The yen has weakened off by around 11.5% against the euro in the past two months. This is largely attributable to the convergence of performance between the US and Japan economies and monetary easing from the Bank of Japan.
The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.
The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.
The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.
Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.
February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.
There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.
Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.
Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.
Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.
We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Showing posts with label portuguese debt. Show all posts
Showing posts with label portuguese debt. Show all posts
Wednesday, 14 March 2012
Tuesday, 28 February 2012
Portugal passes bailout review - aid tranche to be released
The main news this morning was that Portugal is to recieve its next €14.6bn tranche of aid under last year's bailout agreement, having passed the Troik's assessment.
The market’s response has been fairly muted but it is definitely relieving news from Portugal.
The Iberian country is clearly next on the market’s ‘hit list’ and this next tranche is essential for eurozone confidence in the short-term. It staves off fears that Portugal is destined to follow the same path as Greece.
Portugal is making the right noises in ruling out the need for further aid but the market is very much in wait and see mode now, the cynics will say they’ve heard it all before.
Ireland has shown that aggressive reforms can actually work and return countries to competitiveness, so there is a precedent to follow there.
The OECD’s research shows that the periphery are actually working hard on their reforms, the problem is it can take a long time for all of the benefits to emerge, time the markets aren’t necessarily willing to grant countries like Portugal.
It will be interesting to see if tomorrow’s 3-year LTRO from the ECB relieves some of the pressure on Portuguese bond yields. Portuguese yields actually increased since mid-December’s LTRO and you’d assume they will be left out in the cold this time, which is a major concern.
Richard Driver
Caxton FX Analyst
The market’s response has been fairly muted but it is definitely relieving news from Portugal.
The Iberian country is clearly next on the market’s ‘hit list’ and this next tranche is essential for eurozone confidence in the short-term. It staves off fears that Portugal is destined to follow the same path as Greece.
Portugal is making the right noises in ruling out the need for further aid but the market is very much in wait and see mode now, the cynics will say they’ve heard it all before.
Ireland has shown that aggressive reforms can actually work and return countries to competitiveness, so there is a precedent to follow there.
The OECD’s research shows that the periphery are actually working hard on their reforms, the problem is it can take a long time for all of the benefits to emerge, time the markets aren’t necessarily willing to grant countries like Portugal.
It will be interesting to see if tomorrow’s 3-year LTRO from the ECB relieves some of the pressure on Portuguese bond yields. Portuguese yields actually increased since mid-December’s LTRO and you’d assume they will be left out in the cold this time, which is a major concern.
Richard Driver
Caxton FX Analyst
Tuesday, 7 February 2012
Weekly Round-Up: UK economy picks up, Greece stalls
Greek issue drags on…and on
The euro is holding up remarkably well given the weight of concern that is surrounding Greece and indeed Portugal. Last Monday’s (30th Jan) EU Summit saw Germany’s deficit control proposals finalized and the official scheduling of the €500bn permanent bailout fund’s (the EFSF) introduction for July this year. Positive steps but hardly game-changers.
The issue that continues to obsess the financial markets is Greece. Talks over private sector involvement in a Greek debt swap, which will involve significant write downs on investor holdings of Greek debt, have been the primary focus of the markets for some time now. Agreement is required for Greece to receive the €130bn it needs to avoid default in March. Time and again we have been assured a deal was imminent, but deadlines have been repeatedly been missed and negotiations are ongoing. On balance, there is probably a feeling that a deal will be reached in the end, which will avoid a Greek default for now. However, we are not anticipating a major euro relief rally on the back of any positive announcement.
This is explained by the issues that remain even if a Greek default is averted. Portugal is clearly next in the firing line; Portuguese bond yields reaching fresh record highs is evidence of this. Rating agency Fitch added to the pressure in the bond markets by downgrading several eurozone states last week, including heavyweights Spain and Italy. The euro has actually made a strong start to the year, largely as a result of short-covering, but we maintain a bearish view on the single unit.
UK growth figures raise hope of U-shaped recovery
Last week’s UK PMI figures were broadly very encouraging; the services sector grew at its fastest pace in ten months, whilst the manufacturing sector bounced back into positive growth. The UK construction sector posted another poor figure, but the data as a whole represents a source of hope that Britain can avoid a double-dip recession. This week’s manufacturing and industrial production figures are also expected to return to growth.
This will all be insufficient to dissuade the Bank of England from introducing further monetary easing to the UK economy at Thursday’s meeting (in the form of further QE). However, it should be enough to convince Mervyn King & Co to add £50bn rather than £75bn of QE, which should reduce the downside risks to sterling. The ECB also meet on Thursday and it could well cut its 1.00% interest rate by a further 0.25%, though they may choose to wait a further month.
US recovery continues to impress
Economic figures out of the US economy are on a clear uptrend at present. This was evidenced most importantly by the key monthly labour market update, which revealed 243 thousand jobs were added to payrolls (the most in nine months). Risk appetite away from the US dollar increased as a result of the announcement, but has since been hemmed in by growing frustrations surrounding Greece.
Sterling is trading at 1.2050 against the euro, in the middle of a range that has persisted throughout the start of this year and should continue to do so over the coming sessions. Trading up at $1.58, sterling is performing excellently against the US dollar and may keep on climbing for now, but is due a pullback soon.
End of week forecast
GBP / EUR 1.2025
GBP / USD 1.5850
EUR / USD 1.3180
GBP / AUD 1.46
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The euro is holding up remarkably well given the weight of concern that is surrounding Greece and indeed Portugal. Last Monday’s (30th Jan) EU Summit saw Germany’s deficit control proposals finalized and the official scheduling of the €500bn permanent bailout fund’s (the EFSF) introduction for July this year. Positive steps but hardly game-changers.
The issue that continues to obsess the financial markets is Greece. Talks over private sector involvement in a Greek debt swap, which will involve significant write downs on investor holdings of Greek debt, have been the primary focus of the markets for some time now. Agreement is required for Greece to receive the €130bn it needs to avoid default in March. Time and again we have been assured a deal was imminent, but deadlines have been repeatedly been missed and negotiations are ongoing. On balance, there is probably a feeling that a deal will be reached in the end, which will avoid a Greek default for now. However, we are not anticipating a major euro relief rally on the back of any positive announcement.
This is explained by the issues that remain even if a Greek default is averted. Portugal is clearly next in the firing line; Portuguese bond yields reaching fresh record highs is evidence of this. Rating agency Fitch added to the pressure in the bond markets by downgrading several eurozone states last week, including heavyweights Spain and Italy. The euro has actually made a strong start to the year, largely as a result of short-covering, but we maintain a bearish view on the single unit.
UK growth figures raise hope of U-shaped recovery
Last week’s UK PMI figures were broadly very encouraging; the services sector grew at its fastest pace in ten months, whilst the manufacturing sector bounced back into positive growth. The UK construction sector posted another poor figure, but the data as a whole represents a source of hope that Britain can avoid a double-dip recession. This week’s manufacturing and industrial production figures are also expected to return to growth.
This will all be insufficient to dissuade the Bank of England from introducing further monetary easing to the UK economy at Thursday’s meeting (in the form of further QE). However, it should be enough to convince Mervyn King & Co to add £50bn rather than £75bn of QE, which should reduce the downside risks to sterling. The ECB also meet on Thursday and it could well cut its 1.00% interest rate by a further 0.25%, though they may choose to wait a further month.
US recovery continues to impress
Economic figures out of the US economy are on a clear uptrend at present. This was evidenced most importantly by the key monthly labour market update, which revealed 243 thousand jobs were added to payrolls (the most in nine months). Risk appetite away from the US dollar increased as a result of the announcement, but has since been hemmed in by growing frustrations surrounding Greece.
Sterling is trading at 1.2050 against the euro, in the middle of a range that has persisted throughout the start of this year and should continue to do so over the coming sessions. Trading up at $1.58, sterling is performing excellently against the US dollar and may keep on climbing for now, but is due a pullback soon.
End of week forecast
GBP / EUR 1.2025
GBP / USD 1.5850
EUR / USD 1.3180
GBP / AUD 1.46
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 6 June 2011
A Greek default: What would it mean?
An interesting Robert Peston blog (BBC) with a somewhat doomsdayish tone discussed the possible ramifications of Greek default. The US exposure to the banks of the eurozone periphery is very significant. The US has the second largest exposure to Greece. A Greek default would almost certainly have knock-on effects throughout the European banking system, not least in the periphery. Worryingly for the US, it has the third largest exposure to Portuguese and Irish debt and a whole lot more vested in Spain, Italy and various other nations.
With the US debt ceiling debate still roaring on, the US banking system would be rocked by a Greek default and the others that would inevitably follow. The global economy would plunge back into a recession, that’s almost certain. Indeed, in light of the recent slowdown in global growth, some are forecasting a double-dip regardless.
What would the consequences of a genuine Greek default be for the single currency? Well, the euro has recovered strongly in the past week, in line with greater confidence that the Greek situation is verging on a resolution. GBP/EUR hit €1.16 and EUR/USD hit $1.40, but these two pairs are now at $1.12 and $1.46 respectively. Should the Greek situation truly implode (unlikely now), the euro would suffer hugely, and the survival of the euro itself would come into question. US banks will have been very encouraged by Merkel’s comments last week, indicating Germany’s commitment to the euro is as strong as ever.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the US debt ceiling debate still roaring on, the US banking system would be rocked by a Greek default and the others that would inevitably follow. The global economy would plunge back into a recession, that’s almost certain. Indeed, in light of the recent slowdown in global growth, some are forecasting a double-dip regardless.
What would the consequences of a genuine Greek default be for the single currency? Well, the euro has recovered strongly in the past week, in line with greater confidence that the Greek situation is verging on a resolution. GBP/EUR hit €1.16 and EUR/USD hit $1.40, but these two pairs are now at $1.12 and $1.46 respectively. Should the Greek situation truly implode (unlikely now), the euro would suffer hugely, and the survival of the euro itself would come into question. US banks will have been very encouraged by Merkel’s comments last week, indicating Germany’s commitment to the euro is as strong as ever.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 18 April 2011
Peripheral debt issues finally hit the euro...hard.
The euro is being sold off by the bucket load today. German ministers have claimed that Greece is unlikely to make it through the summer without defaulting. Success for the euro-sceptic True Finns party in the Finnish parliamentary elections has created further uncertainty around the recent Portuguese bailout request. Moody’s rating agency has also downgraded Irish debt to junk status today. All this on what was supposed to be a relatively quiet session!
Investors have been spooked by reports from the Greek media that Greece recently told the EU and the IMF that it wanted to restructure its debt. The story was denied by officials in Athens, but the damage had already been done.
Should such an event occur, it would be the first debt restructuring in the EU’s fairly brief history, which in the absence of precedent carries with it very real concerns. If Greece defaults, who would bet against Portugal and Ireland defaulting? Spanish debt has held up fairly well in the wake of the Portuguese bailout request, but contagion to Portugal’s Iberian counterpart remains a constant threat.
BBC business editor Robert Peston’s blog on Friday noted the risks of peripheral defaults to Germany. The German economy is performing robustly at present, but the German banking system is actually quite vulnerable, and Peston’s point about their exposure to peripheral debt is a good one. A debt restructuring would mean a haircut for creditors like German banks, so the German people should be careful about toughening up on its struggling eurozone friends!
As a result of today’s news, the euro has fallen sharply across the board. Against the dollar, the single currency has fallen by nearly 1.5%, and almost 1% against sterling. Asian sovereign buyers have been very willing to buy on euro dips, and have also been particularly resilient to eurozone debt issues in recent months.
We expect euro will find some support in the Asian session, though recouping all of today’s losses will require a serious show of faith.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Investors have been spooked by reports from the Greek media that Greece recently told the EU and the IMF that it wanted to restructure its debt. The story was denied by officials in Athens, but the damage had already been done.
Should such an event occur, it would be the first debt restructuring in the EU’s fairly brief history, which in the absence of precedent carries with it very real concerns. If Greece defaults, who would bet against Portugal and Ireland defaulting? Spanish debt has held up fairly well in the wake of the Portuguese bailout request, but contagion to Portugal’s Iberian counterpart remains a constant threat.
BBC business editor Robert Peston’s blog on Friday noted the risks of peripheral defaults to Germany. The German economy is performing robustly at present, but the German banking system is actually quite vulnerable, and Peston’s point about their exposure to peripheral debt is a good one. A debt restructuring would mean a haircut for creditors like German banks, so the German people should be careful about toughening up on its struggling eurozone friends!
As a result of today’s news, the euro has fallen sharply across the board. Against the dollar, the single currency has fallen by nearly 1.5%, and almost 1% against sterling. Asian sovereign buyers have been very willing to buy on euro dips, and have also been particularly resilient to eurozone debt issues in recent months.
We expect euro will find some support in the Asian session, though recouping all of today’s losses will require a serious show of faith.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 14 April 2011
Greek debt returns to the spotlight
German minister Wolfgang Schauble today expressed concerns that Greece may be unable to meet its debt repayments by June. This triggered a wave of uncertainty within the debt and currency markets, as fears remerge that Greece may be forced into restructuring its debt.
ECB policymaker Bini Smaghi has also joined the discussion. Smaghi stated that a restructuring of Greek debt would be disastrous for its economy - he, pointed to the risks to its banking sector, social cohesion and even democracy within the troubled state. Greek government bonds have come under real pressure today as a result. Smaghi warned that public speculation over eurozone debt issues can turn out to be self-fulfilling prophecies (almost certainly true of both the Irish and Portuguese bailouts), and so might be the case here. Smaghi went on to assert that if Greek banks were to lose access to ECB financing, then “The Greek economy would be on its knees”, which seems somewhat hypocritical to me...
Last week saw Portugal request a bailout - the market remained broadly unconcerned, perhaps relieved that the issue had finally been addressed. The real concerns were that Spanish and Italian debt would come under pressure as investors focused elsewhere, but these struggling states have impressively been able to maintain investor confidence thus far.
Greek officials have denied the need to restructure their debt; but then again Portugal strongly rebuffed accusations that they would require a bailout (and we all know how that ended). The current picture of Greece’s economy is one of GDP contraction, low tax revenues, soaring unemployment and vicious public sector cuts. Prevailing arguments suggest that this is creating a downward spiral from which the state cannot pull out - unless its debts are written off.
The euro has come under real pressure as a result of the various comments that have surfaced today, dropping by over a cent against the dollar. Could this finally be the turnaround in the euro we’ve been waiting for? It seems unlikely. We’ll have to wait and see how the Greek situation develops, but today’s euro-weakening should only be a temporary. We have seen time and again the resolve of Asian sovereigns to buy the euro, particularly when it has dipped in the European session.
In addition, we’re already seeing the euro recover as we speak, suggesting that market concerns may have been overdone. Nonetheless, this has been a welcome break for a struggling UK currency, which is now trading at a more palatable level above €1.13.
Richard Driver
Currency Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
ECB policymaker Bini Smaghi has also joined the discussion. Smaghi stated that a restructuring of Greek debt would be disastrous for its economy - he, pointed to the risks to its banking sector, social cohesion and even democracy within the troubled state. Greek government bonds have come under real pressure today as a result. Smaghi warned that public speculation over eurozone debt issues can turn out to be self-fulfilling prophecies (almost certainly true of both the Irish and Portuguese bailouts), and so might be the case here. Smaghi went on to assert that if Greek banks were to lose access to ECB financing, then “The Greek economy would be on its knees”, which seems somewhat hypocritical to me...
Last week saw Portugal request a bailout - the market remained broadly unconcerned, perhaps relieved that the issue had finally been addressed. The real concerns were that Spanish and Italian debt would come under pressure as investors focused elsewhere, but these struggling states have impressively been able to maintain investor confidence thus far.
Greek officials have denied the need to restructure their debt; but then again Portugal strongly rebuffed accusations that they would require a bailout (and we all know how that ended). The current picture of Greece’s economy is one of GDP contraction, low tax revenues, soaring unemployment and vicious public sector cuts. Prevailing arguments suggest that this is creating a downward spiral from which the state cannot pull out - unless its debts are written off.
The euro has come under real pressure as a result of the various comments that have surfaced today, dropping by over a cent against the dollar. Could this finally be the turnaround in the euro we’ve been waiting for? It seems unlikely. We’ll have to wait and see how the Greek situation develops, but today’s euro-weakening should only be a temporary. We have seen time and again the resolve of Asian sovereigns to buy the euro, particularly when it has dipped in the European session.
In addition, we’re already seeing the euro recover as we speak, suggesting that market concerns may have been overdone. Nonetheless, this has been a welcome break for a struggling UK currency, which is now trading at a more palatable level above €1.13.
Richard Driver
Currency Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 7 April 2011
BoE sticks, ECB twists.
Today it was announced that the BoE left the interest rate unchanged at 0.5%, whilst the ECB announced a quarter percent rate rise to put the eurozone base rate at 1.25%. Given that these decisions were widely predicted, the market response to the news has been somewhat muted.
The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.
Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.
As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.
In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The ECB press conference was of more interest. Trichet’s comments may not have triggered any significant movements but we do think they could have signalled an end to the euro uptrend that we have seen over the past month. Trichet refused to commit to a further rate rise, adopting a wait-and-see approach. If anything his comments suggested that the rate rise was more at the “once-and-done” end of the spectrum than, the “first-of-several” end.
Significantly, Trichet omitted the phrase “strong vigilance” with regard to monitoring inflation levels, reflective of a less ECB hawkish stance. He certainly reiterated that price pressures would be closely watched, but there’s reason for uncertainty surrounding ECB monetary policy going forward, which contrasts with broad expectations that the BoE will hike rates at least by July.
As well as a broadly euro-negative ECB press conference, the single currency has also come under some pressure today in light of last night’s Portuguese bailout request. Talk of the markets turning their attention on to Spanish debt issues has created a renewed air of uncertainty around the eurozone’s fiscal problems. We have held the view over recent weeks that the euro is overvalued and today’s announcements appear to have given further credence to this view.
In other news, Japan’s misery continues as another earthquake strikes the northeast of the country. It’s fortunately not on the same scale as last month’s quake so we can be hopeful that there’ll be considerably less devastation caused. Global stocks have fallen on the news but the currency markets remain as yet unpeturbed.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 6 April 2011
Why the euro has reached its heights...
Today we saw the euro hit a fourteen month high against the dollar, breaking stubborn resistance to currently trade above $1.43. We have subsequently seen euro/US dollar forecasts of $1.40, $1.45, $1.50 and beyond amid expectations of an ECB rate tightening cycle.
Despite such forecasts, we hold firm to our view that the euro is overvalued at $1.43 and will run out of momentum fairly soon after tomorrow’s rate rise, assuming that Trichet only announces a 0.25% rate rise and not a 0.5%. We are confident that a 0.5% is too hawkish even for the ECB.
So what are the dollar’s long-term prospects? A much-improved picture of the US economy has emerged from the US, to the extent that we can be quite confident that QEII will not be extended past June. A 2011 Fed interest rate rise has even been mooted by one or two US policymakers; such are the prospects for US growth looking forward. In conclusion, the dollar’s weakness seen in recent weeks is unlikely to last past this summer, as the market prices in a more hawkish Fed stance.
The UK has also enjoyed an improved economic outlook on the back of very strong services data on Tuesday. Some hopes for a May rate rise may have been dashed by today’s release of disappointing manufacturing and industrial data for February but it really didn’t tell us anything we weren’t already aware of. Regardless of today’s figures, expectations of a June rate rise have been strengthened over the past week, which is likely to place the BoE at the front of the queue (a factor that is bound to be sterling positive) following tomorrow’s ECB decision.
Added to a more optimistic view of the euro’s major counterparts, we expect eurozone problems (and indeed the impact of tomorrow’s ECB rate rise in exacerbating those problems), to come under the spotlight in coming weeks. Portuguese bond yields are at 9% and look set to reach new record highs up near 10%, causing many to change their bailout timeframe from a matter of months to weeks. Though we have said this for some time, the cost of their debt really isn’t sustainable and this rate rise could be the straw that breaks the camel’s back as far as Portugal is concerned. In addition, details of a more permanent eurozone-wide bailout facility remain elusive, which has irritated markets in the past and those frustrations could yet return.
Whilst we do think that the euro will drop off from its current highs, we do not think that the single currency will fall too far below the psychological $1.40 mark. We are confident that Asian investment will keep the euro well-supported, that the market has grown a thicker skin to peripheral debt issues, and that a certain degree of bailout crisis has already been priced into the euro. Nonetheless, $1.43 for euro/US dollar at the end of this month would certainly be a surprise.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Despite such forecasts, we hold firm to our view that the euro is overvalued at $1.43 and will run out of momentum fairly soon after tomorrow’s rate rise, assuming that Trichet only announces a 0.25% rate rise and not a 0.5%. We are confident that a 0.5% is too hawkish even for the ECB.
So what are the dollar’s long-term prospects? A much-improved picture of the US economy has emerged from the US, to the extent that we can be quite confident that QEII will not be extended past June. A 2011 Fed interest rate rise has even been mooted by one or two US policymakers; such are the prospects for US growth looking forward. In conclusion, the dollar’s weakness seen in recent weeks is unlikely to last past this summer, as the market prices in a more hawkish Fed stance.
The UK has also enjoyed an improved economic outlook on the back of very strong services data on Tuesday. Some hopes for a May rate rise may have been dashed by today’s release of disappointing manufacturing and industrial data for February but it really didn’t tell us anything we weren’t already aware of. Regardless of today’s figures, expectations of a June rate rise have been strengthened over the past week, which is likely to place the BoE at the front of the queue (a factor that is bound to be sterling positive) following tomorrow’s ECB decision.
Added to a more optimistic view of the euro’s major counterparts, we expect eurozone problems (and indeed the impact of tomorrow’s ECB rate rise in exacerbating those problems), to come under the spotlight in coming weeks. Portuguese bond yields are at 9% and look set to reach new record highs up near 10%, causing many to change their bailout timeframe from a matter of months to weeks. Though we have said this for some time, the cost of their debt really isn’t sustainable and this rate rise could be the straw that breaks the camel’s back as far as Portugal is concerned. In addition, details of a more permanent eurozone-wide bailout facility remain elusive, which has irritated markets in the past and those frustrations could yet return.
Whilst we do think that the euro will drop off from its current highs, we do not think that the single currency will fall too far below the psychological $1.40 mark. We are confident that Asian investment will keep the euro well-supported, that the market has grown a thicker skin to peripheral debt issues, and that a certain degree of bailout crisis has already been priced into the euro. Nonetheless, $1.43 for euro/US dollar at the end of this month would certainly be a surprise.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 30 March 2011
Should Portugal just bite the bullet and seek annexation by Brazil...?
So suggests an interesting article on the Financial Times website today.
The context: The current strength of the euro reveals that the markets are not overly concerned with the Portuguese debt crisis at present, or indeed with the eurozone debt problems in general. This remains the case despite almost daily news of credit downgrades to peripheral nations; most recently Greece and Portugal. With a decision on the EU bailout fund delayed until June, the debt crisis is unlikely to be resolved any time soon.
The unstable fiscal situation in Portugal is so bad that an interview on the Financial Times website mooted a highly controversial solution. It was argued that Brazil, Portugal’s former colony, should annex the struggling Iberian state. Portugal is a very low growth, high deficit economy with major governmental issues (currently doesn’t have one!). Brazil’s economy, by contrast, is set to boom again this year and is so large (in total GDP at least, not per capita) it could accommodate Portugal’s substantial and crippling debt with little trouble.
Granted, the comment was ‘tongue-in-cheek’ and was clearly designed to provoke a reaction. Such a solution is totally unprecedented and quite plainly there is no willingness from either nation to allow such a dilution to their national identities.
Nonetheless, the interview did treat the Portuguese issue with the urgency it warrants, and with the urgency we see returning to the markets. Our bet is that as soon as next week’s ECB rate rise is a thing of the past, market sentiment towards the debt issue will worsen and weigh on the euro accordingly. Already borrowing costs in the periphery are unsustainable; throwing in a 0.25% rise in the base interest rate is only going to send costs higher.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The context: The current strength of the euro reveals that the markets are not overly concerned with the Portuguese debt crisis at present, or indeed with the eurozone debt problems in general. This remains the case despite almost daily news of credit downgrades to peripheral nations; most recently Greece and Portugal. With a decision on the EU bailout fund delayed until June, the debt crisis is unlikely to be resolved any time soon.
The unstable fiscal situation in Portugal is so bad that an interview on the Financial Times website mooted a highly controversial solution. It was argued that Brazil, Portugal’s former colony, should annex the struggling Iberian state. Portugal is a very low growth, high deficit economy with major governmental issues (currently doesn’t have one!). Brazil’s economy, by contrast, is set to boom again this year and is so large (in total GDP at least, not per capita) it could accommodate Portugal’s substantial and crippling debt with little trouble.
Granted, the comment was ‘tongue-in-cheek’ and was clearly designed to provoke a reaction. Such a solution is totally unprecedented and quite plainly there is no willingness from either nation to allow such a dilution to their national identities.
Nonetheless, the interview did treat the Portuguese issue with the urgency it warrants, and with the urgency we see returning to the markets. Our bet is that as soon as next week’s ECB rate rise is a thing of the past, market sentiment towards the debt issue will worsen and weigh on the euro accordingly. Already borrowing costs in the periphery are unsustainable; throwing in a 0.25% rise in the base interest rate is only going to send costs higher.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 28 March 2011
Ongoing cause for eurozone concern but sterling/euro levels set to remain until April 7th
In the wake of the EU Summit last week, and further eurozone developments over the weekend, now is a good time to discuss how on earth the euro can be performing so strongly and how long we can expect this continue.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 23 March 2011
MPC Minutes dishearten investors but high hopes for change were misplaced
After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 18 March 2011
Crunch Time: EU Summit
Next Friday’s EU Summit marks a self-imposed deadline for eurozone leaders to reach an agreement on a “comprehensive package” to deal with the region’s fiscal problems. Progress was made earlier than expected at the preliminary Summit last weekend, and the markets responded positively – perhaps too positively if Trichet’s recent pessimistic comments are anything to go by.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 17 March 2011
Market Volatility Explained
The beginning of 2011 has thrown up a series of major market-moving events and we thought it’d be useful to take a closer look at the extent to which localised unrest and disasters can send shockwaves through the currency markets, and why. After all, how many of you would expect that the Norwegian Kroner will directly benefit from social uprisings in Bahrain? (Norway is a major oil producer, Middle Eastern tensions push oil prices up, Norway profits.)
Whilst the currency markets are more volatile than, for example the equity markets, in calmer times even currency movements can be relatively predictable. When the market spotlight is focused on economic fundamentals, data announcements have a direct impact and exchange rates are more faithful to trends. In early 2011, we saw sentiment governed by interest rate speculation and sterling benefited accordingly whilst the greenback suffered.
However, such factors are of little relevance to investors during times of uncertainty. Most recently the Japanese crisis, but before this the natural disasters in Australia and New Zealand, and unrest throughout the Middle East and North Africa, place traditional economic factors on the backburner. Long-term investors flee to the safety of currencies such as the Swiss franc, the US dollar and the Japanese yen. Short-term investors, or “speculators,” react so quickly to events that their movement is as unpredictable as the freak occurrences on which they base their currency “bets.”
Using the Swiss franc as an example, market volatility surrounding natural disasters is clearly visible in the context of the Japanese earthquake/tsunami/nuclear crisis, and is clearly visible. The “swissie” climbed 6 cents against the Australian dollar from 1.06 to 1.12 in the space of 3 days, having hovered around the 1.06 mark for the preceding three weeks. Investors abandon calculated risks on currencies such as the aussie, euro and sterling, and revert back to safety in such uncertain times leading to sharp appreciation of “safer” currencies such as the Swiss franc.
We can be confident that these times of heightened volatility will prove temporary. As events stabilise in states such as Bahrain and Japan the market’s will begin to calm down and factors such as interest rate differentials and growth potential will return to focus, bringing with them more predictable currency investments. However, amid soaring debt levels in eurozone peripheral countries, there may yet be another crisis round the corner unless the EU can reach a firm agreement at their Summit meeting next week.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Whilst the currency markets are more volatile than, for example the equity markets, in calmer times even currency movements can be relatively predictable. When the market spotlight is focused on economic fundamentals, data announcements have a direct impact and exchange rates are more faithful to trends. In early 2011, we saw sentiment governed by interest rate speculation and sterling benefited accordingly whilst the greenback suffered.
However, such factors are of little relevance to investors during times of uncertainty. Most recently the Japanese crisis, but before this the natural disasters in Australia and New Zealand, and unrest throughout the Middle East and North Africa, place traditional economic factors on the backburner. Long-term investors flee to the safety of currencies such as the Swiss franc, the US dollar and the Japanese yen. Short-term investors, or “speculators,” react so quickly to events that their movement is as unpredictable as the freak occurrences on which they base their currency “bets.”
Using the Swiss franc as an example, market volatility surrounding natural disasters is clearly visible in the context of the Japanese earthquake/tsunami/nuclear crisis, and is clearly visible. The “swissie” climbed 6 cents against the Australian dollar from 1.06 to 1.12 in the space of 3 days, having hovered around the 1.06 mark for the preceding three weeks. Investors abandon calculated risks on currencies such as the aussie, euro and sterling, and revert back to safety in such uncertain times leading to sharp appreciation of “safer” currencies such as the Swiss franc.
We can be confident that these times of heightened volatility will prove temporary. As events stabilise in states such as Bahrain and Japan the market’s will begin to calm down and factors such as interest rate differentials and growth potential will return to focus, bringing with them more predictable currency investments. However, amid soaring debt levels in eurozone peripheral countries, there may yet be another crisis round the corner unless the EU can reach a firm agreement at their Summit meeting next week.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 16 March 2011
Eurozone crisis still bubbling under the surface
The crisis in Japan is understandably dominating the headlines in the financial markets as the impact on the global economy is contemplated. Aside from this, the state of emergency in Bahrain is also providing reason for the markets to remain in a heightened state of nervousness. The country’s debt rating has been cut to BBB by Moody's and there remains the possibility of an Iranian militarily intervention if the protests escalate.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.
After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.
Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 10 March 2011
UK interest rates left unchanged - expect a rise in June
It is no secret that central bank interest rates represent the main driver of the foreign exchange market at present. So why isn’t today’s monthly UK interest rate announcement an exciting one? Well, because we knew that the 0.5% rate would be maintained, as it has been every month for the past two years.
UK inflationary pressures are soaring at double the BoE’s target and given the ECB’s recent hawkish indication of an April rate hike, there has been growing demand for the MPC to take similar action to tighten policy. However, the BoE is wary of destabilising the economic recovery at this stage and we don’t see rates changing until June. Nor should they; we really need to wait until June to know what impact the UK’s austerity measures will have on British growth.
However, it will be interesting to see what the minutes of the MPC reveal. At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. We may see a fourth vote added in favour of a rate rise this month, but we still don’t envisage the BoE raising rates before June - by which time there should be firmer evidence that economic conditions are improving.
Given that the MPC was expected to maintain rates, we have seen a somewhat surprising drop in value for sterling, falling by over a cent against the dollar to its lowest point in almost a fortnight. However, the focus for the market will now turn on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles. After a week where the euro has suffered somewhat against its major counterparts on the back of flare-ups in Greece, Portugal and now Spain, the single currency would benefit hugely from some progress on the peripheral debt issue.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
UK inflationary pressures are soaring at double the BoE’s target and given the ECB’s recent hawkish indication of an April rate hike, there has been growing demand for the MPC to take similar action to tighten policy. However, the BoE is wary of destabilising the economic recovery at this stage and we don’t see rates changing until June. Nor should they; we really need to wait until June to know what impact the UK’s austerity measures will have on British growth.
However, it will be interesting to see what the minutes of the MPC reveal. At last month’s MPC meeting, resident hawks Andrew Sentance and Martin Weale recruited Spencer Dale to their cause, but remained outnumbered by 6:3. We may see a fourth vote added in favour of a rate rise this month, but we still don’t envisage the BoE raising rates before June - by which time there should be firmer evidence that economic conditions are improving.
Given that the MPC was expected to maintain rates, we have seen a somewhat surprising drop in value for sterling, falling by over a cent against the dollar to its lowest point in almost a fortnight. However, the focus for the market will now turn on the EU summit this weekend, where officials will attempt to work towards an agreement on the eurozone’s fiscal troubles. After a week where the euro has suffered somewhat against its major counterparts on the back of flare-ups in Greece, Portugal and now Spain, the single currency would benefit hugely from some progress on the peripheral debt issue.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 8 March 2011
Will the eurozone debt crisis flare up once more via Portugal? And what will it mean for the euro?
Eurozone leaders are meeting this weekend in a prelude to the main EU summit in a fortnight’s time, where they will attempt to work towards an expanded bailout fund to deal with the region’s debt problems. As ever, the market expects little progress.
Addressing the key issue, it’s less a question of whether Portugal will need to accept a bailout and more of a question of when. The likelihood is that this will be sooner rather than later as the longer Portugal delays the inevitable, the more expensive it will become. The ailing country’s 10-year bond yields reached euro-era highs yesterday at 7.55%, which is simply not sustainable. Portugal opposes turning to the EU and IMF for help, but similar bond yield trends triggered bailouts for Greece and Ireland last year, and if Portugal sticks to its stubborn line then monetary assistance may be forced upon it by April.
As if things weren’t bad enough for poor old Portugal, Trichet has recently indicated that the ECB will raise interest rates to fight inflation (as discussed in the last blog), which will only increase borrowing costs for a country that remains in recession. So, what choice does Portugal have?
Interestingly, the market has moved the spotlight back onto Greece this week, in light of Greece’s recent credit downgrade. However, the markets are fickle and the Portuguese problem will be back in the headlines before long.
The impact that a Portuguese bailout or a Greek default will have on the euro is not as clear as might be imagined. A trend appears to have emerged of fading market sensitivity to eurozone debt crises over the past year; Greece shocked investors, Ireland less so, and more recently the euro has strengthened across the board despite these imminent periphery issues. On the other hand, investors may lose patience with the eurozone’s inability to find a long-term solution. Clearly a firm agreement on the bailout fund at the end of this month would do much to set investors minds at ease.
For the time being, the single currency seems set to continue to benefit from its new “front-of-the-queue” status with regard to raising interest rates. However, once this arrives (consensus is that this will be in April), focus will then shift to the effect that this rate rise could have on countries like Portugal, and their impending funding issues. Accordingly, a long-term euro uptrend is far less secure than its monthly outlook and sterling could yet revisit the winning ways it enjoyed early this year, especially following its own rate hike (potentially May/June), which is bound to entice investors.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Addressing the key issue, it’s less a question of whether Portugal will need to accept a bailout and more of a question of when. The likelihood is that this will be sooner rather than later as the longer Portugal delays the inevitable, the more expensive it will become. The ailing country’s 10-year bond yields reached euro-era highs yesterday at 7.55%, which is simply not sustainable. Portugal opposes turning to the EU and IMF for help, but similar bond yield trends triggered bailouts for Greece and Ireland last year, and if Portugal sticks to its stubborn line then monetary assistance may be forced upon it by April.
As if things weren’t bad enough for poor old Portugal, Trichet has recently indicated that the ECB will raise interest rates to fight inflation (as discussed in the last blog), which will only increase borrowing costs for a country that remains in recession. So, what choice does Portugal have?
Interestingly, the market has moved the spotlight back onto Greece this week, in light of Greece’s recent credit downgrade. However, the markets are fickle and the Portuguese problem will be back in the headlines before long.
The impact that a Portuguese bailout or a Greek default will have on the euro is not as clear as might be imagined. A trend appears to have emerged of fading market sensitivity to eurozone debt crises over the past year; Greece shocked investors, Ireland less so, and more recently the euro has strengthened across the board despite these imminent periphery issues. On the other hand, investors may lose patience with the eurozone’s inability to find a long-term solution. Clearly a firm agreement on the bailout fund at the end of this month would do much to set investors minds at ease.
For the time being, the single currency seems set to continue to benefit from its new “front-of-the-queue” status with regard to raising interest rates. However, once this arrives (consensus is that this will be in April), focus will then shift to the effect that this rate rise could have on countries like Portugal, and their impending funding issues. Accordingly, a long-term euro uptrend is far less secure than its monthly outlook and sterling could yet revisit the winning ways it enjoyed early this year, especially following its own rate hike (potentially May/June), which is bound to entice investors.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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