spent January making hefty gains against the USD and GBP, though has given away some ground to the EUR, which has rallied across the board in recent weeks.

The Norwegian economy certainly still looks set to warrant plenty of investment in 2013. With a budget surplus of 15% of GDP in 2012, the largest of any AAA nation, Norway is a shining example of fiscal discipline against a backdrop of soaring global debt levels. Norway’s debt is as safe from default as can be.

The country’s booming oil and gas sectors will continue to support Norwegian growth levels this year, while rising employment and wage growth will also contribute to progress. That said, the latest unemployment update from Norway showed a surprise rise to 3.5% but this is likely to be a mere blip. The Norwegian manufacturing sector has suffered as a result of waning external demand (from the eurozone) and a strong currency but rising investment in the oil sector will more than compensate for this. Norwegian GDP could be as high as 3.0% this year, which would surely be the strongest among the G10 economies.

In terms of the Norges Bank’s monetary policy, firm Norwegian growth over the past year has not translated into higher interest rates thanks to very subdued inflation levels and a strong currency. Norges Bank Governor Olsen has expressed concern over rising household debt levels and rising house prices and there have been clear suggestions that a hike to the current 1.50% interest rate is on the horizon; we are expecting a hike to 1.75% in May. 

We expect the NOK to outperform GBP, USD, SEK and most probably the EUR this year.

Richard Driver
Currency Analyst
Caxton FX

Caxton FX Weekly Round-Up: GBP, EUR, USD

There’s no let up for sterling after weak GDP number 

Friday’s UK GDP figure for the final quarter of 2012 came in towards the
bottom end of expectations, revealing a 0.3% contraction. Understandably,
the triple-dip headlines have been in full flow. It wasn’t all bad news for
sterling last week though; the MPC minutes indicated that the BoE is not
looking to respond to last quarter’s weak growth with more QE. However,
recent comments from incoming BoE Governor Mark Carney suggest he may
be willing to shake things up in the summer. In addition, data confirmed that
the UK labour market added to its remarkable record of making strides amid
wider domestic economic weakness.

The minutes and positive UK unemployment data gave GBP only a very brief
respite before taking another dive lower. Sterling gets a bit of a break from
bad UK news over the coming few sessions, with only UK manufacturing PMI
catching the eye on Friday morning.

The pound seems to have lost a significant amount of its safe-haven status in
the recent weeks, with the market losing confidence in the UK government’s
ability to steer us through this crisis. The loss of the UK’s triple-A credit rating
looks almost certain in the coming months. Cameron’s pledge to hold a
referendum on the UK’s EU membership in late 2017 is a concern but is
unlikely to be a major weight on GBP given that it is almost five years and a
UK general election away.

US dollar firm ahead of Fed meeting 

Putting to one side the dollar’s weakness against the euro (which itself is very
much in favour), the greenback is actually performing very well across the
board. This is clear from GBP/USD’s collapse to a 5-month low below $1.57.  
We are not expecting major changes within the US Federal Reserve’s
statement on Wednesday night. The market may be disappointed to see a
lack of improvement to the Fed’s projections on US growth and
unemployment. This is likely to keep any possible amendments to the Fed’s
QE3 operations well and truly postponed until the second half of 2013, which
may be a comfort.

Wednesday will most likely see the advance US GDP figure confirm that the
US economy slowed down drastically in the final quarter of 2012, largely due
to the damaging effects of Hurricane Sandy. A slowdown from 3.1% to 1.3%
quarterly growth is expected. As ever, it is extremely tricky to predict how the
US dollar will respond to domestic economic events; whether good data will
strengthen the dollar by bringing forward expectations of an end to QE3 or
whether it will boosts risk appetite enough to weaken the dollar.
Sentiment towards the euro remains very positive indeed; officials by and
large (including Draghi, importantly) remain content with the euro’s strength
and refuse to be involved in the ‘currency wars.’ Meanwhile growth data
from Germany has made an excellent start to the year, with business climate,
economic sentiment and PMI growth figures all fuelling euro gains.

End of week forecast
GBP / EUR 1.1630
GBP / USD  1.5650
EUR / USD 1.3500
GBP / AUD  1.4900
 
Sterling is trading down below €1.17 and we are not calling a bottom on this
pair just yet.  A move towards €1.1650 looks likely in the near-term. As noted
above, the pound continues to look vulnerable against the greenback, while
the EUR/USD looks set to make an attempt at $1.35.

Richard Driver
Currency Analyst
Caxton FX

Bank of Canada deals the loonie a blow

The Bank of Canada is ahead of almost every other developed nation central bank in terms of when it expects to normalise monetary policy (raise interest rates). The fact that it is even discussing it is your first clue, as conversations within central banks such as the Bank of England, Reserve Bank of Australia, the European Central Bank and the Riskbank are slanted towards rate cuts, not rate hikes. If it’s not rate cuts, then it’s more QE from the likes of the US Federal Reserve and the Bank of Japan, whose base rates are already at rock bottom levels.

Last year’s Bank of Canada rhetoric pointed towards a rate hike this year. However, the slowdown seen in the US at the end of 2012 has contributed to softer growth in its northern neighbour. Canadian growth has consistently surprised the BoC to the downside in the past year, particularly in the second half of 2012. Governor Carney (BoE-bound this summer) & Co yesterday indicated that the Canadian economy will not be up to full capacity until the second half of next year, which is a major delay compared to the previous ‘late 2013’ projection. Combined with subdued inflation and ongoing concerns over household imbalances, this has led the BoC to communicate that a rate hike is by no means imminent. It estimates a rate hike at the end of this year but our bet is that it will come a later than that.

The loonie has taken a hit as a result of the BoC’s change of position. GBP/CAD climbed by more than a cent and a half up to 1.5850, where it currently trades. Meanwhile CAD/USD dipped by a cent to a level just below parity, which represents a two-month low. This is a bit of a knock to the loonie but we do expect the currency to outperform GBP in the coming months, with another move down to 1.55 very much on the cards. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Round-Up: UK GDP figure looms

Sterling continues to decline ahead of key UK GDP figure

We take no pleasure in reporting yet more bad news from the UK economy, which reported a 0.1% contraction in retail sales in December. There is unlikely to be much of a let-up for the pound, with Wednesday’s UK labour market not expected to provide much inspiration. Also released on Wednesday are the MPC minutes from the rate-setting committee’s meeting a fortnight ago. We are expecting David Miles to remain the lone dove in the MPC by voting for more QE. The other eight voters are likely to be convinced to keep their powder dry by persistently high inflation and further evidence of improved credit conditions due to the Funding for Lending Scheme. Weak growth figures may have convinced one or two to vote for QE however.

Sterling will struggle to benefit much from the minutes, with Friday’s UK GDP figure for Q4 2012 likely to be very disappointing indeed. The consensus market forecast rests at -0.2% but we are inclined to believe that a more significant contraction will be confirmed, with a -0.4% showing by no means beyond the realms of possibility. More bad news is in store for the pound in the short-term then. However, with sentiment so weak towards the UK economy now, we increasingly have to question just how much more damage bad data can do to the pound.

Indeed, broadly weak government borrowing and CBI industrial order expectations data have not left a mark on sterling today. As a result of the former figure, speculation has inevitably been boosted that the rating agencies are circling the UK’s triple-A credit rating. We must admit, a downgrade will surely be dealt in the coming weeks. What is not certain is how much this would affect the pound; the UK has never suffered a rating downgrade and as such we are in uncharted territory. We know from the example of the US downgrade last summer that the dollar emerged unscathed, but this may not necessarily be true of the pound.

News from Europe generally positive though concerns still linger

We have seen a very impressive German economic sentiment survey emerge today, which has given the euro further support. However, the accompanying press release points to only moderate economic growth from Germany in 2013 and we certainly don’t have high hopes for much more than 0.3% GDP growth as waning demand from eurozone partners continues to bite Germany’s exporters.

Thursday morning brings the monthly installment of eurozone PMI growth figures. Markit - the compilers of the PMI surveys - has claimed that the “worst is over” with respect to eurozone growth and expectations are for modest improvements across the board, though the indicators remain deep in recession territory.

End of week forecast

GBP / EUR	1.1800
GBP / USD	1.5770
EUR / USD	1.3400
GBP / AUD	1.4900

Sterling has regained the €1.19 level this morning but we doubt the market is done with the downside yet. The 85p EUR/GBP level remains very much in sight, which amounts to €1.1765.

Sterling is looking equally vulnerable against the US dollar, having fallen through some key levels. $1.5770 is the next big support level for GBP/USD. Arguably, the best sterling can hope for is that the market sees fit to take profit on betting against it of late, fearful of an upside surprise within Friday’s UK GDP figure.

Richard Driver

Currency Analyst

Caxton FX

UK retail sales deals another shocking blow to the pound

If there were ever any lingering hopes that the UK economy avoided a contraction in Q4 2012, this morning’s awful UK retail sales figure should have done enough to put them to bed. The figures confirmed that retail sales actually contracted in December (December!) by 0.1%, instead of the meagre 0.2% growth that was expected. This means that over Q4 as a whole, retail sales contracted by a whopping 0.6%.

It doesn’t come as much of a surprise that online sales still did well over December, while there was plenty of demand for fuel, while clothing sales at least avoided a drop. However, food and household goods did very poorly indeed.

As a result, sterling has taken a pounding (excuse the pun) in recent sessions but today has been all about losses against the US dollar. Sterling has dropped below $1.59 today, which represents a two-month low.

With the UK GDP figure for Q4 likely to confirm negative growth next Friday (Jan 25), it’s hard to see where sterling is going to attract investment from in the near-term. That said, we still think that most of the weakness in the UK economy has been priced into the pound by now. Let’s just hope that the snowy weather passes quickly because the UK economy needs to be operating at full capacity to avoid another contraction in Q1 2013, which would leave the UK in a dreaded triple-dip recession. On a brighter note, reports from the high street suggest the January sales are going well – there is hope!

Richard Driver 

Currency Analyst 

Caxton FX

                                                                     

Caxton FX Weekly Update: GBP, EUR, USD

Draghi fuels a major euro rally

After some early weakness in the initial sessions of 2013, the euro has made some staggeringly strong gains in the past few days. ECB President Draghi is primarily responsible for the move, quashing speculation that the central bank will elect to cut interest rates again in the coming months. The ECB was unanimous in its vote against a rate cut, a measure that was hinted at in its December meeting.

Draghi celebrated the easing of pressures in the eurozone financial system and whilst noting further likely weakness in the region’s economy well into the first half of 2013, Draghi did predict calming conditions would result in an upturn in growth later on in the year. IMF Chief Christine Lagarde lent the euro some further support by corroborating this view this morning.

In the short-term though, eurozone growth data is likely to remain weak. Only this morning we have had confirmation of an unexpected contraction of industrial production in the region. However, unfortunately for the GBP/EUR pair, the euro is not responding to weak eurozone figures at the moment. The same cannot be said of sterling’s relationship to UK data.

More doom and gloom for the UK economy

The UK economy is about as dark and gloomy as its weather at present. Last week brought yet more evidence that the UK economy contracted (the latest estimate is a 0.3% contraction). The week ahead is likely to confirm that UK inflation remained at 2.7% last month, while Christmas spending should produce an improved UK retail sales figure on Friday.

Nonetheless, sterling is likely to remain out of favour until after the Q4 UK GDP figure is announced on Jan 25 but if the current snowy weather continues, a bounce back into positive growth territory may be delayed until later on in Q1.

Market hoping for clarity on QE3 this evening

There has been no shortage of indications that within the Fed there is plenty of support for discontinuing the central bank’s QE3 operations. The hawks have had their say but Bernanke falls within the dovish camp and it would be no surprise to see him adopt his customary cautious stance and fail to signal an end to QE3 in 2013. This would not be good for the US dollar in the short-term but expect plenty of volatility overnight either way, as the market hangs on the Fed Chairman’s every word.

There is plenty of significant US economic data out this week, which will be relevant to QE3 expectations. It’s a full calendar including consumer sentiment, employment, housing, manufacturing and retail sales data. This will need to be solid if the US dollar is to bounce back in the short-term.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.61
EUR / USD	1.3450
GBP / AUD	1.5350

Sterling is trading at a rather alarming (depending on your interests) nine-month low of €1.2025. We maintain a positive outlook for GBP/EUR as a whole but we did note downside risks in January, though admittedly we did not anticipate such a drastic downside move.

Sterling continues to tread water above the $1.60 level and may continue to do so for a little while longer, though by the end of Q1 2013 we do see this pair well below $1.60. For now, this pair trades half a cent above this psychological threshold.

Richard Driver

Currency Analyst

Caxton FX

The Outlook for Sterling in 2013

Caxton FX is anticipating GBP/EUR to bounce back from its recent weakness and finish 2013 closer to the €1.30 level. Meanwhile, our projections for GBP/USD are far more pessimistic; we expect the rate to make a sustained move below $1.60, finishing the year near the $1.50 benchmark.  

GBP/EUR

Tensions in the eurozone have eased in recent months but so many of the region’s fundamental problems remain unresolved. Accordingly, we expect GBP/EUR’s longer-term recovery to be resumed over the course 2013.

The UK’S stuttering economy is the key factor holding the pound back at present. Another quarterly contraction is likely to be confirmed on Jan 25, which will intensify market nerves with respect to a possible triple-dip recession and a probable loss of the UK’s prized AAA credit rating. Despite what is likely to be minimal economic growth this year, we are not expecting the Bank of England to engage in further quantitative easing, which should be supportive of the pound.

Growth in the eurozone is even weaker and we expect the region to remain in recession for a while longer yet. We expect bond market pressures to ramp up again and Spain to be forced into a bailout request, while Greece will almost certainly return to the headlines. This year’s elections in Italy and Germany also pose significant risks to the euro.  

With UK economic data so weak, GBP/EUR faces significant short-term risks. However, we expect GBP/EUR to regain the €1.25 level by the middle of the year, before finishing 2013 closer to €1.30.

GBP/USD

We believe sterling is over-valued against the US dollar. The US economy is still enjoying moderate expansion in a low-growth global economy, to which the US Federal Reserve looks set to respond by ending its QE3 programme in the second half of the year. As the two dominant global currencies, our projections for a weaker EUR in 2013 dictate a firmer outlook for the greenback.

Weak global growth and the absence of a resolution to the debt problems in the US and the eurozone should maintain plenty of safe-haven demand for the USD this year. The Bank of Japan and the Swiss National Bank are engaged in currency intervention to weaken the JPY and CHF, so the USD will continue to enjoy status as the prime safe-haven currency of choice.

GBP/USD is not too far away from its recent 16-month highs of $1.63 at present but we expect this pair to spend most of this year below the $1.60 benchmark. A return to last year’s levels around $1.55 looks probable with significant risks of a move as low as $1.52. 

Weekly Summary: Dollar on the up

US dollar makes a strong start to 2013

The US dollar made a horrible finish to 2012 but the currency has enjoyed a resurgence in the first few sessions of 2013. The Fed has given the greenback a much needed helping hand by indicating that it has limits in sight with respect to QE3. The Fed is very unlikely to conclude its QE3 operations in the first half of this year but a 2013 finish is very much on the cards, which is all good news for the USD.

The US fiscal cliff was averted by Congress last week and this sent global equities soaring, though the response in the foreign exchange markets was markedly more cautious. The dollar seems to be benefiting from lingering nerves over the need for the US to once again raise its debt ceiling and the risk of another US debt downgrade. Also aiding the dollar was a large degree of profit-taking on the EUR/USD pair’s climb up to $1.33.

At $1.63, sterling was looking very expensive at the turn of the year and has indeed been pulled back down to the $1.60 area by this recent dollar rally. Support at this level appears to be pretty robust however, which may give this pair some more time above the threshold (though we still believe it to be “borrowed”). However, we do note significant risks of another downward slide.

UK growth data disappoints to weigh on GBP

It’s not been a very happy start of the year as far as UK economic figures are concerned. The UK manufacturing sector saw some unexpected growth in December, the most in nine months, but the news from the construction sector and in particular the services sector was much less positive. The worst contraction in the UK services sector since the middle of 2009 is likely to ensure a negative GDP figure for Q4 2012, which is announced on January 24. We are not expecting the UK economy to continue contracting throughout 2013, though make no mistake the prospects of a significant upturn are pretty bleak.

The Bank of England meets this Thursday (Jan 10) and despite growth concerns we are expecting Mervyn King & Co to opt against the option of another dose of quantitative easing. Growing signs of success within the BoE/Government’s Funding for Lending Scheme, whereby bank lending is incentivized, are likely to be sufficient for most MPC members to hold fire on their QE votes.

End of week forecast

GBP / EUR	1.2350
GBP / USD	1.6050
EUR / USD	1.30
GBP / AUD	1.5350

Sterling is still at a very respectable rate against the US dollar and exchanging at current levels is still a decent result. Against the euro, this is far less the case. Yes, the rate has bounced off its 8-month lows around €1.2150, but it is still hard to view these levels of €1.23 as attractive to buy euros. We do maintain our outlook for a weaker euro this year, which should see a return to the €1.25 level, though we may well have to be patient amid such disappointing UK economic figures. For January trades, this may be close to as good as it gets with a poor UK GDP figure on the horizon.

Richard Driver
Currency Analyst
Caxton FX 

January Outlook: GBP/EUR/USD

The end of 2012 was characterised by euro strength and dollar weakness, with sterling’s performance falling somewhere in between. We have seen GBP/USD rally to fresh highs lately, while GBP/EUR has posted new multi-month lows. Whilst our central scenario is that we will see these two trends reversed over the course of 2013, we note significant short-term risks to sterling vis-à-vis the euro. A weak UK GDP figure for Q4 2012 or a loss of the UK’s AAA credit rating are likely to keep GBP/EUR below €1.25 in the coming weeks, which is significantly below where we see it trading by this time next year.

GBP/EUR

Sterling suffering from UK triple-dip fears

December’s growth data pointed to a disappointing slowdown in November, with the UK’s key services sector only narrowly avoiding a monthly contraction. We have been warned in no uncertain terms by the Bank of England that the UK economy could well have contracted in Q4 2012. The available figures do indeed point to this, even if it is likely to be only marginal. Still, talk of a triple-dip recession is hardly going to foster a mood of confidence towards the UK recovery.

Looking ahead, the near-term outlook for UK growth is likely to be flat, as the economy wrestles with ongoing weakness in demand from the eurozone. We are simply not seeing the rise in UK exports that is necessary and with the eurozone poised to continue contracting throughout the first half of this year, this problem is unlikely to be addressed.

Chancellor George Osborne’s Autumn Statement, delivered in December, told us that the UK government is sticking to its guns on fiscal consolidation, which is likely to continue constraining growth, though we agree that this approach is essential. However, weak growth in combination with Osborne’s failure to make progress on bringing down the country’s soaring debt levels are likely to convince at least one of the major credit rating agencies to downgrade the UK’s triple-A rating. This is a risk for sterling, though we are among those who are sceptical about just how much this would hurt the pound.

In terms of BoE monetary policy, we still only have one MPC member (David Miles) voting in favour of more quantitative easing. The vast majority of the voters appear content to allow the effects of the Funding for Lending scheme to continue feeding through and unless we see evidence of further significant economic weakness, we don’t expect any more QE until at least the second half of 2013. As such, this month’s BoE meeting should yield no major developments, though the release of the MPC minutes on Jan 23 will be as closely watched as ever.

Euro strong but fundamentals point to a decline

As far as the euro is concerned, we have to admit that we are surprised to report GBP/EUR’s recent decline to an eight-month low below €1.2150. Supporting the euro is the fact that Greece is out of the woods for the time being and eurozone tensions have eased accordingly. The key driver of the euro’s resilience, as ever, is the perpetual diversification of USD into EUR by Middle and Far Eastern central banks. 

Nonetheless, we continue to foresee a euro decline through 2013, led by declining economic fundamentals and ongoing eurozone risks. It goes without saying that a weaker euro would benefit the eurozone economy. However, using rhetoric to this effect was a rather dicey move for EU officials last year, amid concerns over the very existence of the euro. We should see greater opportunity for policymakers to take advantage of calmer markets and talk up the merits of a weaker euro this year, without highlighting any existential crisis on the part of the single currency.

In terms of what to look out for this year, elections in Germany and Italy stand out as risk events, as does the likelihood of a Spanish sovereign bailout request sooner rather than later. Fortunately for the euro, Germany doesn’t go to the polls for another nine months, while Greece will likely stay out of the headlines for time being. Longer-term, we do expect the eurozone’s problem child to continue missing its targets, whilst there is also a risk of a breakdown of the Greek coalition.

Political uncertainty in Italy poses one of the most significant risks to the euro in the short-term; elections are likely to be held in March. This should put Spanish bond yields under pressure, as would a Moody’s downgrade of Spanish debt to junk status, which is looking probable based on comments made by the rating agency last October.

Sterling has bounced off its multi-month lows in the €1.2150 region and is currently trading around €1.2350. We expect this pair to remain fairly stable around this level in January, before edging back up towards €1.25 in the coming months.

GBP/USD

US steps away from the fiscal cliff

2013 has kicked off with a bang thanks to the rather predictable eleventh hour deal to avoid the US fiscal cliff. The absence of such a deal would have seen highly damaging tax rises and spending cuts coming into the force on January 1. The US Congress has taken a leaf out of the eurozone’s book by effectively kicking the can down the road but fiscal tightening will nevertheless be a major feature of the US economy this year. The Congressional Budget Office is expecting the US economy to grow by around 2.0% in 2013, which factors in a 1.4% reduction due to spending cuts.

The fact is that nothing of any real substance has yet been decided on American fiscal reform. The next two months will be the subject of further fierce negotiations on what cuts are made and where. The dysfunction of the US political system over recent years almost guarantees a further headline grabbing crisis in the coming months. Indeed, Moody’s and Standard & Poor’s have ramped up the pressure by branding this week’s deal “insufficient.”

Where does this all leave the GBP/USD pair? Well, the dollar has performed remarkably poorly in recent weeks and sterling actually mustered the strength to rally to an impressive fifteen-month high of $1.6380 in early New Year trading. However, the dollar is showing some initial signs of a rebound with this pair having retreated by over two cents from the aforementioned high.

Buying USD above $1.60 remains attractive

Put simply, we have seen any level above $1.60 as a strong opportunity to buy USD for a while now, so current levels of $1.6150 still look highly attractive. We have to admit that this pair finished 2012 significantly higher than we expected, but we remain confident that the greenback will find its feet in 2013. Behind this is a belief that economic fundamentals will acquire a greater share of market focus this year. With the US economy easily outpacing its US and UK counterparts, even after the effects of fiscal consolidation are factored in; increased focus on economic performance should benefit the greenback. In the short-term though, January should provide some more shelf-life for this pair above $1.60.

One month direction:

GBP/EUR: €1.2375

GBP/USD: $1.61

EUR/USD: $1.30

Richard Driver

Currency Analyst

Caxton FX