UK services sector figures were released this morning, showing a level of expansion not seen for thirteen months. In combination with strong construction data yesterday, this paints a much improved picture of the UK economy. It’s certainly a more positive picture than has been seen over the past few weeks following disappointing consumer confidence and retail sales data. Sterling has enjoyed a real boost on the back of the figures, climbing by 0.8% against the dollar, and over a 1% against the euro.
So how will this affect sentiment towards the UK economic recovery going forward? Well, it’s no secret that our economy is heavily geared towards the services sector (something the Conservative government are trying to amend but for the time being holds true). So the solid growth levels we have seen over the past three months in the services sector are broadly indicative of a decent GDP figure for the first quarter.
Current estimates for the April 27th first quarter GDP announcement are back up around 0.8% in light of today’s data. This matches the quarterly growth figure that we saw last summer, which was then followed by a 0.5% contraction in the final quarter of last year. It would perhaps therefore be premature to assume the UK’s recovery is guaranteed. However, the signs are certainly improving and, predictably, the debate surrounding when the BoE will raise interest rates has recommenced.
Over recent weeks, an August rate rise has been the dominant expectation. However, the brighter outlook for the economy indicated by data in the past couple of session has strengthened our case for a June rate rise. We still believe, along with 66 out of a survey of 67 economists, that a rate rise in Thursday’s BoE announcement is highly unlikely. We also believe that May will come too soon even if first quarter GDP comes in above forecast as the MPC will want evidence that the recovery can be sustained.
So what has today’s data done to our longer-term sterling outlook?
Major gains against the US dollar are still set to be limited by what we expect to be a slightly weaker euro over the coming weeks (the strength of sterling/US dollar has a close correlation with that of the euro/US dollar pairing). Nonetheless, we can see the pound hitting $1.6350 by the end of April, and climbing to €1.1650 against the euro.
These forecasts may be a little too sterling-positive for some. Sceptics towards the UK economy will require evidence of a more consumer-led recovery before investing in the pound, which in light of ongoing public spending cuts may be some time away. However, we believe specualtion of a second quarter BoE rate rise will provide enough fuel for some decent sterling gains.
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, 5 April 2011
Monday, 4 April 2011
The Aussie, the Kiwi and the Loonie- will the good old days of two or three to the pound return?
GBP/AUD: 1.56
GBP/NZD: 2.10
GBP/CAD: 1.56
These are the current interbank rates for sterling against the aussie, the kiwi and the loonie (Canadian dollar). Four years ago, one pound would buy you two and half aussie dollars, almost three kiwi dollars, and well over two Canadian dollars. These levels are reflective of historically riskier currencies versus the size and safety of the UK economy in years gone by. So, will we see these sorts of levels again or must be consigned to a new trading range?
In the case of the export-driven Australian and New Zealand economies, these have benefitted on a huge scale from the rise of China. Now the world’s second largest economy, China is a major trading partner to these two antipodean nations, and with commodity prices so high, their currencies have appreciated strongly. The higher interest rates of these two economies has for the past few years also provided investors with a far higher yield than those available in the UK, the US or Japan for example. This interest rate differential is set to be maintained for at least the next couple of years to come. The global recession hit the UK far harder than either Australia or New Zealand and it will take some time yet before a full recovery is established and it cope with fully normalised monetary policy (ie higher interest rates).
The loonie has also had reason to perform well, though for different reasons. Canada’s economy has benefitted from a broad rise in oil prices and from improving conditions in the US economy, its main trading partner. Canada’s economic fundamentals are solid – far more so than the UK’s - and the loonie had appreciated against the pound despite having equally low central bank interest rates.
None of the factors that have caused these ‘growth-linked’ currencies to appreciate against the pound, particularly the strength of the world’s two largest economies, look likely to fade any time soon. It would therefore be of huge surprise even in the long term to see a return of the levels of four years ago. The outlook for the British economy, in comparison to the “riskier” ones discussed above, looks distinctly pessimistic. With UK suffering economic contraction in the last quarter of 2010 and continuing to struggle with persistently high inflation, it might be argued that sterling is presently a riskier currency than the aussie dollar on a fundamental level. The day the pound has fully regained, for instance the near 40% it has lost against the aussie in the past 4 years, looks a very long way off indeed.
Although we actually view sterling to be undervalued at present (many others do not), it certainly appears that the current lowly trading ranges are set to continue for some time.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
GBP/NZD: 2.10
GBP/CAD: 1.56
These are the current interbank rates for sterling against the aussie, the kiwi and the loonie (Canadian dollar). Four years ago, one pound would buy you two and half aussie dollars, almost three kiwi dollars, and well over two Canadian dollars. These levels are reflective of historically riskier currencies versus the size and safety of the UK economy in years gone by. So, will we see these sorts of levels again or must be consigned to a new trading range?
In the case of the export-driven Australian and New Zealand economies, these have benefitted on a huge scale from the rise of China. Now the world’s second largest economy, China is a major trading partner to these two antipodean nations, and with commodity prices so high, their currencies have appreciated strongly. The higher interest rates of these two economies has for the past few years also provided investors with a far higher yield than those available in the UK, the US or Japan for example. This interest rate differential is set to be maintained for at least the next couple of years to come. The global recession hit the UK far harder than either Australia or New Zealand and it will take some time yet before a full recovery is established and it cope with fully normalised monetary policy (ie higher interest rates).
The loonie has also had reason to perform well, though for different reasons. Canada’s economy has benefitted from a broad rise in oil prices and from improving conditions in the US economy, its main trading partner. Canada’s economic fundamentals are solid – far more so than the UK’s - and the loonie had appreciated against the pound despite having equally low central bank interest rates.
None of the factors that have caused these ‘growth-linked’ currencies to appreciate against the pound, particularly the strength of the world’s two largest economies, look likely to fade any time soon. It would therefore be of huge surprise even in the long term to see a return of the levels of four years ago. The outlook for the British economy, in comparison to the “riskier” ones discussed above, looks distinctly pessimistic. With UK suffering economic contraction in the last quarter of 2010 and continuing to struggle with persistently high inflation, it might be argued that sterling is presently a riskier currency than the aussie dollar on a fundamental level. The day the pound has fully regained, for instance the near 40% it has lost against the aussie in the past 4 years, looks a very long way off indeed.
Although we actually view sterling to be undervalued at present (many others do not), it certainly appears that the current lowly trading ranges are set to continue for some time.
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, 1 April 2011
Strong US Non-Farms lift the dollar
It was announced today that the US economy recorded a larger than expected increase in non-farm payroll figures; the number of people (excluding the farming industry) who have been added to the employment register. This was also complimented by a reduction in the US unemployment rate itself from 8.9% to 8.8%.
Stubbornly high US unemployment has been the major reason for the Federal Reserve’s incredibly loose monetary policy so any improvements in the labour market should point us in the direction of tighter monetary policy. Today saw further improvement with an increase in payrolls of 216k, against expectations of a more modest 191k. This is certainly encouraging news for the economy but we will need to see a series of similar improvements for an interest rate hike to be brought into view. We have heard comments today suggesting as much from the New York State Fed, who stated that even though US job growth could rise even more rapidly in coming months, there is still no need to tighten policy just yet.
Nonetheless today’s figures do provide additional evidence that the US economic recovery is strengthening. Accordingly, the US dollar is at a six-month high against the yen and has made some decent gains against both sterling and the euro today. However, the improved employment figures have actually had an inverse impact on the USD/AUD and USD/NZD pairs. This is because an improved outlook for the world’s biggest economy encourages risk appetite; investors have been given the confidence to seek higher yielding currencies over the greenback.
On the home front, sterling suffered from a disappointing set of UK manufacturing figures today, which showed growth but at its slowest rate in five months. It seems we will have to wait a little longer for a turnaround in the fortunes of the UK’s struggling currency.
Meanwhile, congratulations to currencies direct on their football team’s league victory- a feat only explained by our absence.
A shocking session in the UK parliament today saw legislation passed to reinstate the Cornish currency (the Bezant) from 2015, a factor that may weigh on the pound in years to come...
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Stubbornly high US unemployment has been the major reason for the Federal Reserve’s incredibly loose monetary policy so any improvements in the labour market should point us in the direction of tighter monetary policy. Today saw further improvement with an increase in payrolls of 216k, against expectations of a more modest 191k. This is certainly encouraging news for the economy but we will need to see a series of similar improvements for an interest rate hike to be brought into view. We have heard comments today suggesting as much from the New York State Fed, who stated that even though US job growth could rise even more rapidly in coming months, there is still no need to tighten policy just yet.
Nonetheless today’s figures do provide additional evidence that the US economic recovery is strengthening. Accordingly, the US dollar is at a six-month high against the yen and has made some decent gains against both sterling and the euro today. However, the improved employment figures have actually had an inverse impact on the USD/AUD and USD/NZD pairs. This is because an improved outlook for the world’s biggest economy encourages risk appetite; investors have been given the confidence to seek higher yielding currencies over the greenback.
On the home front, sterling suffered from a disappointing set of UK manufacturing figures today, which showed growth but at its slowest rate in five months. It seems we will have to wait a little longer for a turnaround in the fortunes of the UK’s struggling currency.
Meanwhile, congratulations to currencies direct on their football team’s league victory- a feat only explained by our absence.
A shocking session in the UK parliament today saw legislation passed to reinstate the Cornish currency (the Bezant) from 2015, a factor that may weigh on the pound in years to come...
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, 31 March 2011
BNP Paribas plump for a May BoE rate rise, we disagree...
A interesting article in FT Advisor recently discussed one of the hot topics in the currency markets at present: - When will the BoE raise interest rates? A BNP Paribas economist is betting on a May rise, stating that “if they don’t act in May then I don’t think they will be able to raise it later in the year.”
We set out Caxton FX’s view last week and we are sticking to it, steadfast and defiant; the BoE will raise rates in June.
Discussions about a UK rate rise in April were dashed this month by an unchanged March voting pattern within the MPC and a distinct shortage of hawkish rhetoric. An April rise was made yet more unlikely following the events in Japan and the UK growth downgrade in the government’s annual Budget. So what about May? A May rate rise is by no means beyond the realms of possibility. This month’s MPC minutes did express a concern that inflation could exceed 5% in the near term, suggesting this could be a benchmark past which the BoE will be reluctant to tolerate further escalation.
Inflation currently sits at 4.4%, the next UK inflation updates comes on 12th April, which will be the inflation figure on which the May 5th BoE interest rate decision will be largely based. Therefore (stay with me), the inflation figure for April would have to increase by 0.6% for the MPC to finally be forced into biting the bullet on a rate hike. A month-on-month inflation increase of 0.6% has not been seen in over a year; it’s not unheard-of but the odds are that it won’t. This is all a bit statistical but it does suggest a May rate rise would be a surprise.
Perhaps more convincing is the argument that the MPC will remain in wait-and-see mode. The majority of policymakers want evidence of a stronger economic recovery. Indeed, we have seen sterling suffer in the past fortnight as sentiment towards the British economy has soured. The present outlook for UK GDP is weak and recent retail sales figures and consumer confidence data set alarm bells ringing. For a May rate rise, we imagine that a clean sweep of positive UK manufacturing, services and construction data would be required, in combination with an encouraging first quarter UK GDP announcement on April 27th. Whilst we do see negative perceptions of the UK economy as somewhat overdone, we are unconvinced the MPC will get the economic indications they are stubbornly waiting for.
In addition, we do not expect a further change in the voting pattern at the MPC’s April meeting – who are the fourth and fifth voters going to be I ask...? Two more MPC policymakers would have to be recruited to Andrew Sentance’s hawkish camp in the space of one month. Again this seems improbable; there have certainly been no indications of any further MPC hawks emerging in recent policymaker speeches.
There is also a political reason for delaying the rate rise. UK local elections are being held on 5th May and it seems unlikely that the MPC will announce a rate rise that would affect the political process, particularly as it would be detrimental to the incumbent Conservative government with whom the BoE work so closely.
As for the “May or not at all” comment, which the FT referred to... this really makes little sense, there will of course be a rate rise this year, there is nothing about the month of May that constitutes a deadline.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
We set out Caxton FX’s view last week and we are sticking to it, steadfast and defiant; the BoE will raise rates in June.
Discussions about a UK rate rise in April were dashed this month by an unchanged March voting pattern within the MPC and a distinct shortage of hawkish rhetoric. An April rise was made yet more unlikely following the events in Japan and the UK growth downgrade in the government’s annual Budget. So what about May? A May rate rise is by no means beyond the realms of possibility. This month’s MPC minutes did express a concern that inflation could exceed 5% in the near term, suggesting this could be a benchmark past which the BoE will be reluctant to tolerate further escalation.
Inflation currently sits at 4.4%, the next UK inflation updates comes on 12th April, which will be the inflation figure on which the May 5th BoE interest rate decision will be largely based. Therefore (stay with me), the inflation figure for April would have to increase by 0.6% for the MPC to finally be forced into biting the bullet on a rate hike. A month-on-month inflation increase of 0.6% has not been seen in over a year; it’s not unheard-of but the odds are that it won’t. This is all a bit statistical but it does suggest a May rate rise would be a surprise.
Perhaps more convincing is the argument that the MPC will remain in wait-and-see mode. The majority of policymakers want evidence of a stronger economic recovery. Indeed, we have seen sterling suffer in the past fortnight as sentiment towards the British economy has soured. The present outlook for UK GDP is weak and recent retail sales figures and consumer confidence data set alarm bells ringing. For a May rate rise, we imagine that a clean sweep of positive UK manufacturing, services and construction data would be required, in combination with an encouraging first quarter UK GDP announcement on April 27th. Whilst we do see negative perceptions of the UK economy as somewhat overdone, we are unconvinced the MPC will get the economic indications they are stubbornly waiting for.
In addition, we do not expect a further change in the voting pattern at the MPC’s April meeting – who are the fourth and fifth voters going to be I ask...? Two more MPC policymakers would have to be recruited to Andrew Sentance’s hawkish camp in the space of one month. Again this seems improbable; there have certainly been no indications of any further MPC hawks emerging in recent policymaker speeches.
There is also a political reason for delaying the rate rise. UK local elections are being held on 5th May and it seems unlikely that the MPC will announce a rate rise that would affect the political process, particularly as it would be detrimental to the incumbent Conservative government with whom the BoE work so closely.
As for the “May or not at all” comment, which the FT referred to... this really makes little sense, there will of course be a rate rise this year, there is nothing about the month of May that constitutes a deadline.
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.
Tuesday, 29 March 2011
Conflict within the fed - what can we take from it all?
Monetary policy is incredibly loose in the US. Record-low interest rates paired with a second round of quantitative easing, have made the dollar a far less appealing prospect to investors. Now, in the past few sessions, noises coming out of the US central bank have started to change.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
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
Startup Britain - the launch
I’ve just returned from the Startup Britain launch (good to see it trending on Twitter by the way). I have to say I was impressed. Not only is it a good idea, but there seems to be a real buy in from the Government too, clearly they can see the financial importance of small businesses to the UK economy- according to the FSB small firms contribute more than 49 per cent of the UK turnover!
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
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.
Friday, 25 March 2011
A tough week for sterling fizzles out quietly, what’s coming next week?
After hopes for an early rate hike were raised by UK inflation levels at 4.4%, sterling has proceeded in the past four days to drop by 2% against the US dollar. Against the euro the pound has dropped by 1.6% to a five- month low. An unchanged voting pattern and dovish tones within the MPC’s minutes; a downward revision of projected UK GDP for 2011 (thank you Mr. Osborne); a threat of a UK rating cut, and some woeful retail sales figures all conspired to ensure sterling’s slide this week.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
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We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
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, 24 March 2011
UK monthly retail figures vindicate MPC rate decision
Today’s UK retail sales data for the month of February suggest that the MPC was correct to keep the BoE interest rate fixed at 0.5%. The figure showed a 0.8% contraction in sales volumes, causing alarm bells to ring with regard to the UK economic recovery.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
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 consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
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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