You can’t keep the pound that easily

In his first speech regarding Scottish independence, BoE Governor Carney outlined the potential issues that could arise if the Scottish kept the pound as part of a currency union. The Governor referred to the eurozone as an example of the significant steps that would need to be taken to support a monetary union. Carney said the Scottish government would have to give up some of its sovereignty over fiscal policy, and there would also need to be fiscal risk-sharing and solid banking arrangements.

The UK treasury has said it is highly unlikely that a currency union will be agreed and the Scottish government needs a plan B. The SNP have so far failed to come up with a “plan B” and despite this being a point of weakness, it is unlikely to hinder the campaign.

Sasha Nugent

Currency Analsyt

Caxton FX

Emerging market central banks rush to curb rapid currency depreciation

In the last 48 hours we have seen emerging market central banks take bold decisions in order to curb severe currency weakening as turmoil in emerging markets strengthened, and investors rush towards safe haven currencies. The Reserve Bank of India was the first to get the ball rolling in a surprise move raising interest rates by 25 basis points to 8%, in a bid to fight back against inflationary pressures.

The Turkish Lira was one of the worst affected currencies as political concerns also weighed on the currency. In an emergency meeting the Turkish central bank raised all the main interest rates, in an attempt to stabilise the currency. The overnight lending rate rose to 12% from 7.75%, the overnight borrowing rate rose to 8% from 3.5% and the one week repo rate increased to 10% from 4.5%.

The South African Reserve Bank also followed suit as the nation battles with labour disputes. The bank raised its borrowing rates by 50 basis points to 5.5% in spite of the fact that inflation remains with the central bank’s target range of 3%-6%.

Despite all these efforts to prevent further currency weakness, any gains after each announcement were soon erased. The market seems to be unimpressed by central bank’s attempts to convince the markets they are ready and willing to take action. Turkey’s central bank’s move could be described as delayed, and although the SARB rate increase was unexpected, it failed to grab investors’ attention. What the market needs is to be convinced that these central banks are completely committed and engaged in consistent aggressive policy in order to ensure not just a stable currency, but also price stability.

Sasha Nugent

Currency Analyst 

Caxton FX

Caxton FX Weekly Report: Sterling strength eases

Sterling takes a breather after an eventful week

After what has been a volatile week for sterling, the days ahead look a little calmer for the currency. UK unemployment data has given the pound a lot of support, despite the fact that the BoE are still a way of from raising interest rates. BoE Governor Carney claimed that the recovery is still not strong enough to warrant a
tightening of policy, and also expressed some concern regarding a stronger pound. These dovish statements will continue to weigh on the pound, at least until the next Inflation Report sheds light on where monetary policy is heading. The Governor is due to speak on Wednesday afternoon and if the language is similar to what we heard last week, sterling will be on the back foot against both the euro and the dollar. The UK preliminary GDP reading will be published on Tuesday and any upside surprise here should limit potential losses for the pound.

The ECB are prepared to fight deflation

Concern about global deflation is building, and after the ECB cut interest rates to combat deflationary pressures, the market has been worried about whether the deflation is on the horizon for the euro area. On the panel at the WEF in Davos last week, ECB President Draghi explained that he doesn’t see deflation in the eurozone. Draghi also signalled that the central bank is prepared to fight deflation by using means other than quantitative easing- an option both the Fed and BoE have adopted. The Governor suggested the bank may opt to buy packages of bank loans to houses and companies if economic conditions worsen.

With inflation at the forefront of the regions problems, CPI figures released on Friday will be a focal point. Another decent rise in price pressures will support Governor Draghi’s claim that the eurozone is not heading for deflation, but is rather experiencing a prolonged period of low inflation. Upside surprise here will be
welcomed and will most likely provided the euro with the boost needed to sustain levels beyond 1.37 in EUR/USD. Sterling will be on the back foot, and any upside surprise here could see levels below 1.20 return temporarily.

Will we see another reduction in stimulus from the Fed?

The Federal Open Market Committee will meet this week to decide whether to reduce stimulus further from the current $75bn per month. Despite the last payroll figure coming in short of estimates, the market hasn’t ruled out the prospect of another reduction from the Fed and this should bolster the dollar. Ben Bernanke 

comes to the end of his term as Fed chairman this week, leaving Janet Yellen to take up the post in February. 

A slew of economic figures will also be released, including CB consumer confidence, advance GDP, pending home sales and unemployment claims. Provided these figures produce some decent results we could see the dollar regain support and drive both the GBP/USD and EUR/USD rate lower. The greenback has managed to prevent the euro from maintaining levels above 1.37, but if the Fed maintain their current asset purchase program, and data disappoints, the euro could have the opportunity needed to sustain levels above 1.37.

End of week forecast

GBP / EUR	1.2010
GBP / USD	1.6480
EUR / USD	1.3600
GBP / AUD	1.9070

Sasha Nugent

Currency Analsyt

Caxton FX

Where is the Indian Rupee going from here?

The GBPINR rate has been trending upwards, and ever since the Federal Reserve Chairman Ben Bernanke announced the central bank’s intentions to reduce monetary stimulus, the Indian rupee has depreciated significantly.

In general there has been a great concern that many emerging market economies such as India will suffer from capital flight once the Fed decide to gradually return to more normal monetary policy. The decision to reduce asset purchases was considered the first step, and currencies such as the Indian rupee tumbled once the intention was announced last summer. More importantly, the rupee’s depreciation intensified due to its current account deficits and growth fears of the emerging markets as a whole.

India also suffers from very high inflation and this has also undermined the currency. The Reserve Bank of India (RBI) is now considering introducing an inflation target and this will allow the markets to clearly asses RBI’s performance as well as understand what their goals are.

On the UK side of things, the economic recovery has strengthened and economic fundamentals continue to paint a brighter picture for the UK. Inflation has slowed to the central bank’s 2% y/y target and unemployment has also plummeted to 7.1%. The rapid improvement in the outlook for the UK has strengthened the pound, and has also increased market speculation about when the BoE will be ready to raise interest rates. BoE Governor Carney has claimed that the central bank has no plans of raising interest rates any time soon, but as long as economic indicators continue to display and improving economic environment, expectations of a rate increase will remain.

Based on these factors we see expect the upward trend in GBPINR to continue. The rupee is stabilizing, but as the Fed continues to wind down purchases, and the economic situation in the UK improves the only way is up for GBPINR.

Sasha Nugent

Currency Analyst

Caxton FX 

What does the UK unemployment rate mean for monetary policy?

UK data delivered another surprise and according to the Office for National Statistics, the unemployment rate has dropped further to 7.1% from 7.4% bringing the 7% threshold given in forward guidance into question. With the unemployment rate now marginally above the benchmark, the need for the Bank of England to reassess the direction of interest rates is nearing.

Despite the labour market improving significantly faster than expected, the latest MPC meeting minutes suggest a rate increase is still unlikely to occur in the near future. The central bank sees no immediate need to raise interest rates, and with the inflation rate now on target there is even more room to maintain loose monetary policy. Of course the surprise drop in the unemployment will encourage the central bank to reconsider their view on the future for monetary policy, but the BoE will be cautious not raise rates prematurely.

This suggests that a re-evaluation of policy will rather result in an alteration in the central bank’s forward guidance, possibly a reduction in the unemployment benchmark to 6.5%, when the next quarterly Inflation Report is released on Feb 12. The market seems more excited about the fact that this unexpected result has brought the BoE closer to at least considering tightening policy, even if execution is not for a while yet. For now, this has been enough to keep demand for sterling rife.

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: Sterling takes control of the GBP/EUR and GBP/USD rates

Unemployment data set to keep the pound in charge

Sterling begins the week in a good position after UK retail sales allowed the pound to recover some losses incurred earlier on in the week. We may see the strength continue as spotlight hits unemployment data due on Wednesday. The UK labour market has continued to show improvement, and a report confirming an increase in city hiring, further supports the brighter picture. The Bank of England have already acknowledged the progress made in the unemployment rate, and any upside surprise here will bring the 7% unemployment target closer. The potential implications this has on future monetary policy should encourage a firmer pound, despite weaker inflationary pressures. The BoE monetary policy minutes also due to be released this week, should shed light on the central bank’s current stance towards tighter monetary policy. Although the need for higher interest rates has faded, a stronger recovery should create an economic environment that can withstand tighter credit conditions. This should keep the possibility for a rate increase in early 2015 alive. We expect the pound will be able to remain on the front foot against both the euro and dollar this week.

More problems for the ECB

The liquidity situation in the Eurozone is becoming an even bigger issue for the ECB, which has resulted in higher money market interest rates. The ECB are now under even more pressure to act against tightening (short-term) credit conditions. ECB President Mario Draghi has expressed the central bank’s commitment to

act against “unwarranted tightening of the short-term money markets”, and this suggests we may see some more action from the ECB sooner rather than later.

A number of key figures will be released this week including German ZEW Economic Sentiment and PMI data. As usual, the manufacturing and services PMI releases will be a focal point and any indication of an improvement in these sectors will be welcomed. It is unlikely that this will take precedence over UK unemployment figures, however, some strong numbers here could limit the potential upside in the GBP/EUR rate. It is a similar picture against the greenback, and we doubt there is enough momentum behind the euro to encourage significantly higher levels in EUR/USD.

A lighter calendar leaves the greenback open for vulnerability

The dollar has strengthened in these last few sessions, especially against the euro. Upside surprise in US figures have encouraged speculation that further cut backs in asset purchases is on the horizon and this should keep the greenback fairly supported in the days ahead. Lack of economic releases from the US leave
the window open for some weakness, and the main releases this week will be unemployment claims, existing home sales, and flash manufacturing PMI. After the last unemployment claims figure came in unexpectedly strong, another solid figure should increase demand for the dollar. With eurozone PMI figures due to be published earlier that day, any disappointing numbers could get the ball rolling for lower levels in EUR/USD, and good US figures should support the move further.
It has been more difficult for the dollar to advance against sterling, and with expectations that the UK labour market has continued to improve, we doubt the dollar will be able to make any significant gains against sterling this week.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6370
EUR / USD	1.3500
GBP / AUD	1.8770

Sasha Nugent

Currency Analyst

Caxton FX

Caxton FX Weekly Report: A week in the back seat

A week in the back seat

The pound has come under pressure so far this week, and the struggle for sterling to maintain levels above 1.20 has resurfaced, at least in the short term. A quiet week on the UK data front leaves the pound vulnerable against the euro and dollar, although retail sales figures due on Friday may provide the market with a reason to put their money back into the pound. With UK inflation now on target, the Bank of England have even more room to maintain accommodative monetary policy, dampening expectations of a rate increase any time soon. Economic indicators continue to suggest that recent growth can be sustained and this should act as a cushion limiting potential losses. The threat of levels below 1.20 remain, especially if Eurozone inflation figures provide upside surprise, although the pound is looking well supported this week. Sterling has been softer against the dollar which has managed to recover after last week’s employment report. With levels now above 1.64, there is still plenty of room on the downside and we expect sterling to remain on the back foot, with some potential gains later on in the week.

A firmer euro but for how long

Although the euro remains in decent shape, we doubt the single currency has enough support in order to prevent higher levels going forward. With market participants closely watching inflation figures from both the UK and the Eurozone, we are likely to see a fair bit of volatility in this pairing. Any upside surprise from the Eurozone reading could easily spark some more downward movement in the GBPEUR rate.

The euro has had a more difficult time against the greenback, and despite the non-farm payrolls figure coming in significantly below estimates, the dollar seems to be dictating play this week. The stronger dollar has prevented levels of 1.37, whilst the single currency has shown its resilience, keeping levels above 1.36. The inflation figure will be the key driver for the euro this week and it is likely we will see some volatility on the back of this release.

The dollar shakes off the non-farm payroll releases
The greenback failed to start the week in the best condition as the US non-farm payrolls encouraged investors to sell the dollar and drive GBP/USD to 1.65. Those gains were quickly reversed, and the market has put last week’s news to the side with full focus on the jam packed week for US data. Retail sales have got the ball rolling and with these figures beating estimates, the greenback gained a little ground. The Beige Book, Philly Fed Manufacturing Index, and Preliminary UoM Consumer Sentiment will all be released this week. Dovish Fed members have raised concern about issue of low inflation, and so US inflation numbers due on Thursday will also be a focal point.

With little to support both the euro and sterling, the dollar seems to be in the
better position to gain. The market has ample opportunity to move on the back of
solid US figures, but any reading which disappoints will leave the window open for
the euro and sterling to take advantage.

End of week forecast

GBP / EUR	1.2100
GBP / USD	1.6350
EUR / USD	1.3600
GBP / AUD	1.8500

Sasha Nugent

Currency Analyst

Caxton FX

The Outlook for Sterling in 2014

The pound has started the year on a high, UK economic activity surprisingly picked up allowing growth to accelerate, ultimately improving sentiment. In particular, the labour market improved as the number unemployed decreased, alongside those claiming job related benefits. Concern about above target inflation faded as price pressures eased towards the Bank of England target of 2% y/y. Caxton FX is anticipating the GBP/EUR to continue on its upward trend to finish the year around the €1.26 level. Despite the surprising strength of the pound, we expect the dollar will rebound and drive the rate towards $1.53 by the end of the year.

GBP/EUR
The euro continues to be reasonably strong against the pound and the battle for sterling to sustain gains against the single currency continues. Despite the increased positivity about the UK economic environment, the pound is still struggling to really drive the rate clear of the 1.20 mark. Above target inflation is no longer a concern, and this has dampened expectations of a rate increase from the Bank of England limiting further gains for the pound. On this basis, we do not expect the central bank to raise rates this year, however we do expect the UK recovery to continue, potentially building the case for a tightening of policy early next year.

The issue of deflation may become a hot topic, especially during a time when many nations are suffering from deflationary pressures. Although UK inflation is on target for the first time in over 4 years, this could easily turn into a situation of disinflation. The market will definitely be keeping an eye on this as the year unfolds.

In the eurozone, inflation is definitely a hot topic, and although the ECB are confident that price pressures are well anchored to their medium to long term expectations, the concern remains. Nevertheless the eurozone is making progress and we expect this to continue. The outcome of the stress tests and asset quality reviews of European banks will also be extremely interesting, not to mention the effect these results will have on sentiment.

The outlook for the UK outperforms that of the eurozone and therefore we expect the pound to edge the GBP/EUR rate higher this year.

GBP/USD

The pound is hanging on to levels above 1.60, but we doubt this can be sustained in the months ahead. Despite the announcement of tapering failing to have any significant effect on the exchange rate, going forward we may see the effects of this begin to show. A mere $10bn reduction in asset purchases is hardly anything significant, but as the US economy picks up, the labour market improves, and inflation rises, we should see the Fed begin to reduce purchases by a more considerable amount supporting the dollar.

Optimism about the UK recovery may limit dollar gains, especially in the second half of the year when talk about a rate increase in 2015 is likely to resurface. How inflation develops in this period will also be important, but with both nations enjoying solid growth, attention will be on which central bank looks closer to tightening monetary policy sooner. The Federal Reserve has reiterated the fact that the wind down of purchases is not a tightening of monetary policy, and with the Bank of England looking just as committed to keeping rates low, we doubt we will see any tightening of policy from either central bank this year.

With worries about the US government debt ceiling diminishing, the tapering topic should keep the dollar on the front foot, and with the BoE also raising a little concern regarding the strength of the pound, we expect sterling to weaken in the months ahead.

January 2014 Currency Report: Sterling regroups in a bid to maintain momentum

Sterling momentum strengthened last month after strong employment data encouraged sterling buyers to resurface. The pound managed to get the upper hand on the euro, whilst the dollar struggled to drive the GBP/USD rate downwards, despite the Fed’s tapering decision. As we enter the New Year, the same factors will influence the pound’s strength and the debate about when the BoE could raise interest rates will continue. The market’s eye will remain fixed on the improvements in the labour market as well as price pressures.

There are still plenty of questions regarding the eurozone, and although the region is showing signs of progress, the issue of deflation and a buoyant euro remains. The ECB have maintained their dovish stance in the last few months and have reiterated their commitment to price stability, claiming the central bank have various tools to combat low inflation. We are yet to know what these tools are, and going in to January, the market will be paying close attention to any language from the ECB which may shed some light on the central bank’s ammunition.
As we approach the next US debt ceiling, some of the pressure on the government has faded amid the agreement in spending levels reached by Democratic and Republican negotiators. Although this agreement avoids a shutdown occurring this month it has not yet been passed through congress and does not increase the US debt limit, leaving the potential for budget crisis still open. Tapering has finally begun, with the Federal
Reserve trimming $10bn from asset purchases reducing the total to $75bn a month. The Fed has managed to convince the market that tapering is not tightening and updated their forward guidance claiming that interest rates will remain low even after the unemployment rate has reached 6.5%.

The year begins on a positive note

With UK economic data still impressing, this month the market is looking for signs to help gauge how sustainable the recovery is. The outlook for the nation is pretty much unchanged and although the last inflation reading showed inflation fell closer to the BoE’s 2% y/y target, there is still a possibility we could see a rate increase in 2015. We know from the latest inflation report, that slack in the economy needs to be absorbed and business investment needs to pick up. The market seems to have pushed these details to the side for the time being and focus remains on the labour market as well as price pressures. As a result, we doubt things will be much different from last month. Language used by the monetary policy committee will be monitored carefully. Last month we witnessed a sterling sell off after comments from BoE member Weale suggested the central bank will maintain loose monetary policy even after the 7% unemployment threshold has been reached. This triggered sterling weakness and if more dovish language is expressed by the BoE we doubt the market will hesitate when unwinding sterling long positions. It will be a difficult month ahead for sterling. With tapering talk limiting potential gains against the dollar and euro investors still preventing the pound from holding on to levels above 1.20, a lot more is needed to get sterling to make any meaningful rebound.

GBP/EUR

Euro pressure eases a little

Towards the end of December we saw euro strength re- emerge and combined with lower UK inflation force the rate from levels above 1.21 back towards 1.18. After the ECB’s last rate cut, eurozone inflation rose to 0.9% y/y, providing the euro with some short-term relief. The ECB’s lack of concern about the currency’s strength encouraged the market to continue to support the euro, and it is unlikely that we will see any change in the ECB’s attitude towards the exchange rate this month. Whilst they have made it clear that targeting the exchange rate is not an option, they have withheld details about what tools are available to combat low inflation. In a number of press conferences and speeches ECB President Draghi has said that the bank expects inflation to remain low for a prolonged period and if downside risks materialise, the bank is ready to take action. There have been whispers that negative deposit rates may be one of the many weapons the ECB has at their disposal, and this month we may get more of an idea about what the central bank has in store. The prospect of another round of cheap loans for European banks may also creep back into focus. The market believes another round of LTROs is on the table, however the central bank are yet to provide any clarity on the likelihood of this happening any time soon. Investors will be listening attentively to ECB members’ comments for clues on the next likely move from the ECB.

There are signs that sterling’s strength has become more sustainable and so we expect the pound to

recover.

GBP/USD

We begin the new year with $10bn less stimulus

There is plenty going on in the US this month to keep volatility in the GBP/USD rate alive. Instead of buying $85bn worth of assets, the Federal Reserve will purchase $75bn in an attempt to wind down the quantitative easing program. The reaction was fairly muted as the central bank managed to convince the market that a reduction in stimulus is not a tightening of policy. The central bank also adjusted its forward guidance, stating that loose monetary policy will remain even after the unemployment rate has reached 6.5%.

Ben Bernanke’s term as Chairman of the Federal Reserve will come to an end this month, paving the way for Janet Yellen to take up the post. Despite Yellen being considered a dove, she supported the move to kick start tapering this month and this suggests she may be less dovish than previously thought. She obtained the Senate’s approval (56-26) to become the first female Chief in the Fed’s 100 year history in last night’s vote.

The issue regarding the US debt ceiling will resurface this month, however, with Republican and Democratic negotiators reaching a deal on spending levels, the risk of a government default has diminished. The deal which is small in size should prevent a shutdown this month if it is approved by Congress, but new borrowings will also have to be passed if a budget crisis is to be avoided.

GBP/EUR: 1.2130
GBP/USD: 1.6280
EUR/USD: 1.3420