The Bank of England kept interest rates on hold at 0.5% today, as it has done every monthsince March 2009. In reality, there wasn’t even an outside chance of a UK rate rise - the UK growth figures have just been too poor of late. Long-term sabre-rattler Andrew Sentance left the MPC last month, and now Mervyn King and his MPC doves are more in control than ever. Even if they did wish to change stance, the MPC would struggle to justify a rise before 2012, with growth so weak and household incomes so squeezed.
The IMF cut its forecast for UK growth in 2011 from 2.0% to 1.5% earlier this week, and we could well be in for a second quarterly growth figure as low as 0.2%. Mervyn King has repeatedly indicated that the UK’s soaring inflation levels are down to temporary factors that will subside next year, so the MPC are likely to ride out these high prices. With UK growth so soft, King is loath to hit the British economy with higher borrowing costs. Indeed, this morning’s UK trade balance data suggested consumer demand is really suffering at present, which took the shine off a narrowed deficit.
Unsurprisingly, the market didn’t respond to the BoE’s announcement; the release of the MPC minutes in a fortnight is likely to prove more market-moving. The market didn’t respond to the ECB’s unchanged 1.25% interest rate either. However, the market has moved since Trichet's press conference, and it has been a significant move.
Trichet delivered on the “strong vigilance” message with regard to upside risk to price stability, so a July rate rise is now more or less guaranteed. However, the euro has suffered a substantial slide on the news. The July rate rise was clearly fully priced in and traders have obviously seen now as an opportunity to take profit; the euro has given away half a cent to sterling, and over a cent to the US dollar. This may also be a reflection of some disappointment that Trichet refused to give any signal as to rate rises beyond July.
Despite the euro’s fall, the long-term outlook for a strong euro remains intact. Though with the market likely to refocus on the Greek situation in coming sessions, the euro could have some further downside in the short-term. Only when a Greek resolution arrives is the euro likely to really kick on from here. Sterling still looks fundamentally weak; none of its gains today have been made on its own merits.
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, 9 June 2011
Wednesday, 8 June 2011
Moody's: Causing trouble in the UK and the EU.
The pound suffered a sharp decline this morning following media reports that the UK could lose its AAA credit rating if the government failed to meet its economic and fiscal targets. Moody’s had made similar indications in March, but the market responded nonetheless. However, sterling has recovered to finish slightly higher than where it started the day against the euro, though it has lost ground to US dollar.
The warning from Moody’s tells us little that we don’t already know. If the UK economy remains teetering on the edge of a double dip recession and if the government cannot reduce its enormous deficit, then it stands to reason that we should lose our AAA rating.
The pound is a very unappealing asset at present but today’s news is barely news, it merely states the obvious. However, data has been reasonably scarce this week and investors were prompted to act.
Moody’s has also been in the news on a potentially much more crucial matter. On the Greek debt issue, Moody’s has made its feeling known on the ECB’s endorsement of a rollover of Greek bonds. Trichet has given his support to the measure of requiring Greek bondholders to reinvest their funds in Greece upon the maturity of existing debt. A Moody’s head has classified such an event as a default, because it is a significant change to the terms of the initial agreement, and the rollover would almost certainly not be voluntary.
What’s more, as an FT Alphaville blog notes, if the ECB was seen to allow an effective default, this would trigger the downgrading of other peripheral nations’ debt, and so the contagion risk is highlighted again. So from this perspective, the ECB can dress it up as ‘soft restructuring’ all it likes, but the ratings agencies and market may see it as another thing altogether. So while most are confident a resolution will come soon, this does not necessarily rid the eurozone of the threat of debt contagion.
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 warning from Moody’s tells us little that we don’t already know. If the UK economy remains teetering on the edge of a double dip recession and if the government cannot reduce its enormous deficit, then it stands to reason that we should lose our AAA rating.
The pound is a very unappealing asset at present but today’s news is barely news, it merely states the obvious. However, data has been reasonably scarce this week and investors were prompted to act.
Moody’s has also been in the news on a potentially much more crucial matter. On the Greek debt issue, Moody’s has made its feeling known on the ECB’s endorsement of a rollover of Greek bonds. Trichet has given his support to the measure of requiring Greek bondholders to reinvest their funds in Greece upon the maturity of existing debt. A Moody’s head has classified such an event as a default, because it is a significant change to the terms of the initial agreement, and the rollover would almost certainly not be voluntary.
What’s more, as an FT Alphaville blog notes, if the ECB was seen to allow an effective default, this would trigger the downgrading of other peripheral nations’ debt, and so the contagion risk is highlighted again. So from this perspective, the ECB can dress it up as ‘soft restructuring’ all it likes, but the ratings agencies and market may see it as another thing altogether. So while most are confident a resolution will come soon, this does not necessarily rid the eurozone of the threat of debt contagion.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 6 June 2011
A Greek default: What would it mean?
An interesting Robert Peston blog (BBC) with a somewhat doomsdayish tone discussed the possible ramifications of Greek default. The US exposure to the banks of the eurozone periphery is very significant. The US has the second largest exposure to Greece. A Greek default would almost certainly have knock-on effects throughout the European banking system, not least in the periphery. Worryingly for the US, it has the third largest exposure to Portuguese and Irish debt and a whole lot more vested in Spain, Italy and various other nations.
With the US debt ceiling debate still roaring on, the US banking system would be rocked by a Greek default and the others that would inevitably follow. The global economy would plunge back into a recession, that’s almost certain. Indeed, in light of the recent slowdown in global growth, some are forecasting a double-dip regardless.
What would the consequences of a genuine Greek default be for the single currency? Well, the euro has recovered strongly in the past week, in line with greater confidence that the Greek situation is verging on a resolution. GBP/EUR hit €1.16 and EUR/USD hit $1.40, but these two pairs are now at $1.12 and $1.46 respectively. Should the Greek situation truly implode (unlikely now), the euro would suffer hugely, and the survival of the euro itself would come into question. US banks will have been very encouraged by Merkel’s comments last week, indicating Germany’s commitment to the euro is as strong as ever.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the US debt ceiling debate still roaring on, the US banking system would be rocked by a Greek default and the others that would inevitably follow. The global economy would plunge back into a recession, that’s almost certain. Indeed, in light of the recent slowdown in global growth, some are forecasting a double-dip regardless.
What would the consequences of a genuine Greek default be for the single currency? Well, the euro has recovered strongly in the past week, in line with greater confidence that the Greek situation is verging on a resolution. GBP/EUR hit €1.16 and EUR/USD hit $1.40, but these two pairs are now at $1.12 and $1.46 respectively. Should the Greek situation truly implode (unlikely now), the euro would suffer hugely, and the survival of the euro itself would come into question. US banks will have been very encouraged by Merkel’s comments last week, indicating Germany’s commitment to the euro is as strong as ever.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 2 June 2011
May Monthly Report
May was broadly speaking a risk-off month, with commodity prices sliding significantly and the Greek debt crisis causing widespread market uncertainty. Central bank monetary policy took a backseat as the major currency market driver, though interest rate speculation was still in evidence under the surface. Specifically, it was the inability of the Bank of England and the US Federal Reserve to tighten policy (due to the poor performance of the US and UK economies), which has stopped their currencies from truly capitalising on the eurozone debt issues.
The single currency has suffered from the most severe debt concerns seen in months. Rumours of a Greek euro-exit and a more general euro-collapse inevitably spooked investors. Greece looks set to remain in the euro and the dominant voices out of the negotiations insist that there will be no debt restructuring. An additional aid package in return for greater austerity measures and privatization seems likely to be the substance of a resolution at this stage, and this should arrive by the end of this month. Much uncertainty still remains, not least over whether the IMF will be providing Greece with its share of the next tranche of Greek bailout aid.
Despite a broad upturn in sentiment towards the Greek situation, the risks of debt contagion have become all too apparent in recent weeks. We have seen rumours of a Greek debt restructure trigger rating agencies to downgrade the economic outlook of other struggling nations such as Belgium and Italy. We have also seen the Spanish government suffer a crushing electoral defeat which places the country’s necessary austerity measures in doubt. Portugal did receive a bailout, but borrowing costs throughout the periphery have scaled new heights.
Safe-haven currencies have benefitted from the eurozone uncertainty. The US dollar therefore had a stronger month, but it remains a fundamentally unappealing currency (due to a downbeat economic outlook and ultra-loose monetary policy). Sterling has weakened against the dollar, but has reached healthier levels against the euro as investors were forced to look for alternatives.
Sterling/Euro
This pair made some decent gains over the month, climbing two cents to trade at €1.14. However, sentiment towards the UK economy has not improved. It may even have worsened since the disappointing first quarter growth figure of 0.5%. April’s UK growth data from the manufacturing, construction and services sector was disappointing. Retail sales figures were strong but the market was unconvinced, correctly putting the growth down to temporary factors such as good weather, the Easter Holidays and Royal Wedding tourism.
Accordingly, a spike in UK inflation (up to 4.5%) and some more hawkish statements from Bank of England Governor Mervyn King failed to have any lasting sterling-positive effect. Today’s poor UK manufacturing growth data for May suggests things are getting worse, not better, and the prospects for an improved second quarter GDP figure are looking shaky.
Whilst the market is somewhat less responsive to fundamental data from the eurozone, the economic picture in France and Germany is broadly positive. The most recent quarterly GDP figures for the two core states were 1.0% and 1.5% respectively (contrast this with a 0.5% figure for the UK).
Clearly it was not a matter of sterling strength that saw this pair climb last month, but euro weakness. Asian sovereigns, previously reliable for sweeping up euros on the cheap, went missing for extended periods. News came thick and fast from various peripheral nations and various rating agencies, but the situation seems to have calmed a little, or at least the market has grown a thicker skin. This has dragged GBP/EUR two cents off its highs of €1.16 over the past week.
The euro also weakened significantly thanks to a dovish ECB press conference, after the ECB announced that the eurozone base rate was to remain at 1.25% for the time being. Trichet disappointed the market by failing to include the phrase “strong vigilance” with regard to eurozone inflation, causing speculators to pare back expectations of the next ECB rate rise from June to July.
July still seems a very good bet; eurozone inflation stayed at 2.8% y/y in May and remains well above the central banks’ target. The prospect of this rate hike should keep the euro fairly well supported over June. However, although sentiment has improved towards the peripheral debt issue, the euro still remains very vulnerable to rumours and to a slowdown in progress. Support from the Far East is crucial, but with the dollar such an unappealing currency, they will be as eager as ever to diversify their funds.
Sterling/US dollar
The $1.70 mark was looking very realistic at the start of May but a surge in risk aversion in recent weeks brought this pair back down as low as $1.60. A slide in commodity prices and intense fears of a Greek debt restructure and resultant financial crisis saw the US dollar benefit from significant safe-haven inflows. However, the decline in commodity prices has consolidated and eurozone debt concerns have faded from focus somewhat in the past week or so.
US fundamental data has been very poor indeed of late. First quarter US GDP put growth on an annualised basis at 1.8%, retail sales and consumer sentiment data was weak and manufacturing growth has slowed down alarmingly. In addition, US government debt has come under close scrutiny in recent weeks, as the Democratic government faces a deadlock with the Republicans on how to reduce its enormous deficit.
Perhaps most importantly, we have seen no real improvement in the US labour market, which is the Fed’s main obstacle to raising the US interest rate from the record low of <0.25%. The Fed’s QEII programme is likely to be discontinued this month. However, a rate rise this year seems unlikely with inflation levels subdued and the US unemployment rate at 9.0%.
A BoE rate hike seems equally unlikely this year, but the GBP/USD rate is helped by gains in the EUR/USD rate. The dollar has failed to hang on to some major gains against the single currency, which took the EUR/USD rate from $1.49 to $1.40. The euro has enjoyed a mild revival to currently trade at $1.44, which as usual has pulled GBP/USD with it.
An ascent back up towards $1.70 may be a bridge too far for this pair in coming weeks, particularly with the UK economy in such poor shape. However, sterling may be able to add a few cents to its recent rebound, with sentiment so pessimistic towards the dollar and with the euro enjoying a resurgence.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.65
EUR / USD 1.4750
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 single currency has suffered from the most severe debt concerns seen in months. Rumours of a Greek euro-exit and a more general euro-collapse inevitably spooked investors. Greece looks set to remain in the euro and the dominant voices out of the negotiations insist that there will be no debt restructuring. An additional aid package in return for greater austerity measures and privatization seems likely to be the substance of a resolution at this stage, and this should arrive by the end of this month. Much uncertainty still remains, not least over whether the IMF will be providing Greece with its share of the next tranche of Greek bailout aid.
Despite a broad upturn in sentiment towards the Greek situation, the risks of debt contagion have become all too apparent in recent weeks. We have seen rumours of a Greek debt restructure trigger rating agencies to downgrade the economic outlook of other struggling nations such as Belgium and Italy. We have also seen the Spanish government suffer a crushing electoral defeat which places the country’s necessary austerity measures in doubt. Portugal did receive a bailout, but borrowing costs throughout the periphery have scaled new heights.
Safe-haven currencies have benefitted from the eurozone uncertainty. The US dollar therefore had a stronger month, but it remains a fundamentally unappealing currency (due to a downbeat economic outlook and ultra-loose monetary policy). Sterling has weakened against the dollar, but has reached healthier levels against the euro as investors were forced to look for alternatives.
Sterling/Euro
This pair made some decent gains over the month, climbing two cents to trade at €1.14. However, sentiment towards the UK economy has not improved. It may even have worsened since the disappointing first quarter growth figure of 0.5%. April’s UK growth data from the manufacturing, construction and services sector was disappointing. Retail sales figures were strong but the market was unconvinced, correctly putting the growth down to temporary factors such as good weather, the Easter Holidays and Royal Wedding tourism.
Accordingly, a spike in UK inflation (up to 4.5%) and some more hawkish statements from Bank of England Governor Mervyn King failed to have any lasting sterling-positive effect. Today’s poor UK manufacturing growth data for May suggests things are getting worse, not better, and the prospects for an improved second quarter GDP figure are looking shaky.
Whilst the market is somewhat less responsive to fundamental data from the eurozone, the economic picture in France and Germany is broadly positive. The most recent quarterly GDP figures for the two core states were 1.0% and 1.5% respectively (contrast this with a 0.5% figure for the UK).
Clearly it was not a matter of sterling strength that saw this pair climb last month, but euro weakness. Asian sovereigns, previously reliable for sweeping up euros on the cheap, went missing for extended periods. News came thick and fast from various peripheral nations and various rating agencies, but the situation seems to have calmed a little, or at least the market has grown a thicker skin. This has dragged GBP/EUR two cents off its highs of €1.16 over the past week.
The euro also weakened significantly thanks to a dovish ECB press conference, after the ECB announced that the eurozone base rate was to remain at 1.25% for the time being. Trichet disappointed the market by failing to include the phrase “strong vigilance” with regard to eurozone inflation, causing speculators to pare back expectations of the next ECB rate rise from June to July.
July still seems a very good bet; eurozone inflation stayed at 2.8% y/y in May and remains well above the central banks’ target. The prospect of this rate hike should keep the euro fairly well supported over June. However, although sentiment has improved towards the peripheral debt issue, the euro still remains very vulnerable to rumours and to a slowdown in progress. Support from the Far East is crucial, but with the dollar such an unappealing currency, they will be as eager as ever to diversify their funds.
Sterling/US dollar
The $1.70 mark was looking very realistic at the start of May but a surge in risk aversion in recent weeks brought this pair back down as low as $1.60. A slide in commodity prices and intense fears of a Greek debt restructure and resultant financial crisis saw the US dollar benefit from significant safe-haven inflows. However, the decline in commodity prices has consolidated and eurozone debt concerns have faded from focus somewhat in the past week or so.
US fundamental data has been very poor indeed of late. First quarter US GDP put growth on an annualised basis at 1.8%, retail sales and consumer sentiment data was weak and manufacturing growth has slowed down alarmingly. In addition, US government debt has come under close scrutiny in recent weeks, as the Democratic government faces a deadlock with the Republicans on how to reduce its enormous deficit.
Perhaps most importantly, we have seen no real improvement in the US labour market, which is the Fed’s main obstacle to raising the US interest rate from the record low of <0.25%. The Fed’s QEII programme is likely to be discontinued this month. However, a rate rise this year seems unlikely with inflation levels subdued and the US unemployment rate at 9.0%.
A BoE rate hike seems equally unlikely this year, but the GBP/USD rate is helped by gains in the EUR/USD rate. The dollar has failed to hang on to some major gains against the single currency, which took the EUR/USD rate from $1.49 to $1.40. The euro has enjoyed a mild revival to currently trade at $1.44, which as usual has pulled GBP/USD with it.
An ascent back up towards $1.70 may be a bridge too far for this pair in coming weeks, particularly with the UK economy in such poor shape. However, sterling may be able to add a few cents to its recent rebound, with sentiment so pessimistic towards the dollar and with the euro enjoying a resurgence.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.65
EUR / USD 1.4750
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, 1 June 2011
Four straight months of diminishing growth for the UK’s ailing manufacturing sector
May was the fourth month in a row that growth in the UK manufacturing sector decreased. If manufacturing growth continues to slow, it won’t be long before we are in contraction.
Today’s PMI data showed the weakest monthly growth since December 2009. No one expected the data to be good, as forecasts were generally pessimistic - but the results are even more alarming for the UK’s economic outlook.
Sterling has taken a major hit in response - dropping by almost a cent against the US dollar, and by half a cent against the euro. All this does is place further doubts over the strength of the UK’s economic recovery, pushing back expectations of a long-awaited Bank of England rate rise. Some players bet on a rate rise at the end of this year, but as things stand we are likely to have to wait until the end of the first quarter of 2012.
With the rate of growth in the construction and services sectors expected to be flat this week, we may have to wait even longer for some positive data. Today’s data doesn’t bode well for UK growth in the second quarter - we are in dire need of an upside surprise from the services sector.
Today’s PMI data showed the weakest monthly growth since December 2009. No one expected the data to be good, as forecasts were generally pessimistic - but the results are even more alarming for the UK’s economic outlook.
Sterling has taken a major hit in response - dropping by almost a cent against the US dollar, and by half a cent against the euro. All this does is place further doubts over the strength of the UK’s economic recovery, pushing back expectations of a long-awaited Bank of England rate rise. Some players bet on a rate rise at the end of this year, but as things stand we are likely to have to wait until the end of the first quarter of 2012.
With the rate of growth in the construction and services sectors expected to be flat this week, we may have to wait even longer for some positive data. Today’s data doesn’t bode well for UK growth in the second quarter - we are in dire need of an upside surprise from the services sector.
Wednesday, 25 May 2011
Project Merlin lending targets- why are they important?
Away from the eurozone debt issue, we have had the story surrounding Project Merlin's lending targets story this week and the subsequent British Bankers Association statement. Why is it important that UK banks get back to lending?
Liquidity is essential to a healthy economy, this is why economies such as the UK, US and Japan have been pumping money into their economies through quantitative easing – it stimulates growth. This is exactly why under Project Merlin, the largest UK retail banks were set lending targets by the government. Borrowing rates on UK loans have surged to a ten year high, which has really deterred borrowers’ appetite.
Whilst reduced borrowing does suggest businesses and consumers are trying to address their balance sheets, it does not do the UK’s growth prospects much good. With people saving rather than spending, UK retail sales are doing awfully. Commercial debt can be very positive for an economy, encouraging innovation and ambition, but most businesses are understandably more concerned with staying afloat and consolidating.
If businesses remain conservative, and reluctant to borrow, then economic growth will be capped. Poor growth means a weaker pound, because as long as the UK recovery remains vulnerable to a double dip recession, sterling will be out of favour. Stronger growth means the Bank of England can raise interest rates from their record lows, giving investors a higher-yield to chase.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Liquidity is essential to a healthy economy, this is why economies such as the UK, US and Japan have been pumping money into their economies through quantitative easing – it stimulates growth. This is exactly why under Project Merlin, the largest UK retail banks were set lending targets by the government. Borrowing rates on UK loans have surged to a ten year high, which has really deterred borrowers’ appetite.
Whilst reduced borrowing does suggest businesses and consumers are trying to address their balance sheets, it does not do the UK’s growth prospects much good. With people saving rather than spending, UK retail sales are doing awfully. Commercial debt can be very positive for an economy, encouraging innovation and ambition, but most businesses are understandably more concerned with staying afloat and consolidating.
If businesses remain conservative, and reluctant to borrow, then economic growth will be capped. Poor growth means a weaker pound, because as long as the UK recovery remains vulnerable to a double dip recession, sterling will be out of favour. Stronger growth means the Bank of England can raise interest rates from their record lows, giving investors a higher-yield to chase.
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, 23 May 2011
Andrew Sentance departs - where does this leave the MPC?
Arch-hawk Andrew Sentance made his last MPC interest rate vote earlier this month, as his tenure comes to an end. He voted for a 0.5% Bank of England interest rate rise, with fellow hawks Andrew Weale and Spencer Dale both voting for a 0.25% interest rate rise. This left the voting pattern as six in favour of keeping rates on hold, and three voting for a rate rise.
Former Goldman Sachs economist Ben Broadbent is Sentance’s replacement, and comments last week suggest he is by no means as hawkish as his predecessor. In his appearance before Parliament’s Treasury Committee last week, he stated that if VAT and high commodity prices are stripped out of the headline UK inflation figure, we are much closer to the BoE’s official 2% target. These comments are not consistent with those of a ‘nailed on’ hawkish voter. He is likely to be viewed as a swing voter, and this could push expectations of a BoE rate rise back, or at least makes bringing expectations forward more difficult.
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.
Former Goldman Sachs economist Ben Broadbent is Sentance’s replacement, and comments last week suggest he is by no means as hawkish as his predecessor. In his appearance before Parliament’s Treasury Committee last week, he stated that if VAT and high commodity prices are stripped out of the headline UK inflation figure, we are much closer to the BoE’s official 2% target. These comments are not consistent with those of a ‘nailed on’ hawkish voter. He is likely to be viewed as a swing voter, and this could push expectations of a BoE rate rise back, or at least makes bringing expectations forward more difficult.
Spencer Dale has come out with some real hawkish rhetoric of late, stating that he was “not at all confident that the recovery has taken hold and will definitely power away. However, I'm even more worried about what's going on in terms of inflation.” Perhaps it is Dale that will replace Sentance as the sabre-rattler in chief.
As it is, the market has the BoE raising rates in its January 2012 meeting. There is so much that can change in this time that for us to commit to a specific month seems more than a little speculative. However, we currently would be sceptical of bets being brought forward to this year, based on the current performance of the UK economy at present and based on the removal of the hawkish faction’s most outspoken voter. 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, 19 May 2011
Sterling v South African Rand Outlook
The South African rand has been the most volatile emerging market currency this year and the GBP/ZAR recent fluctuations have been reflective of this. The appreciation of the rand in the past three months has been largely thanks to the return of risk appetite, which is attributable to growing confidence in the global economic recovery. This confidence has faltered of late but should be a prominent feature looking forward.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.
The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.
Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.
Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.
However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.
Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.
Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.
The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.
Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.
Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.
However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.
Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.
Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.
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, 17 May 2011
Sterling fails to sustain gains after sharp inflation rise
One would expect a 0.5% surge in a headline inflation figure which was already double the BoE’s official target to give sterling a genuine and sustained boost. This has not been the case today, sterling has erased the pretty decent gains it made in the build up to the data release, to trade flat on the day presently.
Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.
Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.
In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.
Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.
In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
UK inflation provides an upside surprise
Data this morning has shown that the UK headline inflation figure has risen to 4.5%, but expectations of a higher figure had already been priced in over the morning. With the previous figure showing that prices had increased by 4.0% from the same point last year this latest monthly rise is in line with strong global price pressures. As the highest UK inflationary figure rise since 2008, the increase is well ahead of the forecasted 4.2% rise.
This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.
King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.
Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.
This indicates that last month’s ease in price pressures was due to temporary factors, with fuel prices and the VAT rise taking their toll on UK inflation. The market had a BoE rate rise priced in for December 2011, and I wouldn’t be surprised if today’s data brings some of those bets forward.
King recently indicated that UK headline inflation could hit 5.0% in the coming months – if he is right then it could well force the MPC to succumb to pressure and raise rates.
Sterling spiked in the build-up to the data release, but how far it will push on from here in light of the upside surprise remains to be seen. UK inflation is expected to climb quite aggressively, and despite today’s data there is still a need for much stronger UK growth before the BoE tightens policy. King’s open letter to George Osborne later today and tomorrow’s MPC minutes should clarify the level of genuine hawkishness within the BoE - a rate rise before December could be disastrous.
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