Weekly Analysis - Sterling holds strong, Euro proves resilient, but the US and Australian Dollars fall. This week will be heavy with US and UK data and should be relatively volatile. Sterling has the momentum, but positive US data could well reverse those gains.

GBP – In the UK, The last week brought relatively good news for the pound. The Bank of England meeting minutes revealed a positive revised growth estimate for the UK on Wednesday, and Retail Sales m/m figures on Friday beat estimates with at least a small sign of growth. The pound has held up against most other currencies and has the momentum to push higher next week. Data to watch for this week from the UK will be the Prelim GDP q/q on Tuesday, Manufacturing PMI on Thursday, and Construction PMI on Friday.

EUR – In the Eurozone, Manufacturing data from last week and an improved PMI figure confirmed that business activity has increased overall. However, with inflation at such low levels, the Eurozone is increasingly concerned with a stronger Euro, which would further destabilize growth. Data is limited this week, but with a CPI Flash Estimate y/y figure on Wednesday, there will be a more complete picture of how prices have increased when compared to economic growth in the region.

USD – Last week, the Dollar provided some resistance to the advancing pound and Euro with positive durable goods orders last Thursday, but much will depend on the preliminary US GDP figure this coming week. This week, the all-important day will be Wednesday, as markets prepare to digest the ADP Non-Farm Employment Change, Advance GDP q/q data on Wednesday out of the US, and the FOMC will make a statement at 7pm GMT. The FOMC is also scheduled to reduce its bond buying by another $10 billion down to $45 billion this week, and with a relatively stable market, it will be easy for the Fed to proceed with this. Also, let’s not forget Thursday, as Janet Yellen will be speaking at a policy summit meeting in Washington D.C.

Canada – Canadian data will also be heavy this week, as the loonie has proved that it has had some forward momentum with positive Core Retail Sales m/m last week. BOC Governor Poloz is speaking this week on Tuesday and Wednesday will bring Canadian GDP m/m figures. The Bank of Canada has been under increasing pressure to lower their benchmark interest rate of 1% since growth has been slower than expected in the past year and the Canadian Dollar has been sliding as a result. 

Australia – Last week, the Australian Dollar was weakened significantly when Australian CPI q/q and the HSBC Flash Manufacturing PMI both came in negatively and undermined the AUD. This week, we could see a similar phenomenon, as there will be CNY Manufacturing PMI on Thursday, expected to improve marginally from a month ago. Also, there will be Australian PPI q/q expected to improve from the last quarter. The Australian dollar has been strengthening from its 2013 devaluation slide, but it seems to have stalled with poor Australian and Chinese data. This week will be an additional focal point to determine the direction of this rate.

End of week forecast

GBP/EUR – 1.2200

GBP/USD – 1.6900

EUR/USD – 1.3930

GBP/AUD – 1.8200

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Caxton FX Weekly Report: The market focuses on the ECB

PMI data encourages more sterling buying

Sterling strength has held on, and a light calendar hasn’t stopped investors favouring the pound. Despite manufacturing PMI reading coming in below estimates, PMI data released in the coming days should provide the pound with support, especially if figures surprise on the upside. The BoE will announce their interest rate decision this week and considering recent comments from MPC members, we doubt there will be any change to policy. The market’s focus is now on the Inflation Report which will most likely see MPC members adjust forward guidance to focus on broader measures. As long as economic figures support a brighter outlook, demand for sterling will remain. The market is not yet convinced the central bank will maintain low interest rates and as long as there is a sense of optimism, speculation regarding the likely timing of tightening will continue to keep sterling on the front foot.

Inflation falls back to 0.7%, what will the ECB do?

In a number of speeches, ECB members have said they do not see the Eurozone entering deflationary territory. The markets however disagree, and some investors feel the ECB will need to act soon in order to prevent deflation. The last Eurozone inflation figure showed inflation eased back to 0.7% y/y and this has kept the pressure on the ECB. Some investors are speculating that the central bank will take action as soon as this week when the committee meet to discuss monetary policy. President Draghi has repeatedly said the ECB will be prepared to fight deflation and in the press conference this week we could hear more about the tools the bank favours, if and when they choose to deploy them. At the WEF in Davos, Draghi hinted the bank could buy packages of bank loans to households and companies.
This week Eurozone PMI data will be released but it is unlikely these figures will do much to bolster the single currency. The market is still willing to buy pounds and the dollar is also favoured over the euro leaving more room on the upside for GBP/EUR and downside for EUR/USD.

It is the non-farm payrolls time again

The Fed’s decision to taper assets purchases has brought the dollar back in control against many of its counterparts. However, the outcome of Friday’s employment report may bring the greenback’s recent strength to a halt. The last employment report disappointed, but the Fed shrugged this figure off when deciding to reduce QE further by another $10bn. Friday’s reading will need to come in line with estimates if demand for the dollar is to continue. The participation rate will also be important considering its recent decline.
There are a number of economic figures that will be released in the run up to the announcement and provided the readings are solid we could see demand for the dollar build ahead of the employment report. ISM Manufacturing PMI, factory orders, ADP Non-Farm Employment Change will all be published and this should offer the dollar some support in the days ahead. We expect the dollar to extend gains this week against both the euro and sterling.

End of week forecast

GBP / EUR	1.2175
GBP / USD	1.6300
EUR / USD	1.3420
GBP / AUD	1.8600

Sasha Nugent

Currency Analyst

Caxton FX

Non-farm payrolls revives the tapering debate

The dollar experienced another boost of momentum today after non-farm payrolls beat estimates adding 204k workers vs 120k . The release highlighted that the Federal shutdown hardly had an effect on employment, and suggested that maybe the labour market is healthier than previously thought. This is likely to reignite the tapering debate. The shutdown as well as some less impressive figures from the US, dampened expectations that the Fed will begin tapering in December, and many market participants believed it was more likely to begin in the New Year. These figures have reopened the possibility of a December taper, and this should result in a firmer dollar in the weeks ahead.

Sasha Nugent
Currency Analyst
Caxton FX

Euro drops on the back of central bank action

This Thursday (5, July 2012) saw the Bank of England announce that it would be increasing its quantitative easing (QE) programme by £50bn, taking the total QE to £375bn. However, the lack of movement in the markets suggest that it was fully priced in.

The market moving news from yesterday was of course the European Central Bank (ECB) announcement to cut rates, with the main refinancing rate cut to 0.75% and the deposit rate to 0%, both down 25 basis points. The rate cuts were as expected but the markets took a fairly dim view on the action taken. Trading was volatile and the GBP/EUR rose from 1.244 to 1.254 in the wake of the announcement, now pushing its three-and-a-half year high.

The cutting of the deposit rate is designed to encourage banks to lend as they would now receive no interest on money deposited with the ECB overnight. Mario Draghi said in his statement that the eurozone was likely to show little or no growth and his downbeat outlook did not help the euro or those countries that have been struggling of late.

Spanish 10-year bonds have today reached levels over 7% and threaten to rise higher. 7% and above is considered by many as a dangerous, as well as an unsustainable level of borrowing costs, and was the level at which other countries, such as Ireland, had to request a bailout.

We also saw a surprise interest rate cut from the People’s Bank of China, an indication that growth in the world's second largest economy is slowing more than Beijing had previously expected. The last time the People’s Bank of China cut interest rates was shortly before poor economic data was released, maintaining its strategy of acting pre-emptively ahead of poor data. This most recent cut comes a week before a range of Chinese economic figures are due to be announced, possibly indicating a retracement in growth.

All eyes now turn to today’s announcement of US non-farm employment data due out at 1.30pm. Forecasts anticipate the data to show the number of people in employment grew to 97,000 this month, rising from 69,000 previously.

A positive announcement could lead the US dollar to be investors’ choice of currency and boost demand for the greenback, with traders lodging positions for the weekend. Should the data be worse than expected, we may also see currency flows toward the greenback, as investors become wary of the global economic condition and seek shelter with the relatively-safe US dollar.

The news will also have an impact on a number of other currencies, including the Aussie dollar and New Zealand dollar, with investors' risk appetite heavily reliant on US economic indicators.

Adam Highfield 
Analyst, Caxton FX

Pound down as GDP revision adds further woe

As suspected – revision of our GDP figure was less than positive (quite literally) as official data showed today that underlying growth was marginally weaker than previously thought in Q4, having been revised down to -0.6% from -0.5%.

The figure will add further credence to the 6 dovish leaning members of the MPC, who wanted to wait and see how the economy faired before jumping in to vote for an interest rate increase, but what will the implications of this be?

The market reaction saw the pound fall further across the board, reaching a month low versus the euro as traders took advantage of the figure and liquidated their long sterling positions. They now have to assess whether this dip in growth will change the prospects for the interest rate outlook.

It’s unlikely that a figure from last year will have too much bearing on rate expectations, particularly as Q1 2011 has gotten off to a solid start. Andrew Sentance et al I’m sure will merely shrug this figure off and put it down to snow-related disruptions. Traders have however pared back expectations for a 25 basis-point increase from May to June.

We now look forward to another busy week. Highlights include Britain’s PMI figures across the manufacturing, services and construction sectors due on consecutive days mid-week. After January’s positive results, (which lent a helping hand to the pound), we could well see further positive figures this month, buoying hopes that the economy will return to growth in the opening quarter of the year. We also have three central bank announcements on the calendar: the Reserve Bank of Australia , Bank of Canada and European Central Bank. However, no changes are expected.

The week’s headline comes right at the end in the form of US non-farm payrolls. Each month the hype in the market gets inflated as the release approaches, but more often than not price action is underwhelming. Nonetheless, US non-farms nearly always bring about an excitable market – no let up volatility approaching just yet.  

Any thoughts or comments are always welcome!

Edward Knox

Analyst - Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

US payrolls down and unemployment down...huh?

As is too often the case, the US non-farm payrolls offered up less information than it did stir up confusion. The actually employment change was far weaker than the market had hoped for, coming in at an additional 36,000, against forecasts of 139,000. However the unemployment rate dropped from 9.4% to 9.0%. 

This dramatic fall in the jobless level could come as a result of a drop in the number of people actually seeking employment. As they cease to look for work, they cease to be classified as unemployed. The disappointing employment change data is likely to take the prominent position among investors as we head in to next week, but nonetheless the dollar has enjoyed a strong close to the week.

The euro dropped to a ten-day low of $1.3547 as investors used the mixed data as an excuse to cash in on profits. The pound has also lost ground this afternoon, dropping back below $1.61.

However heading into next week, we continue to fly the flag of sterling optimism! When the market looks closely at today’s US employment figures it’s likely to conclude that the Fed are going to be in no further hurry to tighten policy. Indeed, Fed Chairman Bernanke could well reiterate that stance during a speech in front of the House Budget Committee on Wednesday, which would pile the pressure back on the dollar.

Against the euro too we see some upside next week ahead of the Bank of England’s policy announcement on Thursday. The market is pricing in a very small chance that the Bank could actually decide to raise interest rates. We’re unconvinced (as I think most are) that they’ll go ahead with such a move but that won’t stop little rumours being thrown around, which shouldn’t do sterling any harm. 

In the meantime, the currency markets can take a back seat as Twickenham lights up the opening of this year’s Six Nations!  Who guessed it would be Mike Tindall at the helm for England.…!?

Duncan Higgins

Senior Analyst - Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

US economy accelerates – dollar turn around seen

In contrast to Britain’s laughably poor economic growth figure earlier in the week, data this afternoon has shown that the US economy expanded by an annualised 3.2% in the final three months of 2010. Although the figure is marginally below the median forecast (3.3%), it does reaffirm the improving economic conditions seen in the US at present.

Earlier in the week the Fed stood by its stance to keep interest rates on hold “for an extended period” and I doubt that today’s figure will alter that view in any way. The real thorn in the side for the Fed is the stubbornly high rate of unemployment. Until economic growth starts to bring jobless numbers down we can expect the Fed to stand pat on policy, despite the recent addition of a couple of hawks onto the voting council.

We have seen a slight pickup for the dollar this afternoon. The GDP figure, although solid, is hardly setting the headlines alight and I think traders will probably be content to close up shop early for the weekend without the need to rush into new positions. However, looking to next week I expect that the dollar could begin a steady comeback as the disparity between the strength of the US and UK’s respective recoveries is made evident.

The pound’s been floating around up near $1.60 for the past two weeks, helped in part by a firmer euro and higher interest rate expectations. With those expectations now dashed and the euro looking vulnerable at $1.37, I can see a brighter outlook for the greenback.

Clearly conditions in the US are improving and the markets expect another positive employment change number at the end of next week. Certainly when compared to the snow bitten UK economy and the debt ridden eurozone, the US is looking like an increasingly good bet. And for those investors still looking for a safe-haven, Japan’s credit downgrade has down the yen no favours giving another reason to look out West.

The factors are building in favour of a stronger dollar. One convincing order on the sell side of EUR/USD and the trend will turn.

Duncan Higgins

Senior Analyst – Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The euro’s slide continues

Despite disappointing data from both the UK and US, the euro has not been able to make up any lost ground.

Sterling did take a slight knock this morning as the UK’s Services PMI figure came in at 49.7, well below the expected result of 52.9. However, any losses were soon regained and the pound hit an intraday high of €1.1855 against the single currency.

Aside from some slightly disappointing employment data, the greenback continues to climb. The euro is now just a shade away from collapsing below $1.30 and who would bet against the move coming as early as tomorrow?

The 17 nation currency continues to go from bad to worse. What would normally be bullish news, a successful Portuguese bond auction, turned sour as the premium Portugal will have to repay went up by well over 100 points. The news that the EU is potentially going to issue Europe wide bonds (rather than country specific) smells horribly like the actions bankers took in combining securities that got the world in this mess in the first place. Next week Italy and Spain will both have their first bond auctions of 2011. It will be very interesting to see what premium they will have to pay to secure finance. All-in-all, this storyline has legs and will dominate most of 2011.

In other news, well not that far from the apple tree, China’s shopping spree for entire nations (behind FT paywall) continues as they pledge to buy €6billion of Spanish debt. This is being viewed as a simple engagement to try to open up foreign markets to Chinese exports. However, with their cheaper yet comparable products, ownership of foreign government debt, vast currency and commodity reserves, could this be just another move to knock America from the top of global economics?

Tom Hampton

Analyst – Caxton FX

For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

Sterling is merely a spectator as the euro slumps against the US dollar

Despite worse than expected construction data from the UK, sterling has made gains against most of its major counterparts as it tracks the US dollar higher.

Positive employment data from the US and continuing fears about the eurozone debt crisis have sent the greenback higher with the pound hanging on to its coattails. A report showing that US companies created almost three times as many jobs in December than expected helped the US currency make its largest gains in almost three months. USD has recouped all losses made against the yen since new year’s eve and taken it back to pre-Christmas levels against the overinflated Swiss Franc.

Continuing issues in the eurozone will be the general theme for 2011 with a possible break-up of the single currency the most extreme prediction from some analysts (see this piece by Harry Wilson in The Telegraph). While this is unlikely, pressure from the stronger EU nations for a resolution could well lead to a state of greater fiscal union with Germany inevitably picking up the pieces.

Reading ‘Peston’s Picks’ from the BBC, I was interested to see his views on the Ipsos Mori survey published today. The survey outlines that FTSE 350 leaders are more upbeat about the start of 2011 than they were in 2010, despite heavy handed austerity measures. Mr Peston goes on to point out that despite muted optimism in early 2010, no one saw the collapse of Greece and Ireland (although according to this BBC piece his colleague James Robins, the BBC Diplomatic correspondent, did exactly that) . What will 2011 have in store for us?

In other news, further integration of China into the world economy took a leap forward as the World Bank has issued its first bond denominated in the Chinese yuan. The international lender could have plans afoot to make China its third largest stakeholder after the US and Japan.

And finally, pun’s about the state of the single currency reached fever pitch as Estonia has been enveloped into the EU’s economic bosom. Apparently, a cow in Tallinn, Estonia’s capital, offers an excellent exchange rate of one kroon to one euro, fifteen times better the actual exchange rate. Well, where there’s muck there’s brass! (sorry)
Tom Hampton
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.

The dollar continues to strengthen

Investors continue to unwind their short positions in the greenback today with the US currency up across the board following on from Fridays positive employment data.

Solid non-farm payroll data and renewed concerns over the debt crisis in the eurozone have contributed to the descent of EUR/USD which is down one cent on the day, currently trading at $1.3930.
With most, if not all questions answered about another round of monetary easing in the US, the market is now able to bring the euro’s problems back to the foreground. Data suggesting that the Spanish economy is reaching stagflation, Irish and Spanish bonds hitting record highs against their German counterparts, and a scare over liquidity issues for a major Spanish bank (see last paragraph) have all helped to suppress the single currency.

The ‘buck’ has maintained its positive run against sterling as well, however the effects are muted as the pound continues its run on the euro, currently trading around €1.1580. GBP did manage to hit a peak of $1.6288 on Thursday, however the dollar has inched its way back to $1.6145.

Apart from the BoE Inflation Report on Wednesday, this week is fairly light on market moving announcements. Expect to see more problems exposed in the EU though; it is about time the truth came out.

In other news, I reported a potential ‘run’ on a major Spanish bank that was having liquidity problems. It turns out that these reports were unsubstantiated. The truth of the situation is this; a large queue formed outside a BBVA branch in Madrid. The people in said queue were in fact waiting to be issued with their numbers for a 10k run. BBVA had sponsored the runners out of the kindness of their corporate hearts, however this was misconstrued as a potential liquidity problem and BBVA’s share price fell by 2%....... Things really are that jumpy in the PIGS at the moment!

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

Sterling strengthens against the US dollar

The pound strengthened against most of the major currencies yesterday following the Bank of England’s decision to cut interest rates by 50 basis points to 1%. Usually currency weakens on the back of interest rate cuts, however the opposite has occurred on this occasion as investors’ believe it points to a positive economic stimulus.

The pound reached a two-week high against the dollar, although experts believe this will be short lived with many predicting losses versus the greenback over the next few months. It hit a 23-year low just last month.

There are several significant announcements taking place in the US today including Nonfarm Payrolls, Average Hourly Earnings, Average Weekly Hours and Unemployment Rate at 13.30 GMT. In the UK, Industrial Production and Manufacturing Production data will be released at 09.30 GMT.

Dollar strengthens over the euro

The dollar strengthened over the euro by 0.59 cents yesterday to close the day at 1.2791, after rumors that the Securities and Exchange Commission is going to relax some accounting rules saw US stocks rally. This had the effect of improving risk appetite in the foreign exchange markets and saw the euro come off its earlier low of 1.2765, which it had been pushed to after lingering pressure from the downgrading of Russia's sovereign debt.

In today's trading there has been little change as investors wait for the announcement of a barrage of important US employment data. Announced at 13.30 GMT, Average Hourly Earnings, Non-farm Payrolls and Unemployment Rate figures will give a clear indication of the health of the US employment market and some investors speculate that we will notice a slowing in the rate of contraction. In the eurozone German Industrial Production data is announced this morning.