Finally the Fed reduces stimulus, but this failed to spark much reaction

After months of speculation regarding the likely timing of tapering, it finally came, with the Fed withdrawing $10bn in stimulus which is set to begin next month. Although not many economists predicted such a move, the announcement failed to trigger any significant movement, and both equities and emerging markets weathered the storm quite well.

The Fed has successfully convinced the market that tapering should not be confused with a tightening of policy. An adjustment to forward guidance reinforced this point, with the bank stating that loose monetary policy will remain, even after unemployment has reached 6.5%. A mere $10bn reduction in stimulus is hardly substantial and this may be part of the reason why equity and emerging markets appear unmoved by the news.

The day that the markets had been dreading seemed almost like a non event. Some might argue that this is a positive thing. We witnessed the effects taper talk had on the emerging market currencies with the Indian Rupee being one of the worst victims of a selloff. This suggests that all the speculation and the delay between September and December prepared the markets well for what was coming, unlike last summer when the markets were caught off guard.

Sasha Nugent

Currency Analyst

Caxton FX

What is more important? Rate increases or price stability?

It has now become common knowledge that the UK recovery is taking hold, and the next hurdle for the economy is to ensure this recovery can be sustained. The BoE have outlined in their forward guidance, that unless any of the thresholds are breached, they will maintain their current dovish stance, and re-evaluate policy once the unemployment rate has reached 7%.

Since the introduction of forward guidance, the markets have had their eye on the inflation and unemployment rate looking for signs to gauge the BoE’s next policy move. The labour market has improved faster than projected and inflation has also eased more quickly towards the BoE’s target of 2%y/y. In situations where unemployment figures surprised the market to the upside, demand for sterling increased, strengthening the pound. When lower inflation numbers have been revealed, sterling has taken a hit, as this dampened investor’s expectations of a rate increase in 2015.

Despite criticism, it is looking more like the central bank will not be forced to raise interest rates. Loose monetary policy has helped to support the recovery which continues to gain traction, all whilst price pressures have eased, now only 0.1% away from the target. Domestic demand is likely to strengthen, resulting in an upward pressure on inflation, but for the time being the BoE now has more room to maintain a policy which seems to be working.

A few months ago the market believed that inflation would remain above target forcing the central bank to take action and raise interest rates. With inflation easing, the BoE is no longer under pressure to do so, and the market seems to be forgetting that despite the dampened expectations of a rate hike, inflation that is in line with the central bank’s target is a good thing. Yesterday CPI unexpectedly came in below expected at 2.1%y/y and this immediately resulted in sterling weakness. What we saw was the pound being penalised for inflation trending towards the central bank’s target.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Fed in Focus

Another week of vulnerability for sterling

Sterling looked less robust last week as a firmer euro managed to direct the rate below 1.19, and finally investors began to respond towards solid US data. This week, inflation and unemployment figures will be released and after comments from BoE member Weale regarding softer inflation, this figure will be watched carefully. Price pressures have eased significantly, and this has dampened expectations that the central bank will need to raise rates soon. Despite the pick-up in economic activity, lower inflation will allow the central bank to fulfil their commitment to maintain low interest rates in order to help absorb slack in the economy. Unemployment has been improving faster than the BoE has predicted and claimant count figures on Wednesday should also support the brighter labour market in the UK. The Bank of England will release the monetary policy minutes from their last meeting, and this should shed some more light on whether the MPC’s view about the UK has changed since the inflation report. Although it is unlikely that the MPC’s stance has changed dramatically, any significant comments here will most probably cause some volatility. Other figures such as retail sales and current account data may also offer sterling some support this week, however it will not be easy to rebound considering the heavy calendar for the eurozone and the Federal Reserve monetary policy meeting this week.

The euro bulls return

Today’s Eurozone PMI figures kick started a week packed with eurozone data. With the bullish euro investors managing to dictate trading in both EUR/USD and GBP/EUR, it doesn’t seem like things will be any different for sterling this week. The euro is still preventing the pound from driving the rate back up to 1.19 and we doubt the market will hesitate on putting more money into the euro if data provides upside surprise. It will most probably be more difficult for the euro to gain against the dollar despite some solid numbers. With the Federal Reserve’s monetary policy announcement on Wednesday, we may begin to see the single currency suffer at the hand of some investor repositioning just in case the Fed decide to surprise us with the beginning of tapering. There is more opportunity for the euro to gain against sterling this week, however if the Fed hold of tapering this month, this could provide the euro with another opportunity to drive the EUR/USD rate through 1.38.

All eyes on the Fed meeting

We are beginning to see signs that the market has begun to pay more attention to the more positive US figures we have seen of late. With the Federal Reserve monetary policy announcement only days away, US data will play an even more significant role in encouraging investors to reposition their portfolios towards the dollar. Although the case for a December taper has been building, many economists believe the Fed will begin to reduce stimulus in January. Therefore, if the Fed refrains from tapering this month, we doubt the market will respond by selling the dollar as aggressively as they did in September. It is likely that the greenback will experience some temporary weakness, however investors will eventually begin to prepare for a January taper. This is a fundamental week for the dollar and direction of both EUR/USD and GBP/USD hangs in the balance of the Federal Reserve announcement on Wednesday.

End of week forecast

GBP / EUR	1.1855
GBP / USD	1.6250
EUR / USD	1.3720
GBP / AUD	1.8350

Sasha Nugent

Currency Analyst

Caxton FX

The effects of a strong Aussie begin to show

For months now the RBA have highlighted their concern about a strong Australian dollar and we are now seeing the effect this is having on the Australian economy.  The stronger Australian dollar has caused manufacturing costs for car manufacturer General Motors to rise, and this coupled with a small domestic market encouraged the firm to stop producing cars in Australia from 2017. The US car producer Ford announced that it would stop making cars in Australia earlier on this year, and the new move from General Motors now poses a threat to the car industry which has increased the importance of retaining Toyota’s business.

Prime Minister Tony Abbott is holding talks with car producer Toyota in an attempt to convince the firm to continue to manufacture motors in Australia and prevent potentially thousands of job losses. This emphasizes the strain a strong currency is having on business costs, making foreign made cars more appealing to consumers. After the numerous failed attempts at talking down the Australian dollar, comments from RBA Governor Stevens regarding intervention finally got the ball rolling. More Aussie weakness is needed, however with the GBPAUD rate currently at 1.83, the rate is moving in the right direction.

Sasha Nugent

Currency Analyst

Caxton FX

What to take from Chancellor Osborne’s Autumn Statement

This morning the Chancellor George Osborne presented his Autumn statement and emphasised that the “economic plan is working but the job is not done”. The chancellor highlighted the impressive improvements in growth, unemployment, inflation pressures and forecasts which suggest these developments will continue. The key points are below:

UK Growth

• The Office of Budget Responsibility (OBR) now project growth this year will be 1.4%, raised from an expected 0.6% in March. 
• Next year’s forecast has also been revised upwards to 2.4% from 1.8%, with the following four years growth expected to be 2.2%, 2.6% 2.7% and 2.7%. 
• The OBR have shed light on the risks to growth, claiming the eurozone will shrink 0.4% this year. 
• Unemployment is expected to fall to 7% in 2015 and 5.6% by 2018, with an expected 400k additional jobs. 
• Private sector job creation will reach 3.1m by 2019 according to estimates. 

Public Finances 

• OBR have revised underlying public sector net borrowing down to 6.8% down from 7.5%, dropping to 5.6% next year, and predicts a small budget surplus by 2018. 
• The Borrowing forecast is down by £73bn in the next few years, with an estimated £111bn being borrowed this year and £96bn next year. 
• The chancellor has introduced a cap on welfare spending, however this excludes pensions. 
• There will be an updated charter of budget responsibility to be presented to the parliament next year. 
• Pensions will rise by £2.95 a week from next April, and the state pension age will rise to 68 in the mid-2030s, up to 69 in the mid-2040s. 

Taxes

• From 2015 capital gains tax on home purchases/sales from non-residence will be introduced. 
• The Bank Levy will increase to 0.156%, raising an additional £2.7bn next year and £2.9bn a year for 2015-16. 
• There will be further tax breaks for shale gas, with the tax rate being halved on early profits. 
• Up to £1000 tax allowance will be transferable between married couples. 
• Jobs tax to be abolished for people aged under 21. 

Businesses

• Rate relief scheme for small business will be extended for another year. 
• There will be a cap increase on business rates at 2% from next year. 

Living standards

• The freeze on fuel duty will continue, meaning next year’s planned rise will be cancelled. 
• Green levies on energy bills will be rolled back, therefore cutting £50 from bill increases. 
• Average rail prices will be kept constant in real terms.

Sasha Nugent

Currency Analyst

Caxton FX

December 2013 Currency Report: Sterling bulls put the pound in charge

Sterling has made quite a comeback in the last month, exceeding levels we saw in September when UK data was consistently providing upside surprise. The BoE Inflation Report released a few weeks ago increased demand for sterling as the prospects of a rate increase was pushed forward to 2015. This coupled with last month’s Services PMI figure which showed the sector grew at the fastest pace in 16 years encouraged the sterling bulls to shoot the GBP/EUR rate through to 1.21, whilst the GBP/USD has breached 1.64.

After the ECB unexpectedly cut rates last month in response to lower inflation figures, the euro has been on the back foot against both sterling and the dollar. Recently there has also been talk about negative deposit rates and whether the central bank will ease monetary policy further. Although the ECB still believe inflation is still well anchored to their medium to long term expectations, the possibility of these moves will limit a recovery for the euro.

The last US non-farm payroll figure reignited the tapering debate and opened a small window for a December taper. If the payrolls figure due this week follows suit, we might just see the Federal Reserve begin to cut back asset purchases this month. For now though, the market requires some significant positive US data in order to support the dollar and gauge the likely timing of the next policy move from the Fed.

Sterling regains ground

This month sterling has definitely kick started things in a better position and there is more hope that the pound may be able to retain this momentum against the euro in the coming weeks. Last month’s Services PMI number got the ball rolling, with the figure rising to 62.5, the sharpest increase in 16 years. The level of new business rose at record pace, and this encouraged investors to begin to buy sterling once again. The latest Manufacturing PMI also beat estimates and support continues to build for the pounds. The key driver behind sterling’s recent gains has been the BoE inflation report which expressed optimism about the UK recovery and opened the possibility of a rate rise in 2015. The monetary policy committee believe that unemployment
will reach 7% by the end of 2015, and that despite a surprisingly lower inflation number, price pressure in the medium term are still well anchored. The market has kept its focus on the possibility of a rate hike in 2015 and this has been the backbone of sterling’s momentum. It wasn’t too long ago when we saw cable breach 1.63 and the GBPEUR rate test the barrier of 1.20. PMI data this week will help to set the trend for sterling strength this month, and together with some strong unemployment data, the pound should be well supported.

GBP/EUR

More dovish talk from the ECB should keep sterling in control of GBPEUR

The ECB certainly had a hand in recent euro weakness. Eurozone inflation slowed to 0.7% y/y and this prompted an unexpected rate cut from the ECB. This move set the tone for the euro and it is unlikely that the euro will be making any major recovery soon. It recently came to light that the ECB discussed negative deposit rates, and although ECB President Draghi was quick to express that those talks had gone no further, ECB’s Hansson did say that the central bank still has room for further easing. The market seems to have adjusted to the prospect of looser monetary policy from the ECB however as long as this possibility remains those bearish euro investors will keep their finger over the sell button. The ECB have also said that the medium to long term inflation expectations are well anchored and based on this we doubt we will see another rate cut from the central bank when they meet this week.

A much better set of economic data could benefit the euro this month. Last week we saw German IFO data provided the euro with some temporary relief, highlighting investors thirst for such positive numbers. With the euro set to remain on the weaker side for a while yet, upside surprise on economic figures could provide the single currency with pockets of opportunity to build momentum and improve sentiment about the economic climate. Considering German Ifo was enough to push EURUSD back above 1.35, there are still some market participants ready to put their money in the euro when given a reason to. For now though, the UK economic backdrop is looking much more stable and with continued talk of loose monetary policy, coupled with uninspiring data, sterling looks set to control this rate in the month ahead.

GBP/USD

To taper or not to taper?

The tapering debate has been going on for months now, and after the Federal shutdown dampened expectations it could happen this year, the last employment report reopened the possibility of a December taper. We know that the Federal Reserve require more evidence of a strong US recovery in order to warrant a withdrawal of stimulus and therefore the employment report will be (as usual) a focal point, and will most probably set the trend for the month. After the last non-farm payrolls release surprised to the upside, any figure in line, or above estimates should increase speculation about the possibility of a reduction in stimulus beginning this month.

In recent sessions we have seen the dollar take a beating after US figures produced some mixed results. At this moment in time, investors are penalising the dollar for data that isn’t meeting expectations and also for the fact that the timing of tapering continues to be pushed back. We may see more of this in December, especially if non-farm payrolls disappoint. Looks like another month of data watch for the dollar.

The Fed chair nomination vote will also grab the market’s attention, and last month nominee Janet Yellen was questioned by the Senate Banking Committee. With the majority of the Senate democrats, Yellen only needs a few votes from republicans to secure her position as Chairwoman of the Federal Reserve. If the Fed decide to keep policy on hold for another month (which is likely), the market will then look to the end of the first quarter for the Fed to begin cutting back their asset purchases.


GBP/EUR: 1.2150
GBP/USD: 1.6210
EUR/USD: 1.3400

Sasha Nugent
Currency Analyst
Caxton FX

 

Caxton FX Weekly Report: The pound directs GBP/USD and GBP/EUR higher

The Bullish Sterling Investors surface

Last week the pound showed its strength, and sent the GBPUSD rate straight through 1.63 after the second GDP estimate prompted investors to buying the pound. This strength has continued so far this week, and maintaining this in current sessions will partly depend on the performance of Construction and Services PMI figures due in the next few days. Another solid set of numbers here should encourage more sterling momentum and will put increasing pressure on both the euro and the dollar. GBP/EUR is looking more comfortable around the 1.2090 level and after sterling dipped above 1.21 we could see these levels remain in the days ahead. The Bank of England will announce its rate decision on Thursday and it is unlikely that the central bank will alter monetary policy. At the moment it looks like it could be another week for the pound to extend recent gains.

What tools will the ECB pull out next?

After all the talk about the next possible policy move from the ECB, Thursday the ECB monetary committee will meet and they will announce their interest rate decision. After last month’s surprise cut, it is unlikely we will see any change in the interest rate when they meet this week, however what will be of more interest, is the press conference to follow. The issue of low excess liquidity for European banks remain, and the mystery of whether the central bank will opt for another LTRO remains. There has also been some talk suggesting that maybe the ECB should consider quantitative easing. A tool that the central bank has avoided and the BoE and Federal Reserve have embraced. The press conference should provide some clarity on these topics and if none are on the horizon, we should see some of the pressure on the euro ease.

Services PMI data will be released this week and could offer the euro some short term relief after a period of weakness. However with sterling looking stronger it may not be able to recover as much as we have seen previously.

It’s that non-farm payroll time again

With GBPUSD levels now trading around 1.64, it is evident that dollar weakness will remain as long as tapering delays continue. US data last week, such as unemployment claims, has failed to do enough much for dollar strength and so market focus turns to the employment report due on Friday. The last non-farm payroll figure surprised the market and stirred speculation that the Fed could possibly begin to taper back purchases this month. This makes Friday’s figure ever more important, and a reading in line or above expectations may result in some investor repositioning. Ahead of the employment report on Friday, there is more than enough data to keep the market busy such as ISM manufacturing and non-manufacturing PMI, preliminary GDP q/q and unemployment claims. Although these numbers are unlikely to trigger significant dollar momentum, strong data could put the dollar in a much better position ahead of the jobs report on Friday.

Optimism regarding the Chinese economy has also affected the dollar’s strength. Demand for safe haven currencies such as the dollar has fallen amid signs of a pick- up in global manufacturing. It is unlikely this influence will last too long, however in the short-term, this will contribute to the greenback’s struggle to
regain ground.

End of week forecast

GBP / EUR	1.2120
GBP / USD	1.6300
EUR / USD	1.3500
GBP / AUD	1.8100

Sasha Nugent 

Currency Analyst

Caxton FX