The monthly figure for UK manufacturing growth has come in well below expectations and sterling has understandably plummeted as a result. Going into today’s session, sentiment towards the UK economy was tentative at best given last week’s first quarter GDP figure of 0.5%. Anything less than 0.5% would officially have put the UK economy back in recession.
The market would have been looking for a clean sweep of positive UK data this week, and this morning’s drastic undershoot only increases the pressure on growth elsewhere. With growth in services and construction expected to slow, risks are certainly to the downside on sterling.
The MPC will make its monthly rate statement on Thursday, and no change in the 0.5% BoE rate is anticipated. With arch-hawk Andrew Sentance set to leave the MPC this month, a BoE rate rise this summer is looking increasingly unlikely.
The ECB is also making its monthly rate decision on Thursday, and whilst the market consensus is that it will follow last month’s rate hike in June, there is a small chance it will tighten policy again this week. Eurozone inflation is well above the official target, and the ECB (unlike the BoE) has shown it is more concerned with maintaining price stability than with safeguarding economic growth. In all likelihood it will be Trichet’s press conference on Thursday that will hold focus, as the market looks for firmer indications that the ECB will raise rates again next month.
Having fallen through robust support levels against the euro at €1.12, sterling looks highly vulnerable to further losses this week. Moreover, it is difficult to pinpoint a catalyst for a sterling turnaround unless this week’s figures show some unexpected growth.
All eyes are on tomorrow morning’s UK construction figures then. Sterling is in dire need of a surprise acceleration in growth. As always, comments are welcomed.
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, 3 May 2011
Thursday, 28 April 2011
Prospects for US dollar go from bad to worse
The fortunes of the US dollar have taken a severe knock over the past 24 hours. In the first press conference the Fed has given following an interest rate announcement, Bernanke took on a decidedly dovish tone towards the outlook for the US economy. In addition to downgrading the growth forecast for 2011, Bernanke reiterated that any potential spike in inflation will likely prove temporary, leading investors to pare back any forecasts for an interest rate rise this side of 2012.
Also weighing on the dollar, Bernanke found his growth downgrade vindicated after data revealed a disappointing GDP figure. On an annualised basis the US economy grew by 1.8% in the first quarter of the year, lower than the consensus forecast of 1.9%, and revealing a marked slowdown from the 3.2% seen in the final three months of 2010.
In response, the market has undertaken a fresh wave of dollar selling over the past couple of sessions, leading the Dollar Index to fall to its lowest level since 2008. The Australian currency hit a fresh post-float high, and both the euro and sterling reached multi-month highs. Looking ahead there appears to be little on the horizon to offer the greenback much support. Even the increasingly rare bouts of risk aversion appear to be favouring the Swiss franc over the dollar.
The problem comes down to loose monetary policy, plain and simple. The Fed is behind the interest rate curve – and by some way. Even though Bernanke’s statement did indicate that QEII will end in June (as widely expected), the market has little reason to stay invested in the currency. Risk appetite is high (regardless of the time bomb that is the eurozone), global growth prospects are improving, and the insatiable desire among Eastern sovereigns to diversify away from the world’s reserve currency remains firmly in place.
It looks now like the euro will go on in the proceeding weeks to hit $1.50, and close on its coat tails I wouldn’t say that $1.70 for the pound is out of the realms of possibility. Barring any serious left of field shocks (a Greece debt restructuring is still unlikely in the medium term despite some well constructed arguments suggesting that they should), the greenback’s downtrend will not let up.
With the economic stuff out the way – I wish you all a fantastic long weekend. Here’s hoping the Royal Wedding lives up to unprecedented media hype....
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Also weighing on the dollar, Bernanke found his growth downgrade vindicated after data revealed a disappointing GDP figure. On an annualised basis the US economy grew by 1.8% in the first quarter of the year, lower than the consensus forecast of 1.9%, and revealing a marked slowdown from the 3.2% seen in the final three months of 2010.
In response, the market has undertaken a fresh wave of dollar selling over the past couple of sessions, leading the Dollar Index to fall to its lowest level since 2008. The Australian currency hit a fresh post-float high, and both the euro and sterling reached multi-month highs. Looking ahead there appears to be little on the horizon to offer the greenback much support. Even the increasingly rare bouts of risk aversion appear to be favouring the Swiss franc over the dollar.
The problem comes down to loose monetary policy, plain and simple. The Fed is behind the interest rate curve – and by some way. Even though Bernanke’s statement did indicate that QEII will end in June (as widely expected), the market has little reason to stay invested in the currency. Risk appetite is high (regardless of the time bomb that is the eurozone), global growth prospects are improving, and the insatiable desire among Eastern sovereigns to diversify away from the world’s reserve currency remains firmly in place.
It looks now like the euro will go on in the proceeding weeks to hit $1.50, and close on its coat tails I wouldn’t say that $1.70 for the pound is out of the realms of possibility. Barring any serious left of field shocks (a Greece debt restructuring is still unlikely in the medium term despite some well constructed arguments suggesting that they should), the greenback’s downtrend will not let up.
With the economic stuff out the way – I wish you all a fantastic long weekend. Here’s hoping the Royal Wedding lives up to unprecedented media hype....
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 27 April 2011
UK GDP gives sterling a glimmer of hope
It’s been a long time coming, but the UK’s first quarter GDP figure was released this morning, revealing a growth figure of 0.5%. This put it bang in line with consensus – a surprising fact in itself – which proved sufficient to give the ailing pound a much needed nudge higher.
When broken down, the figure is relatively encouraging. Had it not been for a disappointing construction sector reading, the figure may have been substantially higher with both manufacturing and services on a firm footing in the opening three months. From sterling’s perspective the key focus is whether the GDP data will swing any MPC voters across to the hawkish ‘let’s raise interest rates’ camp.
Unfortunately, I think this is still some way off. Taken together with the previous quarter, the UK economy has not grown in the past 6 months (albeit it hasn’t contracted either). I doubt that the dovish leaning members of the MPC will take too much encouragement from that fact. A sustained run of stronger economic signals needs to be seen before we can rekindle hopes of a summer interest rate rise.
Nonetheless, sterling has recovered from its pre-release lows. Owing to rumours of a much lower GDP number, the pound has only managed a recovery to just short of €1.13. Looking ahead however, we have reason to suggest that the pound has found its elusive bottom. Sterling may still be some way from embarking on a steady recovery, but I don’t think we’ll see any fresh lows set.
Upward momentum from here will be decidedly protracted. In broad terms, the UK currency is still out of favour and the euro remains seemingly untouchable. Even amid a growing chorus surrounding a Greek debt restructuring, the euro is holding steady, plugging fresh 15-month highs against the US dollar. However, the pound is hugely undervalued and with a few more encouraging figures, sentiment should begin to swing. The standard monthly PMI figures are due next week (services, manufacturing, and construction sectors) and will provide the first signs of economic health in the second quarter.
Whilst this blog has focused on the pound’s fortunes against its multi-nation neighbour, it must be noted that sterling is making consistent gains against the US dollar – the worst performing G20 currency at present. Clinging tight to the coattails of the euro/dollar pairing, we could yet see $1.67!
When broken down, the figure is relatively encouraging. Had it not been for a disappointing construction sector reading, the figure may have been substantially higher with both manufacturing and services on a firm footing in the opening three months. From sterling’s perspective the key focus is whether the GDP data will swing any MPC voters across to the hawkish ‘let’s raise interest rates’ camp.
Unfortunately, I think this is still some way off. Taken together with the previous quarter, the UK economy has not grown in the past 6 months (albeit it hasn’t contracted either). I doubt that the dovish leaning members of the MPC will take too much encouragement from that fact. A sustained run of stronger economic signals needs to be seen before we can rekindle hopes of a summer interest rate rise.
Nonetheless, sterling has recovered from its pre-release lows. Owing to rumours of a much lower GDP number, the pound has only managed a recovery to just short of €1.13. Looking ahead however, we have reason to suggest that the pound has found its elusive bottom. Sterling may still be some way from embarking on a steady recovery, but I don’t think we’ll see any fresh lows set.
Upward momentum from here will be decidedly protracted. In broad terms, the UK currency is still out of favour and the euro remains seemingly untouchable. Even amid a growing chorus surrounding a Greek debt restructuring, the euro is holding steady, plugging fresh 15-month highs against the US dollar. However, the pound is hugely undervalued and with a few more encouraging figures, sentiment should begin to swing. The standard monthly PMI figures are due next week (services, manufacturing, and construction sectors) and will provide the first signs of economic health in the second quarter.
Whilst this blog has focused on the pound’s fortunes against its multi-nation neighbour, it must be noted that sterling is making consistent gains against the US dollar – the worst performing G20 currency at present. Clinging tight to the coattails of the euro/dollar pairing, we could yet see $1.67!
Tuesday, 26 April 2011
Over or under valued?
The pound is trading near six-month lows against the euro; the Australian currency is at post-float highs against the US dollar; and the euro is also at 15-month highs against the greenback. Most would agree that these levels – as well as many other pairings at present – do not reflect fair value. However, there is a great deal of benefit to be had in the longer term from having an undervalued currency.
A weak currency provides a real boost to the country’s exporters and this has been targeted as a key route to recovery by many global economies, in particular the UK. Britain needs to rebalance its economy and in the longer term a weak currency should encourage that process. Unfortunately it also exacerbates inflationary pressures, but there can be little doubt that over a longer time frame, the British economy stands to benefit from a lower pound – even if that isn’t immediately apparent for those heading abroad this Spring!
The US dollar is also very weak at present, and this has become the subject of some debate. As a major importer, the US does not necessarily stand to benefit from a weak currency and indeed the Fed has reiterated its commitment to a strong dollar. Its market value tells a different story however, and the greenback is unlikely to claw back losses until the Fed take steps toward tightening monetary policy.
The Chinese yuan has been at the heart of the ‘currency wars’ debate. The Chinese export sector has been booming on the back of a hugely undervalued yuan, much to the consternation of other countries. With inflation particularly high in Asia, China is now beginning to allow the steady appreciation of its currency, but this will be a slow process. China can ill afford to slow its rate of growth too drastically.
The countries that have shown extraordinary resilience to the strength of their currencies include Canada, Australia, and New Zealand., which have all reached multi-year highs against the US dollar in recent months. This strength, though warranted, is far from supportive for the economy and Canadian policymakers in particular have expressed their concern. We’re certainly unlikely to see any material intervention in the market to curb this strength, but comments talking down the currency should have the same effect.
In the case of Australia, such is the demand from China’s booming economy that exporters appear capable to withstand the strength of the aussie dollar. High levels of risk appetite combined with soaring commodity prices look set to keep higher-yielding currencies well-supported throughout year. Indeed the aussie and kiwi dollars could have even further to climb in the short term; who would want to bet against them frankly? These currencies may well be overvalued, but a turnaround in trend remains a distant prospect at best.
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.
A weak currency provides a real boost to the country’s exporters and this has been targeted as a key route to recovery by many global economies, in particular the UK. Britain needs to rebalance its economy and in the longer term a weak currency should encourage that process. Unfortunately it also exacerbates inflationary pressures, but there can be little doubt that over a longer time frame, the British economy stands to benefit from a lower pound – even if that isn’t immediately apparent for those heading abroad this Spring!
The US dollar is also very weak at present, and this has become the subject of some debate. As a major importer, the US does not necessarily stand to benefit from a weak currency and indeed the Fed has reiterated its commitment to a strong dollar. Its market value tells a different story however, and the greenback is unlikely to claw back losses until the Fed take steps toward tightening monetary policy.
The Chinese yuan has been at the heart of the ‘currency wars’ debate. The Chinese export sector has been booming on the back of a hugely undervalued yuan, much to the consternation of other countries. With inflation particularly high in Asia, China is now beginning to allow the steady appreciation of its currency, but this will be a slow process. China can ill afford to slow its rate of growth too drastically.
The countries that have shown extraordinary resilience to the strength of their currencies include Canada, Australia, and New Zealand., which have all reached multi-year highs against the US dollar in recent months. This strength, though warranted, is far from supportive for the economy and Canadian policymakers in particular have expressed their concern. We’re certainly unlikely to see any material intervention in the market to curb this strength, but comments talking down the currency should have the same effect.
In the case of Australia, such is the demand from China’s booming economy that exporters appear capable to withstand the strength of the aussie dollar. High levels of risk appetite combined with soaring commodity prices look set to keep higher-yielding currencies well-supported throughout year. Indeed the aussie and kiwi dollars could have even further to climb in the short term; who would want to bet against them frankly? These currencies may well be overvalued, but a turnaround in trend remains a distant prospect at best.
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.
Thursday, 21 April 2011
Weekly round-up: Euro at dizzy heights.
Eurozone debt concerns fail to dent euro strength
The euro has once again managed to shake off considerable concerns surrounding debt problems in the periphery. An unprecedented Greek debt restructure now looks a matter of time, and further uncertainty over Portugal has surfaced following the success of a euro-sceptic party in a Finnish parliamentary election. Peripheral bond spreads are continuing to widen as a result, and yet the euro has hit multi-month highs against both sterling and the US dollar in recent sessions. The determination of major sovereign accounts to diversify away from the dollar despite very real debt problems never ceases to amaze.
MPC minutes disappoint but UK retail sales provide hope
Last week’s minutes revealed that the MPC is no closer to matching the ECB’s April interest rate rise in the near future. As expected, the voting pattern within the committee remains unchanged and allusions to the UK’s weak output and uncertain recovery disappointed investors. The MPC is clearly waiting for firmer evidence that the UK recovery is assured before tightening policy.
Contrary to expectations, we saw some surprising (if only slight) growth in monthly UK retail sales, an indicator that a balanced UK recovery is at least in sight. Nonetheless, a series of positive figures from the consumer/retail side will be required in the next few months if the MPC is to be convinced to pull the trigger on a rate rise.
Sterling to gain in a shortened week
There are only three working days for UK markets but there are still some key announcements to navigate this week. The UK economy will again be in focus with first quarter UK GDP announced this Wednesday. The prospect of a BoE rate rise this summer - and therefore sterling’s short term direction - hangs on a decent figure.
Last quarter saw UK output contract by half a percent; the hopes of a sustained sterling recovery depend on growth rebounding by no less than market expectations (0.6%). At present the market is pricing in a November rate rise from the BoE, which contrasts fully with consensus that the ECB will again tighten policy as soon as June. However, these BoE rate expectations could be brought forward with the help of a solid UK GDP data.
Further dollar weakness
As risk appetite seems to increase with every week that goes by, the US dollar is falling further out of favour. Sterling currently trading at a 17-month high against the greenback and the aussie has hit a fresh post-1983 high. With the dollar-funded carry trade very much on the scene, particularly within the context of the Fed’s quantitative easing programme, the US currency’s downtrend looks set to continue for weeks to come.
An update on US policy is due on Wednesday evening and the market will be looking for indications that the FED’s QEII programme will end in June as originally planned. However, we’re unlikely to hear anything just yet that alludes to higher interest rates in the US, which should keep the US dollar pinned back. Preliminary US quarterly GDP data rounds off a shortened week. Signs suggest a decent figure, but we’re not expecting this to be the catalyst for any US dollar turnaround with risk appetite on top.
For those of you taking holidays to Europe this Easter period, the GBP/EUR has come in your favour considerably today (though it remains at low levels unfortunately). Caxton FX can currently offer you €1.1120 on our prepaid currency cards if you want to avoid those withdrawl fees. Either way, have a great break!
Comments, as ever, are always welcome.
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 has once again managed to shake off considerable concerns surrounding debt problems in the periphery. An unprecedented Greek debt restructure now looks a matter of time, and further uncertainty over Portugal has surfaced following the success of a euro-sceptic party in a Finnish parliamentary election. Peripheral bond spreads are continuing to widen as a result, and yet the euro has hit multi-month highs against both sterling and the US dollar in recent sessions. The determination of major sovereign accounts to diversify away from the dollar despite very real debt problems never ceases to amaze.
MPC minutes disappoint but UK retail sales provide hope
Last week’s minutes revealed that the MPC is no closer to matching the ECB’s April interest rate rise in the near future. As expected, the voting pattern within the committee remains unchanged and allusions to the UK’s weak output and uncertain recovery disappointed investors. The MPC is clearly waiting for firmer evidence that the UK recovery is assured before tightening policy.
Contrary to expectations, we saw some surprising (if only slight) growth in monthly UK retail sales, an indicator that a balanced UK recovery is at least in sight. Nonetheless, a series of positive figures from the consumer/retail side will be required in the next few months if the MPC is to be convinced to pull the trigger on a rate rise.
Sterling to gain in a shortened week
There are only three working days for UK markets but there are still some key announcements to navigate this week. The UK economy will again be in focus with first quarter UK GDP announced this Wednesday. The prospect of a BoE rate rise this summer - and therefore sterling’s short term direction - hangs on a decent figure.
Last quarter saw UK output contract by half a percent; the hopes of a sustained sterling recovery depend on growth rebounding by no less than market expectations (0.6%). At present the market is pricing in a November rate rise from the BoE, which contrasts fully with consensus that the ECB will again tighten policy as soon as June. However, these BoE rate expectations could be brought forward with the help of a solid UK GDP data.
Further dollar weakness
As risk appetite seems to increase with every week that goes by, the US dollar is falling further out of favour. Sterling currently trading at a 17-month high against the greenback and the aussie has hit a fresh post-1983 high. With the dollar-funded carry trade very much on the scene, particularly within the context of the Fed’s quantitative easing programme, the US currency’s downtrend looks set to continue for weeks to come.
An update on US policy is due on Wednesday evening and the market will be looking for indications that the FED’s QEII programme will end in June as originally planned. However, we’re unlikely to hear anything just yet that alludes to higher interest rates in the US, which should keep the US dollar pinned back. Preliminary US quarterly GDP data rounds off a shortened week. Signs suggest a decent figure, but we’re not expecting this to be the catalyst for any US dollar turnaround with risk appetite on top.
For those of you taking holidays to Europe this Easter period, the GBP/EUR has come in your favour considerably today (though it remains at low levels unfortunately). Caxton FX can currently offer you €1.1120 on our prepaid currency cards if you want to avoid those withdrawl fees. Either way, have a great break!
Comments, as ever, are always welcome.
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, 20 April 2011
Bank of England Minutes disappoint- sterling takes a tumble
Sterling has slumped badly against the euro today in the wake of the MPC’s minutes, which were received particularly poorly by the market. We might wonder why the response has been so strong given that no one actually expected to see an additional MPC member vote in favour of an interest rate rise.
The thing that has disappointed investors today is the dovish tone of the minutes. The BoE’s priorities have yet again been made clear; UK growth must come before they hit consumers with higher borrowing costs. Allusions to “an uncertain economic outlook” stuck out like a sore thumb. The wait-and-see mode stands firm, and last week’s fall in UK inflation has put the doves back in control.
Data has been mixed over the past month or so; manufacturing and services data was encouraging but the retail and consumer confidence side remains at very low levels. UK monthly retail sales data will be released tomorrow, good news is not expected but it is badly needed if sterling’s fortunes are to improve.
Next week UK first quarter GDP is released; without a steady figure here the sterling could have further to drop. The market has now pushed back expectations of the next BoE rate rise to November. Compare this to expectations of another ECB rate rise in July and you can see why sterling is at such low levels against the single currency.
Market thinned markets have also exaggerated sterling’s drop against the euro.
The move has also come amid an already euro-positive correction of Monday’s wave of risk aversion. However, on a more positive note for sterling, the minutes do suggest that last month’s surprise drop in inflation was just a blip in an uptrend that is likely to see CPI exceed 5% this year. If UK growth does improve in coming months, then amid such price pressures we could yet see expectations of a BoE rate rise brought forward to the summer. One thing seems clear though, any decent sterling/euro rate (say…1.18), seems a very long way away indeed.
Comments are always welcomed.
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 thing that has disappointed investors today is the dovish tone of the minutes. The BoE’s priorities have yet again been made clear; UK growth must come before they hit consumers with higher borrowing costs. Allusions to “an uncertain economic outlook” stuck out like a sore thumb. The wait-and-see mode stands firm, and last week’s fall in UK inflation has put the doves back in control.
Data has been mixed over the past month or so; manufacturing and services data was encouraging but the retail and consumer confidence side remains at very low levels. UK monthly retail sales data will be released tomorrow, good news is not expected but it is badly needed if sterling’s fortunes are to improve.
Next week UK first quarter GDP is released; without a steady figure here the sterling could have further to drop. The market has now pushed back expectations of the next BoE rate rise to November. Compare this to expectations of another ECB rate rise in July and you can see why sterling is at such low levels against the single currency.
Market thinned markets have also exaggerated sterling’s drop against the euro.
The move has also come amid an already euro-positive correction of Monday’s wave of risk aversion. However, on a more positive note for sterling, the minutes do suggest that last month’s surprise drop in inflation was just a blip in an uptrend that is likely to see CPI exceed 5% this year. If UK growth does improve in coming months, then amid such price pressures we could yet see expectations of a BoE rate rise brought forward to the summer. One thing seems clear though, any decent sterling/euro rate (say…1.18), seems a very long way away indeed.
Comments are always welcomed.
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, 19 April 2011
With all this talk about America’s AAA rating – Is the world’s largest economy breaking down?
Okay, the rating agency Standard & Poor’s did not actually downgrade America’s AAA credit rating, but we had to make the pun work. Nonetheless, the news that S& P has downgraded its outlook for the US economy from stable to negative is still quite astonishing. Perhaps even more so as the US is showing signs that its economy is recovering quite impressively in many areas; so what has brought this criticism on?
Quite simply, the US trade deficit is enormous. Last Tuesday, it was announced that the US trade balance showed a -$45.8B deficit, well above forecasts. The argument is that this level of public finance deficit is simply not sustainable even for an economy as strong as the US. Adding to this problem is the fact that the opposing political bias between the Senate and Congress means that attacking the problem with any degree of efficiency or success is proving very difficult. As an FT Alphaville blog notes, the US political impasse may last until next year’s Congressional elections, and an appropriate budget will probably arrive late in 2013.
In a Forbes blog, S & P’s move was described as a “false alarm.” But as is later noted, this is only the case if the market is convinced of this fact. If the market gradually considers US Treasuries to be a riskier asset on the back of such rating agency scrutiny, then the US will be paying a much higher premium for its considerable debt. We’re inclined to agree that the market will not lose confidence in the US economy on the back of S & P’s analysis. However, if more follow then the picture changes dramatically.
From a foreign exchange point of view, the US dollar has actually benefitted from the rather gloomy outlook for the US economy. For those of you that followed the yen’s movements in the aftermath of the recent Japanese crisis, this will not come as a huge surprise. The dollar remains a safe-haven currency (though its status as such has come into question in recent months), and so in a time when the world’s largest economy has come into question, investors will flee to safety. Risk appetite will return after the Easter period, and our medium-term view of a weaker dollar remains unchanged. However, unlike S & P, this is based on the Fed’s ultra-loose monetary policy rather than a weaker outlook for the US economy.
As always any comments are welcome, feel free to disagree!
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Quite simply, the US trade deficit is enormous. Last Tuesday, it was announced that the US trade balance showed a -$45.8B deficit, well above forecasts. The argument is that this level of public finance deficit is simply not sustainable even for an economy as strong as the US. Adding to this problem is the fact that the opposing political bias between the Senate and Congress means that attacking the problem with any degree of efficiency or success is proving very difficult. As an FT Alphaville blog notes, the US political impasse may last until next year’s Congressional elections, and an appropriate budget will probably arrive late in 2013.
In a Forbes blog, S & P’s move was described as a “false alarm.” But as is later noted, this is only the case if the market is convinced of this fact. If the market gradually considers US Treasuries to be a riskier asset on the back of such rating agency scrutiny, then the US will be paying a much higher premium for its considerable debt. We’re inclined to agree that the market will not lose confidence in the US economy on the back of S & P’s analysis. However, if more follow then the picture changes dramatically.
From a foreign exchange point of view, the US dollar has actually benefitted from the rather gloomy outlook for the US economy. For those of you that followed the yen’s movements in the aftermath of the recent Japanese crisis, this will not come as a huge surprise. The dollar remains a safe-haven currency (though its status as such has come into question in recent months), and so in a time when the world’s largest economy has come into question, investors will flee to safety. Risk appetite will return after the Easter period, and our medium-term view of a weaker dollar remains unchanged. However, unlike S & P, this is based on the Fed’s ultra-loose monetary policy rather than a weaker outlook for the US economy.
As always any comments are welcome, feel free to disagree!
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.
Friday, 15 April 2011
Weekly round-up: Euro ends the week on the back foot
UK inflation prolongs sterling’s weakness
Hopes for a near-term BoE interest rate rise were dashed last Tuesday as UK headline inflation surprisingly eased from 4.4% to 4.0%. The unexpected drop has releived the pressure on the MPC to tighten monetary policy to combat inflation levels that are still double the BoE’s target. Whilst enjoying a minor resurgence at the end of last week, sterling remains broadly out of favour with expectations of a BoE rate rise now pushed back from August to October. A couple of weeks ago, many major players were betting on a May rate rise!
This contrasts with expectations for a further eurozone rate rise in July, following a steady flow of hawkish ECB rhetoric. Meanwhile, the US Federal Reserve remains well behind the curve in terms of interest rate hikes, which along with the ongoing ‘QEII’ programme, is almost wholly responsible for the US dollar’s continuing weakness. The dollar is the weakest currency out there after the yen, nobody wants to hold it. Last week’s poor data from the US labour market, the Fed’s most pressing concern, did little to improve the dollar’s long-term prospects.
Euro still strong but struggling for further momentum
Towards the end of last week, the euro failed to extend gains as peripheral debt issues finally started to weigh. Uncertainty has sprung up around a possible Greek debt restructuring to follow Portugal’s recent bailout request, and Ireland’s credit rating has come under further scrutiny. Nonetheless, the ECB’s interest rate stance, which continues to trump eurozone debt issues, is still likely to provide some scope for further euro upside during the week ahead.
Our expectation is that the single currency may continue to creep higher against the US dollar, but sustaining a level above $1.45 looks overstretched. This strength should also keep the pound trading comfortably above $1.60 against the ailing greenback, but again a push beyond resistance at $1.64 looks unlikely in the short term. Particularly as the markets quieten down ahead of the Easter Holiday period this weekend, we expect a period of sideways trading with investors unlikely to extend riskier positions. Investors are lazy like that.
UK recovery remains patchy
Last week’s UK economic data did show slight improvements in consumer confidence as well as the labour market. However, this was insufficient to improve sentiment towards sterling to any significant degree, particularly as retail sales and average earnings were negative. With such characteristically mixed UK figures, the MPC is highly likely to continue to wait for signs that British growth is on a steadier course before hitting the UK’s struggling economy with an interest rate hike.
Looking ahead to this week, the MPC minutes will put sterling back in focus on Wednesday. If a fourth vote in favour of tightening policy is revealed, this will surely provide the basis for a sterling rebound. Such a change in the voting pattern remains unlikely however, and any sterling gains are likely to be the result of dollar and euro negativity. UK monthly retail sales are also released on Thursday; if last month’s contraction is repeated then we may well see sterling stooping lower across the board. Next Wednesday’s (27th) first quarter UK GDP is the major figure on the horizon, anything less than steady growth is likely to keep sterling pegged on the back foot in coming weeks.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Hopes for a near-term BoE interest rate rise were dashed last Tuesday as UK headline inflation surprisingly eased from 4.4% to 4.0%. The unexpected drop has releived the pressure on the MPC to tighten monetary policy to combat inflation levels that are still double the BoE’s target. Whilst enjoying a minor resurgence at the end of last week, sterling remains broadly out of favour with expectations of a BoE rate rise now pushed back from August to October. A couple of weeks ago, many major players were betting on a May rate rise!
This contrasts with expectations for a further eurozone rate rise in July, following a steady flow of hawkish ECB rhetoric. Meanwhile, the US Federal Reserve remains well behind the curve in terms of interest rate hikes, which along with the ongoing ‘QEII’ programme, is almost wholly responsible for the US dollar’s continuing weakness. The dollar is the weakest currency out there after the yen, nobody wants to hold it. Last week’s poor data from the US labour market, the Fed’s most pressing concern, did little to improve the dollar’s long-term prospects.
Euro still strong but struggling for further momentum
Towards the end of last week, the euro failed to extend gains as peripheral debt issues finally started to weigh. Uncertainty has sprung up around a possible Greek debt restructuring to follow Portugal’s recent bailout request, and Ireland’s credit rating has come under further scrutiny. Nonetheless, the ECB’s interest rate stance, which continues to trump eurozone debt issues, is still likely to provide some scope for further euro upside during the week ahead.
Our expectation is that the single currency may continue to creep higher against the US dollar, but sustaining a level above $1.45 looks overstretched. This strength should also keep the pound trading comfortably above $1.60 against the ailing greenback, but again a push beyond resistance at $1.64 looks unlikely in the short term. Particularly as the markets quieten down ahead of the Easter Holiday period this weekend, we expect a period of sideways trading with investors unlikely to extend riskier positions. Investors are lazy like that.
UK recovery remains patchy
Last week’s UK economic data did show slight improvements in consumer confidence as well as the labour market. However, this was insufficient to improve sentiment towards sterling to any significant degree, particularly as retail sales and average earnings were negative. With such characteristically mixed UK figures, the MPC is highly likely to continue to wait for signs that British growth is on a steadier course before hitting the UK’s struggling economy with an interest rate hike.
Looking ahead to this week, the MPC minutes will put sterling back in focus on Wednesday. If a fourth vote in favour of tightening policy is revealed, this will surely provide the basis for a sterling rebound. Such a change in the voting pattern remains unlikely however, and any sterling gains are likely to be the result of dollar and euro negativity. UK monthly retail sales are also released on Thursday; if last month’s contraction is repeated then we may well see sterling stooping lower across the board. Next Wednesday’s (27th) first quarter UK GDP is the major figure on the horizon, anything less than steady growth is likely to keep sterling pegged on the back foot in coming weeks.
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.
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