Bernanke's speech at Jackson Hole, where at the same point last year he introduced QE2, has disappointed those hoping for a further programme of monetary easing, which would boost confidence, help to safeguard the US economic recovery, and improve the US stock market.
In truth, Bernanke's failure to pull the trigger on QE3 should not come as a surprise. The US economy is certainly in dire straits; its second quarter US GDP figure (annualised) was announced this afternoon to be a disappointing 1.0%. However, we may have to see the US recession dip back into recession, or at least come closer to doing so, in order for Bernanke to introduce QE3.
One key issue is that of US inflation. When QE2 was signalled, US inflation was falling, but at present the figure is rising and further monetary easing would exacerbate this. Another issue is that of dissent within the US Federal Reserve; the central bank is more prone to decisions by consensus and it would have been unusual for Bernanke to go ahead with the collection of high-profile, dissenting, fellow US policymakers we have heard from in recent weeks.
Bernanke stated that he is focusing on ways to promote US growth and improvements in the US labour market. However, this is not the end of the issue. The Fed is quite clearly willing to implement more quantitative easing, it is just setting the bar a little higher than many in the equity markets would prefer. The Fed's meeting minutes demonstrate that they are discussing the measure seriously as an issue.
So what's happened in the currency markets? Well, the US dollar rallied initially but gains have been erased. The was no new information provided by Bernanke. Do we the dollar hanging on to this week’s gains in the longer-term? No, we remain bearish on the greenback. Not even safe-haven flows seem likely to provide long-lasting support. An outlook characterised by low growth (and possible recession), high unemployment, ultra-low interest rates (and QE3?) and possibly further debt downgrades should ensure dollar-weakness.
Richard Driver
Caxton FX Anlayst
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 26 August 2011
Wednesday, 24 August 2011
Can the Bank of Japan's curb the yen's strength?
The Japanese economy is in recession, it is still recovering from a devastating natural disaster, Japan’s interest rate is at rock bottom and what is more, Moody’s has just downgrades Japanese debt. So why has the Japanese yen strengthened to record levels in recent weeks and months?
The answer is simple: the yen’s safe-haven status. The past six months have thrown up a huge amount of uncertainty in the financial markets. The Japanese earthquake disrupted international trade patterns, oil prices are sky high, global growth has slowed down, the eurozone debt crisis threatens the global banking system, and the US has had its debt downgraded and could be heading into another recession.
What do investors do in this climate? Head out of riskier assets such as commodity-linked currencies and equities, and into traditional safe haven assets such as government bonds (such as UK or US, not Greek!), gold, and the yen and swiss franc. The fact that the Japanese economy is struggling matters not a jot, the yen’s safe-haven status trumps all.
Turmoil in the financial markets looks unlikely to let up any time soon; it will probably take months for a long-term solution to the eurozone debt crisis to emerge, not to mention the increasing likelihood of a US recession and further debt downgrade next year. So what can stop the yen from strengthening?
Certainly the Japanese government and the Bank of Japan are very uncomfortable with the yen at current levels. There has been much jawboning about intervention in the currency markets in order to weaken the yen. The Bank of Japan conducted some unilateral intervention on Aug 4th, injecting around $3bn into the Japanese economy. Going on the yen’s climb in the time that has passed, this was unsuccessful.
Japan has very recently announced a $100bn credit line to encourage domestic firms to sell yen and invest overseas. Japanese officials may be coming to terms with the fact that they cannot to disrupt the yen’s longer-term strengthening. Further intervention efforts can be expected however, if for no other reason than to slow the yen’s appreciation. 75 yen to the dollar may well be the next benchmark which triggers further action from the Bank of Japan.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The answer is simple: the yen’s safe-haven status. The past six months have thrown up a huge amount of uncertainty in the financial markets. The Japanese earthquake disrupted international trade patterns, oil prices are sky high, global growth has slowed down, the eurozone debt crisis threatens the global banking system, and the US has had its debt downgraded and could be heading into another recession.
What do investors do in this climate? Head out of riskier assets such as commodity-linked currencies and equities, and into traditional safe haven assets such as government bonds (such as UK or US, not Greek!), gold, and the yen and swiss franc. The fact that the Japanese economy is struggling matters not a jot, the yen’s safe-haven status trumps all.
Turmoil in the financial markets looks unlikely to let up any time soon; it will probably take months for a long-term solution to the eurozone debt crisis to emerge, not to mention the increasing likelihood of a US recession and further debt downgrade next year. So what can stop the yen from strengthening?
Certainly the Japanese government and the Bank of Japan are very uncomfortable with the yen at current levels. There has been much jawboning about intervention in the currency markets in order to weaken the yen. The Bank of Japan conducted some unilateral intervention on Aug 4th, injecting around $3bn into the Japanese economy. Going on the yen’s climb in the time that has passed, this was unsuccessful.
Japan has very recently announced a $100bn credit line to encourage domestic firms to sell yen and invest overseas. Japanese officials may be coming to terms with the fact that they cannot to disrupt the yen’s longer-term strengthening. Further intervention efforts can be expected however, if for no other reason than to slow the yen’s appreciation. 75 yen to the dollar may well be the next benchmark which triggers further action from the Bank of Japan.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 22 August 2011
Weekly Round-Up: Sterling the new safe haven currency?
Merkel and Sarkozy offer little action
Last week’s meeting between Merkel and Sarkozy failed to provide any concrete action on the eurozone debt issue. The introduction of a eurozone bond was discarded as an option and the EFSF is not to be expanded. Vague commitments to common governance and a Tobin tax were the main results, neither of which inspired much confidence.
The euro is still trading fairly strongly tough, particularly against the dollar. This is largely attributable to increasing dollar-weakness and a degree of relief that the ECB are buying eurozone debt to stabilise peripheral bond yields.
US recession looms
The Philly Fed manufacturing index revealed an alarming contraction last week, intensifying speculation that the US economy is heading back into recession. The index gave its worst reading since the recession levels of March 2009. Global stocks suffered a major slide as a result, and riskier commodity-linked currencies sold off sharply, but the euro remains stable.
The US GDP figure is expected to be revised down by 0.2% to 1.1% (annualised) on Friday. Also on Friday is the key focus of the week, Fed Chairman Ben Bernanke’s speech. The prospects of a third programme of quantitative easing are improving with every poor piece of US data and Bernanke’s comments this week could be crucial for the dollar’s longer-term direction.
Sterling gains some safe-haven status
News from the UK economy was by no means positive last week. The monthly UK retail sales figure came in below expectations and UK unemployment data was particularly poor. In addition, the MPC minutes were very dovish indeed. The two remaining MPC hawks, Charles Bean and Spencer Dale abandoned their quest for higher UK interest rates and joined the rest of the 9 member committee in voting for an interest rate hold at 0.5%. This all but eliminates the chances of monetary tightening this year and pushes back bets towards the back end of next year, if at all.
Nonetheless, sterling is trading very strongly against both the euro and particularly the US dollar. Much of this is due to the pound receiving an increased share of safe-haven flows. With doubts over the US credit rating and building concerns of another US recession, as well as fears of currency intervention with regard to the yen and the swiss franc (major safe haven currencies), sterling has acquired its own haven status.
With the dollar likely to remain weak in the long-term, particularly if further QE is signalled by Bernanke on Friday, sterling’s prospects have improved significantly across the board.
There is plenty of risk with regard to eurozone data this week; we have a raft of PMI data released tomorrow, as well as forward-looking German economic sentiment and business climate data. The economic picture in Germany and the eurozone as a whole has taken a turn for the worse in light of last week’s poor GDP figures (0.1% and 0.2% respectively). If weak eurozone data puts eurozone debt back under pressure, then market nerves will rise once again.
Sterling is trading at $1.65 and €1.1450 at present. Risks on both pairings this week are to the upside, while the EUR/USD pairing should remain somewhere near current levels of $1.44.
End of week forecast
GBP / EUR 1.15
GBP / USD 1.66
EUR / USD 1.4430
GBP / AUD 1.57
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Last week’s meeting between Merkel and Sarkozy failed to provide any concrete action on the eurozone debt issue. The introduction of a eurozone bond was discarded as an option and the EFSF is not to be expanded. Vague commitments to common governance and a Tobin tax were the main results, neither of which inspired much confidence.
The euro is still trading fairly strongly tough, particularly against the dollar. This is largely attributable to increasing dollar-weakness and a degree of relief that the ECB are buying eurozone debt to stabilise peripheral bond yields.
US recession looms
The Philly Fed manufacturing index revealed an alarming contraction last week, intensifying speculation that the US economy is heading back into recession. The index gave its worst reading since the recession levels of March 2009. Global stocks suffered a major slide as a result, and riskier commodity-linked currencies sold off sharply, but the euro remains stable.
The US GDP figure is expected to be revised down by 0.2% to 1.1% (annualised) on Friday. Also on Friday is the key focus of the week, Fed Chairman Ben Bernanke’s speech. The prospects of a third programme of quantitative easing are improving with every poor piece of US data and Bernanke’s comments this week could be crucial for the dollar’s longer-term direction.
Sterling gains some safe-haven status
News from the UK economy was by no means positive last week. The monthly UK retail sales figure came in below expectations and UK unemployment data was particularly poor. In addition, the MPC minutes were very dovish indeed. The two remaining MPC hawks, Charles Bean and Spencer Dale abandoned their quest for higher UK interest rates and joined the rest of the 9 member committee in voting for an interest rate hold at 0.5%. This all but eliminates the chances of monetary tightening this year and pushes back bets towards the back end of next year, if at all.
Nonetheless, sterling is trading very strongly against both the euro and particularly the US dollar. Much of this is due to the pound receiving an increased share of safe-haven flows. With doubts over the US credit rating and building concerns of another US recession, as well as fears of currency intervention with regard to the yen and the swiss franc (major safe haven currencies), sterling has acquired its own haven status.
With the dollar likely to remain weak in the long-term, particularly if further QE is signalled by Bernanke on Friday, sterling’s prospects have improved significantly across the board.
There is plenty of risk with regard to eurozone data this week; we have a raft of PMI data released tomorrow, as well as forward-looking German economic sentiment and business climate data. The economic picture in Germany and the eurozone as a whole has taken a turn for the worse in light of last week’s poor GDP figures (0.1% and 0.2% respectively). If weak eurozone data puts eurozone debt back under pressure, then market nerves will rise once again.
Sterling is trading at $1.65 and €1.1450 at present. Risks on both pairings this week are to the upside, while the EUR/USD pairing should remain somewhere near current levels of $1.44.
End of week forecast
GBP / EUR 1.15
GBP / USD 1.66
EUR / USD 1.4430
GBP / AUD 1.57
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 17 August 2011
MPC hawks fly the nest
The MPC minutes have revealed that all nine members of the Bank of England’s rate-setting committee voted to keep the base rate on hold at the current 0.5% level. Adam Posen remains the sole policymaker voting for further quantitative easing, despite some awful UK employment data released this morning.
The fact that Martin Weale and Charles Bean have dropped their rate hike calls is highly significant; it drives home the message that UK economic prospects are highly uncertain. In light of last week’s quarterly inflation report, Weale and Bean’s defection is not wholly surprising. With medium-term inflation risks very much skewed to the downside, there is now little pushing the BoE to hike rates. The picture is similar to what we are seeing in the US -low growth and a subdued inflation outlook -which is reversing near and medium-term rate hike bets on both sides of the Atlantic.
Another factor persuading the former hawks to change tack is the threat that the eurozone debt crisis poses to the UK economy. Central banks all over the world are reluctant to raise rates amid the current uncertainty in the financial markets; they really don’t know what’s going to happen. Merkel and Sarkozy’s meeting yesterday provided little clarity as to a viable solution to the debt crisis.
The recent second quarterly UK growth figure was undeniably poor and has increased speculation of quantitative easing. However, there is a degree of optimism surrounding underlying growth. The Office of National Statistics estimates that growth would have been half a percent higher in the absence of temporary factors such as the Royal Wedding. The bar for further quantitative easing is set pretty high and July’s services PMI figure will have eased concerns for the time being.
Today’s data from the UK labour market supports the MPC’s dovish stance; at 30k, jobless claims are at the highest we have seen in over two years. At 7.9%, the unemployment rate also erased improvements made over recent months.
Sterling’s losses in response to this morning’s MPC minutes and poor employment data were short-lived across the board. In truth, bets on a near-term BoE rate hike were pretty much non-existent and expectations for a move early next year were sparse. The minutes just confirmed suspicions that the MPC will remain dovish for the foreseeable future. At $1.6550 on the interbank rate, sterling is now at a ten-week high against the greenback, which represents an excellent opportunity to buy dollars.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The fact that Martin Weale and Charles Bean have dropped their rate hike calls is highly significant; it drives home the message that UK economic prospects are highly uncertain. In light of last week’s quarterly inflation report, Weale and Bean’s defection is not wholly surprising. With medium-term inflation risks very much skewed to the downside, there is now little pushing the BoE to hike rates. The picture is similar to what we are seeing in the US -low growth and a subdued inflation outlook -which is reversing near and medium-term rate hike bets on both sides of the Atlantic.
Another factor persuading the former hawks to change tack is the threat that the eurozone debt crisis poses to the UK economy. Central banks all over the world are reluctant to raise rates amid the current uncertainty in the financial markets; they really don’t know what’s going to happen. Merkel and Sarkozy’s meeting yesterday provided little clarity as to a viable solution to the debt crisis.
The recent second quarterly UK growth figure was undeniably poor and has increased speculation of quantitative easing. However, there is a degree of optimism surrounding underlying growth. The Office of National Statistics estimates that growth would have been half a percent higher in the absence of temporary factors such as the Royal Wedding. The bar for further quantitative easing is set pretty high and July’s services PMI figure will have eased concerns for the time being.
Today’s data from the UK labour market supports the MPC’s dovish stance; at 30k, jobless claims are at the highest we have seen in over two years. At 7.9%, the unemployment rate also erased improvements made over recent months.
Sterling’s losses in response to this morning’s MPC minutes and poor employment data were short-lived across the board. In truth, bets on a near-term BoE rate hike were pretty much non-existent and expectations for a move early next year were sparse. The minutes just confirmed suspicions that the MPC will remain dovish for the foreseeable future. At $1.6550 on the interbank rate, sterling is now at a ten-week high against the greenback, which represents an excellent opportunity to buy dollars.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 16 August 2011
German GDP slows, alarm bells ringing?
Second quarter German GDP was released this morning and it showed an alarming slowdown in growth in the European powerhouse. The German economy grew by just 0.1% from April to July, below expectations of a 0.5% figure, and well below a first quarterly growth figure of 1.3%. In addition, the eurozone’s second quarter GDP figure as a whole came in at 0.2% (from a Q1 figure of 0.8%). What is more, forward-looking data suggests there Germany can expect ongoing slower growth in the second half of the year.
The euro has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?
Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.
It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.
Richard Driver
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 has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?
Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.
It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 15 August 2011
A Weekly Round-Up: Sterling, Euro, Dollar
Stocks tumble but the major pairings remain in range
Attention last week was very much centred on activities in the stock market. The US debt downgrade, combined with ongoing concerns surrounding global growth and the absence of a long-term solution to the eurozone debt situation, triggered major declines in global equities. Market confidence was as low as we have seen it all year. Nonetheless, the US dollar failed to capitalise from heightened demand for safe-haven assets.
However, there have not been major moves amongst the major currency pairings; sterling remains fairly unchanged against both the euro and the dollar. The truth remains that the US, UK and eurozone economies have such serious economic problems that they cannot muster the support to sustain a rally.
The main event this week as far as the euro is concerned is tomorrow’s meeting between Merkel and Sarkozy. The two heavyweights will be looking at a long-term solution to the euro-regions debt situation which is now threatening major eurozone nations such as Spain, Italy and France.
The Fed promises record-low rates until mid-2013
Last week’s US Federal Reserve meeting was highly significant. Chairman Ben Bernanke announced that the US interest rate will remain at its current record-low level of <0.25% for the next two years, in a bid to nurture the US economy’s struggling recovery. The removal of any rate hike bets weakens the US dollar’s prospects in the long-term. However, prevailing concerns surrounding another global recession are likely to keep the greenback supported via its safe-haven demand.
In terms of the US economy, we had more mixed data last week. Monthly US retail sales figures showed an encouraging uptick, but some awful US consumer sentiment data suggests future figures could disappoint. This week’s data calendar is a quiet one from the US economy, we have had some awful manufacturing data out this afternoon which will only cement pessimistic bets for growth.
MPC minutes in focus
This week brings some important UK-related news. The UK consumer price index (headline inflation) is announced tomorrow. This is forecast to show an uptick but last week’s BoE quarterly inflation report was distinctly dovish on this issue. It suggested that inflation will still spike up to 5.0% in coming months, before falling fairly rapidly back down towards the official 2.0% target next year.
The MPC minutes are released on Wednesday and it will be very interesting to see whether quantitative easing gained further air-time, and whether one of the two remaining MPC hawks defected to the dovish camp. One thing can be safely assumed, there will be no UK interest rate hike for many months to come. Thursday sees the release of the monthly UK retail sales figure, which is expected to show some further modest growth.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.6330
EUR / USD 1.4450
GBP / AUD 1.55
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.
Attention last week was very much centred on activities in the stock market. The US debt downgrade, combined with ongoing concerns surrounding global growth and the absence of a long-term solution to the eurozone debt situation, triggered major declines in global equities. Market confidence was as low as we have seen it all year. Nonetheless, the US dollar failed to capitalise from heightened demand for safe-haven assets.
However, there have not been major moves amongst the major currency pairings; sterling remains fairly unchanged against both the euro and the dollar. The truth remains that the US, UK and eurozone economies have such serious economic problems that they cannot muster the support to sustain a rally.
The main event this week as far as the euro is concerned is tomorrow’s meeting between Merkel and Sarkozy. The two heavyweights will be looking at a long-term solution to the euro-regions debt situation which is now threatening major eurozone nations such as Spain, Italy and France.
The Fed promises record-low rates until mid-2013
Last week’s US Federal Reserve meeting was highly significant. Chairman Ben Bernanke announced that the US interest rate will remain at its current record-low level of <0.25% for the next two years, in a bid to nurture the US economy’s struggling recovery. The removal of any rate hike bets weakens the US dollar’s prospects in the long-term. However, prevailing concerns surrounding another global recession are likely to keep the greenback supported via its safe-haven demand.
In terms of the US economy, we had more mixed data last week. Monthly US retail sales figures showed an encouraging uptick, but some awful US consumer sentiment data suggests future figures could disappoint. This week’s data calendar is a quiet one from the US economy, we have had some awful manufacturing data out this afternoon which will only cement pessimistic bets for growth.
MPC minutes in focus
This week brings some important UK-related news. The UK consumer price index (headline inflation) is announced tomorrow. This is forecast to show an uptick but last week’s BoE quarterly inflation report was distinctly dovish on this issue. It suggested that inflation will still spike up to 5.0% in coming months, before falling fairly rapidly back down towards the official 2.0% target next year.
The MPC minutes are released on Wednesday and it will be very interesting to see whether quantitative easing gained further air-time, and whether one of the two remaining MPC hawks defected to the dovish camp. One thing can be safely assumed, there will be no UK interest rate hike for many months to come. Thursday sees the release of the monthly UK retail sales figure, which is expected to show some further modest growth.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.6330
EUR / USD 1.4450
GBP / AUD 1.55
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, 11 August 2011
France could be the tipping point to euro collapse
The equity markets came under further downward pressure today. The fresh concerns that have arisen in the last couple of session have been directed at France.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 10 August 2011
Bank of England downgrades UK growth prospects
The Bank of England’s quarterly inflation report has revealed downgraded growth forecasts for the UK economy and a calmer projection of UK inflation. Higher prices may not be positive for me and you as consumers, but investors love high inflation, because the best tool for controlling it is raising interest rates (and we all love higher interest rates...as long as we are not borrowing).
The market was prepared for a more pessimistic outlook for UK economy. Growth figures over the past quarter have taken a turn for the worse and expectations are not for a strong rebound, so the Bank of England’s forecasts stand to reason.
On the upside for sterling, Mervyn King gave us no reason to think they are moving any closer to introducing further quantitative easing. Nonetheless, the Bank of England will be satisfied to ride out the expected spike up to 5% in UK inflation in the short-term, before watching prices ease fairly rapidly next year. In the absence of high inflation in 2012 and with growth likely to be stodgy, a Bank of England rate hike looks unlikely to come at all next year at this stage. The Bank of England is mirroring the Fed’s monetary policy outlook to a certain extent; no QE yet and certainly no rate hike for a long time.
What we are seeing is uncertainty in the global economy filtering into central bank monetary policy. Near-term interest rate bets in Australia, New Zealand, Norway and the eurozone have all been scaled back as a result of the eurozone debt panic and fears of another US recession; people really don’t know what’s going to happen.
Sterling recovered from a knee-jerk sell-off against both the euro and the dollar; after all, there were no great surprises from the report or from King. This afternoon has seen equities suffer another sell-of, which has seen risk currencies, including the euro suffer some fairly sharp declines. The US Federal Reserve’s statement last night has clearly done little to ease market fears that the US economy is heading back into a recession, not to mention the unresolved debt crisis in the eurozone. Speculation is also surfacing that France (a core eurozone nation) may lose its AAA credit rating, just as the US has recently done at the hands of Standard and Poor’s.
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 market was prepared for a more pessimistic outlook for UK economy. Growth figures over the past quarter have taken a turn for the worse and expectations are not for a strong rebound, so the Bank of England’s forecasts stand to reason.
On the upside for sterling, Mervyn King gave us no reason to think they are moving any closer to introducing further quantitative easing. Nonetheless, the Bank of England will be satisfied to ride out the expected spike up to 5% in UK inflation in the short-term, before watching prices ease fairly rapidly next year. In the absence of high inflation in 2012 and with growth likely to be stodgy, a Bank of England rate hike looks unlikely to come at all next year at this stage. The Bank of England is mirroring the Fed’s monetary policy outlook to a certain extent; no QE yet and certainly no rate hike for a long time.
What we are seeing is uncertainty in the global economy filtering into central bank monetary policy. Near-term interest rate bets in Australia, New Zealand, Norway and the eurozone have all been scaled back as a result of the eurozone debt panic and fears of another US recession; people really don’t know what’s going to happen.
Sterling recovered from a knee-jerk sell-off against both the euro and the dollar; after all, there were no great surprises from the report or from King. This afternoon has seen equities suffer another sell-of, which has seen risk currencies, including the euro suffer some fairly sharp declines. The US Federal Reserve’s statement last night has clearly done little to ease market fears that the US economy is heading back into a recession, not to mention the unresolved debt crisis in the eurozone. Speculation is also surfacing that France (a core eurozone nation) may lose its AAA credit rating, just as the US has recently done at the hands of Standard and Poor’s.
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, 9 August 2011
Global stocks suffer as global recession fears mount
Away from the turmoil that we are seeing on the streets of the UK, matters in the financial markets are equally chaotic. The FTSE 100 dipped below the 5000 benchmark for the first time in over a year and indices across the world are showing similarly sharp declines.
What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’
Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.
Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.
The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.
The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.
Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
What has caused it? Well, concerns over global growth have been growing over recent weeks and months. There has been a noticeable slowdown in growth data throughout the global economies. Most alarmingly though, the US economy has entered an alarming ‘soft patch.’
Eurozone debt issues have also built to a crescendo in recent weeks. Greece narrowly avoided a messy default (though it was clearly a selective default) and was dealt its second bailout in 18months and Portugal has had to be bailed out. Even more concerning is the fact that bond yields in Spain and Italy (two major eurozone economies) have hit record highs in the past week. Unless borrowing costs in these two nations calm down, the willingness of Germany to provide further funding will be stretched to breaking point. Surely Germany cannot be expected to bankroll the eurozone’s heavily indebted states indefinitely.
Arguably the straw that broke the camel’s back was rating agency Standard & Poor’s avoidance of the United States’ AAA credit rating. Their eleventh hour avoidance of a US default failed to prevent the move, and global markets have reacted by flooding out of risk assets and into safe-havens such as gold and the swiss franc.
The steep decline we have seen in recent sessions has stabilised today, perhaps indicative of a feeling that stocks have been oversold. However, with the US Federal Reserve meeting tonight and tomorrow’s UK quarterly inflation report likely to downgrade respective US and UK growth forecasts, the good news story to boost confidence looks unlikely to be forthcoming.
The safe-haven dollar is trading pretty strongly at present but long-term prospects look fairly grim from where we are sitting. Low growth, high unemployment, a debt downgrade, ultra-loose monetary policy and the possibility of a third programme of quantitative easing, low inflation; all these factors point to a weaker dollar. Yes the UK and the eurozone have their own problems, very serious problems, but the dollar looks particularly weak in the long-term.
Meanwhile, events in London may well be taking their toll on the sterling. Things are getting out of hand and it wouldn’t be surprising for the markets to finally take note.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 11 July 2011
Delay is hurting the euro.
Shares in Italy’s biggest bank, Unicredit Spa, lost 7.9 percent on what the Italian media have dubbed “Black Friday,” a day which saw a large sell-off in Italian assets. Unicredit Spa, along with several other banks, witnessed a sharp drop in the stock market caused largely by worries about the results of stress tests of European banks, the results of which will be released on July 15th. Friday’s market sell-off has increased fears that Italy, the third largest economy in the euro zone, could be the next to suffer in the debt crisis. This brings major concern to the ECB as the euro zone’s current rescue mechanism, the EFSF, would have insufficient funds to help should Italian bond yields continue to rise and put heavy pressure on Italy’s finances.
A gathering of the European Union’s top finance officials in Brussels on Monday is being described as a “coordination, not a crisis meeting.” Despite Herman Van Rompuy’s (president of the European Council) spokesman claiming that Italy will not be on the agenda, it seems impossible that the situation in Italy will not be discussed in Van Rompuy’s meeting with ECB President Jean-Claude Trichet and Jean-Claude Juncker, chairman of the Eurogroup and a few more.
This small meeting of EU finance officials comes ahead of a larger meeting of the 17 euro zone ministers this afternoon which will focus mainly on discussion of the private sector’s involvement in a second bailout package for Greece. Germany, Austria, Finland and the Netherlands are the main advocates in pushing for banks, insurers and other private holders of Greek bonds to shoulder up to a quarter of the bailout package, but after two weeks of negotiations with bankers, very little progress has been made on a plan agreeable to all sides.
The latest proposal that seems to be gaining credence is a plan which would swap Greek bonds for longer-dated debt that would extend maturities by seven years. However, this would likely be seen as a default by ratings agencies while both ECB and German officials stick tight to their claims that they will not accept any plan that is regarded a default.
Another idea that has been floated around, but would essentially mean euro zone finance ministers’ accepting a Greek default, is a buy-back system in which the EFSF bailout fund would buy Greek bonds from the market and retire them. Another major problem with this idea is that it would require changes to the EFSF’s rules, so it would have to pass through national parliaments.
A key issue in all of this is time. Although Greece says it doesn’t need the bailout until early September, euro zone officials see it necessary to get a deal done within the next couple of weeks as any further delay could weigh heavily on investor confidence in the region. As for the euro, speed is definitely of the essence. It has declined by over two cents against the dollar, and by almost a cent against the pound.
Matt Abraham
Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
A gathering of the European Union’s top finance officials in Brussels on Monday is being described as a “coordination, not a crisis meeting.” Despite Herman Van Rompuy’s (president of the European Council) spokesman claiming that Italy will not be on the agenda, it seems impossible that the situation in Italy will not be discussed in Van Rompuy’s meeting with ECB President Jean-Claude Trichet and Jean-Claude Juncker, chairman of the Eurogroup and a few more.
This small meeting of EU finance officials comes ahead of a larger meeting of the 17 euro zone ministers this afternoon which will focus mainly on discussion of the private sector’s involvement in a second bailout package for Greece. Germany, Austria, Finland and the Netherlands are the main advocates in pushing for banks, insurers and other private holders of Greek bonds to shoulder up to a quarter of the bailout package, but after two weeks of negotiations with bankers, very little progress has been made on a plan agreeable to all sides.
The latest proposal that seems to be gaining credence is a plan which would swap Greek bonds for longer-dated debt that would extend maturities by seven years. However, this would likely be seen as a default by ratings agencies while both ECB and German officials stick tight to their claims that they will not accept any plan that is regarded a default.
Another idea that has been floated around, but would essentially mean euro zone finance ministers’ accepting a Greek default, is a buy-back system in which the EFSF bailout fund would buy Greek bonds from the market and retire them. Another major problem with this idea is that it would require changes to the EFSF’s rules, so it would have to pass through national parliaments.
A key issue in all of this is time. Although Greece says it doesn’t need the bailout until early September, euro zone officials see it necessary to get a deal done within the next couple of weeks as any further delay could weigh heavily on investor confidence in the region. As for the euro, speed is definitely of the essence. It has declined by over two cents against the dollar, and by almost a cent against the pound.
Matt Abraham
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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