Greek coalition talks collapse and prospect of new elections hurts euro

Sterling remains flavor of the month
Sterling has climbed by a further three cents against the euro in the past fortnight. Sterling’s progress against commodity currencies such as the AUD, NZD, CAD and ZAR has been ever more impressive in the past few months. Sterling has climbed by over 10% against the ZAR and NZD since mid-Feb, while it has advanced against the ZAR by the same margin since mid-March.

Sterling’s safe-haven status is behind its demand and this is not something we see disappearing any time soon. Also helping the pound was last week’s MPC vote against further quantitative easing. Whilst there will be some nerves surrounding the voting pattern (to be revealed by the MPC minutes next week), stubbornly high inflation seems to be of greater concern to the policymakers (thus making more QE harder to justify). Tomorrow’s Quarterly Inflation Report from the Bank of England will be highly relevant in this regard. A firmer inflation outlook is likely to be provided, which again should be broadly supportive of the pound.

Euro suffers from lack of Greek coalition agreement

Global investor confidence and risk appetite has taken a turn for the worse in the past fortnight, driven by concerns over Greece. Since the failure of the ruling Greek coalition to maintain sufficient votes at its recent election, major doubts have arisen as to whether Greece will remain within the euro. Coalition talks have collapsed and another election will be held in mid-June, which means the current uncertainty will be extended. As a result, Spanish and Italian bond yields are on the rise, with the former’s 10-year debt yields looking particularly alarming at fresh 2012 highs over 6.25%.

Should an anti-austerity coalition government surface from the current mess, then Greek bailout funds would be withheld, leading to default and a probable Greek breakaway. The knock-on effects in the eurozone and the global financial system as a whole are expected to be more drastic than those of Lehman’s collapse. It is no surprise then, that the euro has suffered a significant decline, with perceived safer-currencies such as sterling and the US dollar filling the void.

GDP data out of the eurozone was very mixed indeed this morning. Italy broadly stuck to the script by contracting by 0.8% in Q1 of this year, while French growth remained stagnant. However, the German economy grew by 0.5% in Q1, which helped the eurozone economy as a whole avoid a technical recession by posting a 0.0% GDP figure. This development has given the euro a mild boost today but with so much austerity still to be delivered in the eurozone and today’s forward-looking economic sentiment surveys showing a fairly sharp decline, eurozone growth is highly likely to return to negative territory this year.

Sterling is trading at €1.25 today, which represents near enough a three and a half year high. We are not calling a top to this pair’s ascent just yet either, with nerves surrounding Greece likely to deteriorate over the coming weeks. In risk averse conditions, the pound has understandably traded a little softer against the US dollar, coming off its highs of $1.63 to trade two and a half cents lower today. This pair could well test the $1.60 level fairly soon, though we are not anticipating any major collapse.

End of week forecast

GBP / EUR 1.26

GBP / USD 1.5950

EUR / USD 1.27

GBP / AUD 1.61

This ain’t no currency war!

There has been a definite shift in sentiment towards ‘risk off’ as news that North and South Korea exchanged artillery fire last night, causing the US dollar, Swiss franc, and Japanese yen to appreciate.

The dollar rose against all of its major counterparts, bar the Swissie, as North Korea fired artillery shells into South Korea near the border. As the South Koreans retaliated, demand for refuge currencies increased and higher yielding assets took a knock. The euro, which is already struggling due to the Irish debt crisis and a renewed bout of political turmoil, has fallen about a cent and a half against the greenback (currently trading at a 7-week low). With further concerns about to rear their head over the state of the Greek economy (the government is threatening to shut down in order to save money), problems in Portugal and a tough global fourth quarter in full swing, we don’t envisage a turnaround in this euro downtrend remain for some time yet.

In addition, expect to see more volatile assets such as the aussie, kiwi and rand remain on the back foot as this period of political and economical uncertainty prevail. The Thanksgiving holiday in the US is yet a further reason for investors to place it safe as they head into a long weekend.

Tom Hampton
Analyst – Caxton FX

Dollar steadies

The dollar extended its advance from a nine-month low against the euro as employment data came in almost three times higher than the market has forecast.

The single currency fell early in the session as weaker than expected European retail sales figures and German factory data were published. Further news that the Spanish economy had stagnated re-positioned focus on to the troubled periphery nations and their debt problems.

Midway through the London session, data revealed that October’s US non-farm employment change was up 151,000. The number was a vast improvement on last month’s fall of 41,000 and bettered analysts’ predictions of a lowly 61,000.

Further news of a liquidity problem within a major Spanish bank (not hard to guess which one) has helped depress the euro further.

The greenback is currently trading at $1.4093 and $1.6233 against the euro and the pound respectively.

In other news, the aussie and kiwi dollar look set to notch up their best weekly gains in months and don’t look like stopping. The aussie broke through parity this week to hit a 28 year high (the highest level since the aussie was allowed to float on the open market) of $1.0181 against the US currency.

There is not as much market moving data out next week, however inflation reports from the UK and China could be very important. Especially for our brothers from the antipodes with lofty aspirations. Hopefully England can put one over on them this weekend!

Tom Hampton
Analyst – Caxton FX

Has Sterling bottomed out?

My screen is finally awash with green today as sterling pulls back some of its losses from the past few days against all of its major counterparts except the Swiss franc.

The pound is back up near €1.1750 against the euro having sunk to a four month low of €1.1672. Further doubt over the longevity of the European economic recovery spread as poor data showed growth in the eurozone slowed in September, causing peripheral bond yield spreads to widen against German counterparts. Against the greenback, the UK currency did creep above $1.57 earlier in the day. The dollar is continuing its fall from grace with concerns over further rounds of quantitative easing and yet more poor data showing that the amount of jobless claims unexpectedly rose last week.

Be warned, Sterling’s rebound could be a momentary correction as the pound was heavily sold on Wednesday. The UK economy remains extremely vulnerable as the BoE alluded to with the possibility of a fresh monetary injection.

In further news, I spent my morning at a seminar on foreign exchange trends, which was as interesting as it sounds.... The major themes to report for the middle to long term are;
A) A double dip recession (depending on your definition) looks an almost certainty for the US, UK and Europe, while Asia looks to be the engine house for the global economy.
B) The unstoppable ascent of the Swiss franc. The lack of support for the traditional safe US dollar has led risk averse investors to the franc and the Japanese yen. However, with the BoJ’s intervention to depress their currency, the Swissie has become the hedge of choice for many. Great internal economic fundamentals and global uncertainty in Q4 look set to send the franc higher.
C) Those of you looking for a higher-yielding asset may look to the Aussie dollar. Some analysts are saying that it is near the end of its run. However, with commodity prices at an all time high, insatiable demand from China and a high interest rate that is looking likely to be moved even higher, it has every potential.

Tom Hampton
Analyst Caxton FX

Sterling down across the board

Sterling is down on the day against all its major counterparts amid speculation on the publication of the MPC meeting minutes tomorrow morning. The CPI figure came in at 3.1%, well above the Bank of England’s target of 2%.


In other news the euro received a boost following solid demand for bond auctions in Ireland and Spain, which helped ease concerns about EU funding. Against the dollar, sterling has managed to claw back early losses to currently sit a third of a cent down due to higher demand for riskier currencies.

Despite today’s setback, we expect to see the UK currency strengthen against the euro over the coming weeks as fears over the EU’s sovereign debt issues return to focus. The regional debt issues should also send the single currency lower against the greenback, leaving sterling/dollar to trade in a relatively tight range between 1.56 and 1.60 in the medium term.

NZD - £ also rose a full cent against the kiwi yesterday, with investors cautious ahead of the Reserve Bank of New Zealand's interest rate decision

• In the evening, New Zealand's central bank reaffirmed that it saw no need to raise rates before mid-year given tame inflation.
  
  
• Expectations of a rate rise in March have dipped following the Bank's announcement, though the kiwi is trading marginally higher this morning following Obama's speech.
  
  
• Asian shares took a boost from the US President's comments, buoying demand for higher-risk currencies. The price at the moment is hovering above 2.28.

Despite an easing of concern over the UK's debt, the pound remains under broad pressure, with the sterling/kiwi price below 2.24

The pound capped sharp losses incurred against the kiwi, clawing back over 2.24 on Friday in the wake of encouraging news from Moody's rating agency.

• The kiwi was softer on Friday, consolidating strong gains after the Reserve Bank of New Zealand shifted their policy to earlier rate rises.
  
• The pound was able to make slight gains, reversing early losses, after Moody's rating agency announced that it had no intention of cutting the UK's triple A rating.
  
• However, the pound has moved lower this morning, unable to consolidate its position as concerns linger over the UK's fiscal position.

Kiwi is trading strongly on the back of an upbeat rate statement from the RBNZ

The New Zealand dollar made strong gains yesterday, lifted by the prospect of the removal of monetary stimulus measures from the middle of 2010.

• The kiwi gained a further 1.2% on the poundafter the RBNZ, which as expected left interest rates on hold at 2.5%, said in its accompanying statement that if the economy continued to recover, conditions may support the removal of monetary stimulus "around the middle of 2010."
  
• Striking a hawkish tone at its policy meeting, the Reserve Bank of New Zealand signalled that it could follow other commodity producers such as Norway and Australia, and move to raise interest rates as early as next April.
  
• The New Zealand dollar was also given further support as Alan Bollard, RBNZ governor, indicated that he was less worried about the strength of the currency.
  
• In this morning's session the pound has pared its losses, recovering over a cent to bring the price back over 2.24.

The RBNZ have stated that monetary policy will begin to tighten, boosting demand for the kiwi

Sterling lost over four cents, or 1.8% to the kiwi dollar in trading yesterday as the Reserve Bank of New Zealand hinted at future rate rises in their policy meeting.

• Sterling was under pressure throughout European trading after the UK's pre-Budget Report did little to ease lingering concerns over Britain's debt problems.
  
• The Chancellor, Alistair Darling, outlined various spending cuts and taxes, as well as lowering this year's growth forecasts, but little encouragement was given that the government would be able to curb the spiralling deficit.
  
• In the evening, the kiwi received a renewed boost after New Zealand's Central Bank opened the door to rate rises from as early as next April.
  
• The RBNZ said that it may start withdrawing monetary stimulus by the middle of 2010, amid an improving local and global economic outlook.
  
• This morning, the market is continuing to move the kiwi higher, with the sterling/NZD pair now trading at a one month low, currently hovering just below 2.24.

Kiwi traded strongly yesterday as risk appetite was buoyed follwoing an encouraging announcement from the Bank of America

The kiwi dollar was higher against a broadly weaker sterling, which came under pressure following weak economic figures.

• The UK services sector data revealed that the industry expanded at a slower rate than in previous months, breaking its upward trend, and dulling demand for the pound.
  
• The kiwi was also buoyed as the safe haven appeal of the US dollar and Japanese yen came under pressure following an announcement from the Bank of America to repay bailout funds.
  
• The New Zealand currency climbed by just over a cent, but was unable to push higher as weak manufacturing data from the US undermined risk appetite.
  
• The pound is up in early trading though as investors pare back risky bets ahead of important US employment figures.

Kiwi traded strongly yesterday, buoyed by rising risk appetite following improved equity prices

The pound closed down nearly a cent against the kiwi dollar yesterday, but recovered significantly from a one-week low of 2.2712 hit earlier in the day.

• The high-risk kiwi was the biggest gainer against the US dollar yesterday, which spilled over into the kiwi/sterling rate, pushing the former higher.
  
• Global equities rallied strongly as risk appetite came firmly back to the table following a move by the UAE central bank to reassure debts built up by Dubai banks.
  
• The kiwi was also found support as the yen was broadly sold following a decision by the Japanese central bank to extend monetary policy easing measures to fight deflation and help the ailing economy while holding rates at 0.1%.
  
• The New Zealand dollar is continuing to trade strongly today as investors' appetite for riskier higher-yield currencies improves, buoyed by receding worries over Dubai's debt problems and strong Asian equity prices.

Kiwi was higher in trading yesterday and is continuing to press higher against the pound this morning

The pound fell back sharply against the kiwi dollar yesterday, losing two and a half cents from a two-month high to close back below 2.30.

• The higher yielding kiwi dollar found support as risk appetite found its way back into the market after the UAE central bank agreed to provide support for the ailing Dubai banks.
  
• The kiwi rose some 1.1% as demand for the New Zealand currency strengthened and risk appetite found its way back in to the market following the encouraging news.
  
• Meanwhile, sterling was under heavy pressure in the wake of a weaker-than-expected consumer confidence survey, which highlighted the fragile state of the domestic economy.
  
• In trading this morning, the kiwi is climbing higher, up over a cent so far today, as news that Japan may expand quantitative easing as led investors to sell the Japanese yen in favour of the riskier New Zealand dollar.

Kiwi suffered as risk aversion at the back end of last week, though stronger this morning

The kiwi dollar retreated to two and half month low against the pound on Friday as risk appetite took a sharp downturn as the Dubai debt issue deepened.

• The New Zealand dollar followed the broader market events and directions that unfolded at the end of last week with regards to the concerns arising over debt issues in Dubai.
  
• In response, sterling reached a high of 2.33 after a sharp pull back in risk activity saw investors trim their positions is the "riskier" currency.
  
• The kiwi is firmer this morning as investors are more confident and less risk averse after the UAE offered to help banks in Dubai, reducing fears of a debt default.

Pound is moving higher against the kiwi dollar supported by an upwardly revised UK GDP figure

The pound posted gains of nearly two cents against the kiwi dollar yesterday as demand dulled for riskier assets following weak US data and lower equities.

• Kiwi was again under pressure as investors continued to take the opportunity to cash profits as risk appetite waned after the US 3Q GDP figure was revised downward.
  
• In addition, equity markets turned negative with US benchmark indexes opening with small losses, which supported a return to the US dollar, softening demand for the kiwi.
  
• The loss of risk appetite brought the sterling/kiwi price to a two week high back over 2.29, though a further reiteration of low US interest rates in the evening did see the New Zealand dollar trim its losses.
  
• In trading this morning, the pound has posted gains after the UK 3rd quarter GDP figure was revised upward.

Strong commodity prices enabled the kiwi to post gains against the pound yesterday, but the sterling price has risen again this morning

The pound lost ground to the kiwi in trading yesterday, relinquishing strong gains made on Thursday of last week, as a surge in risk appetite boosted demand for the high-yielder.

• Strong equity and commodity prices on the European and US sessions were supportive of kiwi buying, driving the price higher. Oil reached up to $80 per barrel, whilst gold rallied to another record high.
  
• The New Zealand dollar is again under pressure this morning as Asian equities failed to rack the strong run on Wall Street. The Nikkei closed down 1.0% overnight.
  
• Currently the pound is trading up 0.5% today with the price hovering just below 2.28. Though analysts have said that the price could be susceptible to a break higher as investors seek to cash profits ahead of a US holiday this Thursday.

Kiwi was unable to make ground on sterling at the end of last week, but is up 0.6% in trading this monring

The sterling/New Zealand dollar price was held in a deadlock in trading on Friday as concern over the UK fiscal position was offset by investors paring back positions in higher-yield currencies.

• The kiwi was under broad pressure as market participants continued to trim their risk positions ahead of a holiday-shortened week in the US.
  
• The pound was also broadly sold following on from Thursday's surprisingly high borrowing figures, which has resurfaced concerns over the fragility of the UK recovery.
  
• In response, the pair held relatively steady closing at 2.2783, with neither currency able to gain an advantage.
  
• Looking ahead to this week, the pair are likely to continue trading within range as investors await important inflation data from New Zealand released on Friday.

Kiwi slid sharply yesterday as traders bought back into the US dollar

The pound rallied over three cents, or 1.5%, against a broadly weaker kiwi dollar yesterday as traders sold off their higher-yielding investments in the wake of sliding stock prices.

• Sterling was able to hit a ten-day high against the New Zealand dollar, which came under pressure from profit taking in carry trades that had been put on earlier in the year.
  
• In addition, investors were quick to trim their holdings in higher-risk currencies in the wake of falling equity and commodity prices.
  
• Overnight, both the Nikkei and Shanghai Composite lost ground following similar falls in the US session, which drove the kiwi lower.
  
• In trading this morning, the pair are trading steadily around the overnight closing price. With little economic data out, the price is likely to take its lead from broader equity prices and profit taking habits.

Sterling lost ground to the kiwi yesterday but is up nearly three cents today following a comment from NZ's opposition leader

The pound was lower in trading on Wednesday, coming under pressure from the minutes from the Bank of England’s latest committee meeting and closing down at 2.2446.

• The minutes revealed a lack of consensus among the committee members over the level of monetary stimulus measures needed at this stage of the economic recovery.
  
• The report also reiterated the slow growth prospects for the UK economy and warned that inflation rates could stay below the 2% target even well into 2011, which was another sterling negative.
  
• However, in trading this morning the kiwi dollar has been broadly sold as investors pare back their riskier positions.
  
• In addition, comments from New Zealand’s opposition leader on the method in which monetary policy should be conducted has given investors further reason to take profits.
  
• Currently the pound is at a 10-day high against the kiwi, up nearly three cents on the day, hovering above 2.27.

Pound posted gains against a weaker kiwi yesterday as a stall in risk appetite weakened demand for the higher-risk currency

Having climbed strongly against the kiwi in the European session, the pound capped its gains, sliding back slightly to close the day 0.4% higher at 2.2554.

• The kiwi lost ground yesterday as risk appetite took a step back, easing demand for higher risk currencies.
  
• In the US, a government report showed US producer prices rose 0.3% in October, disappointing market expectations for a rise of 0.6% and dulling demand for the high-yielding kiwi.
  
• In addition, US core producer prices, those excluding food and energy, unexpectedly dropped by the most in three years, which supported a rise in the sterling/kiwi price.
  
• In trading this morning, the New Zealand dollar has recovered losses, bringing the price back below 2.24 as demand for the UK currency stumbles.

Sterling is up against the kiwi as rising risk appetite has little impact on a weaker NZ dollar

The pound crept up against the kiwi dollar in trading yesterday, though with little economic data to guide the market the pair held relatively steady.

• Rising risk appetite, spurred by better-than-expected US retail sales and robust Japanese growth figures, was unable to lift demand for the higher-yielding currency.
  
• Investors remain wary of the kiwi after the Reserve Bank of New Zealand made it clear that they plan to keep interest rates at a record low level well into 2010.
  
• In trading this morning the pound has rallied over a cent, bringing the price back over 2.25 with investors taking their lead from a weaker Australian dollar.