UK growth data disappoints
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 5 September 2011
Friday, 2 September 2011
Caxton FX Monthly Outlook
August saw a collapse in global investor confidence which triggered huge losses in the stock market. Rating agency Stand & Poor’s downgrade of US debt proved the catalyst, but a variety of issues contributed to the slide in sentiment; global growth is stalling, the US economy is nearing another recession, and a long-term solution to the eurozone debt problem continues to evade us.
The US dollar and other safe-haven assets strengthened considerably amid the huge uncertainty that prevailed in early August but prospects for the dollar look negative. The Fed has announced that the US interest rate will remain at record lows until mid-2013, and debate within the central bank surrounding ‘QE3’ (further US quantitative easing) is ongoing. US economic data has broadly been very disappointing in recent weeks; hopes of a H2 pick-up in growth are diminishing and bets on another US recession are increasing.
Sterling enjoyed a strong few weeks, offering investors some safe-haven appeal of its own. With US and eurozone issues dominating the headlines, and with the Swiss National Bank and Bank of Japan taking measures to devalue their currencies, the market looked to sterling as a safer alternative. With confidence returning and risk appetite recovering, this theme has been reversed in the past week and the pound’s prospects are bearish; a poor growth outlook and a dovish central bank are weighing heavily.
Sterling/Euro
Eurozone concerns are at a reasonably low ebb at present; despite bond yields still at elevated levels, the ECB’s programme of buying Spanish, Italian, Portuguese and Irish bonds is a show of commitment that has gone some way to calming fears. Nonetheless, frustrations remain; the European Financial Stability Fund has not been expanded and is thus insufficient in size to deal with a Spanish or Italian bailout.
The proposal of a common eurobond has been rejected by Merkel and Sarkozy. Vague commitments to common governance and a Tobin tax were the main results of the two leaders’ last meeting, neither of which inspired much confidence. However, judging by the strength of the euro, the market seems willing to wait for officials to work out a longer-term answer to the eurozone’s structural debt problem.
The outlook for the ECB interest rate outlook is coming under increased scrutiny, in light of a slowdown in quarterly growth figures from Germany (0.1%), France (0.0%) and eurozone as a whole (0.2%).This slowdown is in line with a global trend however, as shown by a second quarter UK growth figure of 0.2%. It should be noted that Trichet was slightly more dovish at last month’s ECB press conference but nevertheless, the ECB have shown they are dedicated to controlling eurozone inflation and rate cut seems unlikely at this stage. The eurozone’s higher interest rate (1.50%) will continue to attract investment moving forward.
Last month’s MPC minutes made the UK interest rate outlook even more dovish, with the two remaining MPC hawks (Weale and Dale) abandoning their quest for a BoE interest rate hike. In addition, the recent Quarterly Inflation Report indicated a calmer outlook for inflation next year. With UK growth so weak, there is little pushing the BoE towards monetary tightening now.
Indeed, there is substantially more chance of further UK quantitative easing than of a rate hike. Last month’s manufacturing and construction PMI data was poor, as were retail sales and unemployment figures. The only saving grace was some strong growth in the UK services sector, which was enough to stave off fears of further UK quantitative easing for the time being. A poor showing in August’s PMI figures in coming sessions could well see this pair drop considerably, all eyes will be on the all-important services figure.
Sterling looks distinctly vulnerable to further falls against the euro. Global stocks are recovering in line with a return of risk appetite, which favours the single currency. The key driver of the euro also remains firmly in place - Asian sovereign diversification away from the dollar into the euro. With multiple bailouts in recent months and questions hanging over Spanish and Italian debt, and now concerns over German and French economic growth, the resolve of far eastern buyers has been tested but the euro seems destined to remain strong.
We have seen highs up at €1.1550 but this pair is trading back down at €1.1350 at present. In accordance with a weakened outlook for the US dollar, a dip down towards the key EUR/GBP target of 90p, which is equal to €1.1111, seems a decent bet.
GBP/USD
This pair remains true to its longer-term range of $1.59-1.67, with both currencies hemmed in by domestic economic underperformance. There have been some truly alarming US economic figures in recent weeks that have contributed significantly to the decline global stocks. US second quarterly growth undershot expectations (showing 1.0% expansion on an annualized basis) and Philly Fed manufacturing and consumer confidence data slid to levels not seen since the recession.
The Fed has responded by pledging to keep the US interest rate at its current record-low for two years to come, until mid-2013. Speculation of a third round of US quantitative easing has been rife over recent weeks and hopes were high for indications at Bernanke’s Fed press conference and his recent speech at Jackson Hole. The Fed Chairman has held fire on further monetary easing for now but the measure remains very much on the table. If data continues along its current downtrend, then the Fed will have to pull the trigger; many will have their sights set on the Fed’s September meeting. The meeting has been extended to two days, a reflection of the depth of debate surrounding the measures which the Fed is considering in order to stave off another US recession.
The longer-term impact of Standard & Poor’s downgrade of US debt (due to inadequate pledges of spending cuts) should not be underestimated. Looking ahead to next year, if the US government fails to address its fiscal position then further downgrades are likely; Standard & Poor’s has stated as much. The short-term fallout saw sterling fail to sustain a move higher against the dollar in the middle of August, having been rejected at $1.66.
The strength of the EUR/USD rate should keep sterling fairly well-supported against the dollar in coming weeks and months but we do not see any break of this pair’s longer-term range in the current climate. However, if US data does continue to worsen and the Fed does introduce QE3, a break towards $1.70 seems a very good bet indeed. In all likelihood, we may have to look beyond September for the Fed to pull the trigger, and this pair will continue to fluctuate in range in the short-term. An increasingly bearish outlook for the dollar, rather than sterling strength should mean that if there is any direction bias for this pair, it is to the upside from the current $1.62 trading level.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.6350
EUR / USD 1.46
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The US dollar and other safe-haven assets strengthened considerably amid the huge uncertainty that prevailed in early August but prospects for the dollar look negative. The Fed has announced that the US interest rate will remain at record lows until mid-2013, and debate within the central bank surrounding ‘QE3’ (further US quantitative easing) is ongoing. US economic data has broadly been very disappointing in recent weeks; hopes of a H2 pick-up in growth are diminishing and bets on another US recession are increasing.
Sterling enjoyed a strong few weeks, offering investors some safe-haven appeal of its own. With US and eurozone issues dominating the headlines, and with the Swiss National Bank and Bank of Japan taking measures to devalue their currencies, the market looked to sterling as a safer alternative. With confidence returning and risk appetite recovering, this theme has been reversed in the past week and the pound’s prospects are bearish; a poor growth outlook and a dovish central bank are weighing heavily.
Sterling/Euro
Eurozone concerns are at a reasonably low ebb at present; despite bond yields still at elevated levels, the ECB’s programme of buying Spanish, Italian, Portuguese and Irish bonds is a show of commitment that has gone some way to calming fears. Nonetheless, frustrations remain; the European Financial Stability Fund has not been expanded and is thus insufficient in size to deal with a Spanish or Italian bailout.
The proposal of a common eurobond has been rejected by Merkel and Sarkozy. Vague commitments to common governance and a Tobin tax were the main results of the two leaders’ last meeting, neither of which inspired much confidence. However, judging by the strength of the euro, the market seems willing to wait for officials to work out a longer-term answer to the eurozone’s structural debt problem.
The outlook for the ECB interest rate outlook is coming under increased scrutiny, in light of a slowdown in quarterly growth figures from Germany (0.1%), France (0.0%) and eurozone as a whole (0.2%).This slowdown is in line with a global trend however, as shown by a second quarter UK growth figure of 0.2%. It should be noted that Trichet was slightly more dovish at last month’s ECB press conference but nevertheless, the ECB have shown they are dedicated to controlling eurozone inflation and rate cut seems unlikely at this stage. The eurozone’s higher interest rate (1.50%) will continue to attract investment moving forward.
Last month’s MPC minutes made the UK interest rate outlook even more dovish, with the two remaining MPC hawks (Weale and Dale) abandoning their quest for a BoE interest rate hike. In addition, the recent Quarterly Inflation Report indicated a calmer outlook for inflation next year. With UK growth so weak, there is little pushing the BoE towards monetary tightening now.
Indeed, there is substantially more chance of further UK quantitative easing than of a rate hike. Last month’s manufacturing and construction PMI data was poor, as were retail sales and unemployment figures. The only saving grace was some strong growth in the UK services sector, which was enough to stave off fears of further UK quantitative easing for the time being. A poor showing in August’s PMI figures in coming sessions could well see this pair drop considerably, all eyes will be on the all-important services figure.
Sterling looks distinctly vulnerable to further falls against the euro. Global stocks are recovering in line with a return of risk appetite, which favours the single currency. The key driver of the euro also remains firmly in place - Asian sovereign diversification away from the dollar into the euro. With multiple bailouts in recent months and questions hanging over Spanish and Italian debt, and now concerns over German and French economic growth, the resolve of far eastern buyers has been tested but the euro seems destined to remain strong.
We have seen highs up at €1.1550 but this pair is trading back down at €1.1350 at present. In accordance with a weakened outlook for the US dollar, a dip down towards the key EUR/GBP target of 90p, which is equal to €1.1111, seems a decent bet.
GBP/USD
This pair remains true to its longer-term range of $1.59-1.67, with both currencies hemmed in by domestic economic underperformance. There have been some truly alarming US economic figures in recent weeks that have contributed significantly to the decline global stocks. US second quarterly growth undershot expectations (showing 1.0% expansion on an annualized basis) and Philly Fed manufacturing and consumer confidence data slid to levels not seen since the recession.
The Fed has responded by pledging to keep the US interest rate at its current record-low for two years to come, until mid-2013. Speculation of a third round of US quantitative easing has been rife over recent weeks and hopes were high for indications at Bernanke’s Fed press conference and his recent speech at Jackson Hole. The Fed Chairman has held fire on further monetary easing for now but the measure remains very much on the table. If data continues along its current downtrend, then the Fed will have to pull the trigger; many will have their sights set on the Fed’s September meeting. The meeting has been extended to two days, a reflection of the depth of debate surrounding the measures which the Fed is considering in order to stave off another US recession.
The longer-term impact of Standard & Poor’s downgrade of US debt (due to inadequate pledges of spending cuts) should not be underestimated. Looking ahead to next year, if the US government fails to address its fiscal position then further downgrades are likely; Standard & Poor’s has stated as much. The short-term fallout saw sterling fail to sustain a move higher against the dollar in the middle of August, having been rejected at $1.66.
The strength of the EUR/USD rate should keep sterling fairly well-supported against the dollar in coming weeks and months but we do not see any break of this pair’s longer-term range in the current climate. However, if US data does continue to worsen and the Fed does introduce QE3, a break towards $1.70 seems a very good bet indeed. In all likelihood, we may have to look beyond September for the Fed to pull the trigger, and this pair will continue to fluctuate in range in the short-term. An increasingly bearish outlook for the dollar, rather than sterling strength should mean that if there is any direction bias for this pair, it is to the upside from the current $1.62 trading level.
Caxton FX one month forecast:
GBP / EUR 1.12
GBP / USD 1.6350
EUR / USD 1.46
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 30 August 2011
Caxton FX Weekly Round-up
Bernanke holds fire on QE3...for now
Last Friday saw Ben Bernanke give his Jackson Hole speech, at which the Fed Chairman ushered in QE2 last year. Many had high hopes for indications of a third programme of monetary easing this time around, but were disappointed. It is clear though that the market has not given up on the Fed pulling the trigger at some point. Nor should it, if US data continues on its current path, then there can be no doubt that the Fed’s hand will be forced on the issue. US consumer confidence data this afternoon was incredibly poor, hitting its lowest point in over two years, at which point the US economy was deep in recession. The signs are all there and we remain bearish on the dollar in the longer-term, though safe-haven flows have been plentiful today.
Tonight’s Fed’s meeting minutes are unlikely to reveal much we don’t already know, further easing is not quite necessary at present but the Fed will act accordingly if US data continues to disappoint. Many will be turning their heads towards next month’s Fed meeting.
Friday also saw the release of the all-important quarterly US growth figure, which undershot consensus forecasts to show 1.0% growth (annualised). This week’s major release is the monthly update from the US labour market, a poor figure here will certainly increase QE3 bets.
Sterling on the back foot amid improved risk appetite
Sterling has performed well in recent weeks, benefiting from increased safe-haven appeal but risk appetite has improved in recent sessions. Global stocks are recovering and safe-haven flows are being redirected from the pound.
This week brings the monthly growth updates from the UK manufacturing, construction and services sectors. The services sector spearheaded growth last month and the same will need to be true this time if concerns of further UK quantitative easing are to be kept at bay.
Euro trading strongly despite usual issues
We have seen fairly weak demand for Italian debt at an auction today, suggesting that it could be the subject of the next episode in the eurozone debt saga. The issue of demands from Finland for collateral in return for Greek aid has re-entered the headlines today, which has put the single currency under pressure today.
Nonetheless, the euro is back at a seven week high against an out-of-favour pound, and is towards the higher-end of its range against the dollar. As ever, Asian investment is keeping the euro fairly well-bid.
On the downside for the euro though, the ECB interest rate outlook has come into question. With data last week revealing a further slowdown in the eurozone (though not as bad as many expected), speculation is growing that we may see interest rate cuts in coming months. Our bet is that this speculation underestimates just how hawkish the ECB is and will continue to be.
Sterling is trading under €1.13 and under $1.63 this afternoon. This GBP/USD level looks a little too weak and we could see it bounce back in coming sessions. Against the euro, sterling looks a little more vulnerable but losses below €1.12 look a stretch.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.64
EUR / USD 1.45
GBP / AUD 1.5150
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.
Last Friday saw Ben Bernanke give his Jackson Hole speech, at which the Fed Chairman ushered in QE2 last year. Many had high hopes for indications of a third programme of monetary easing this time around, but were disappointed. It is clear though that the market has not given up on the Fed pulling the trigger at some point. Nor should it, if US data continues on its current path, then there can be no doubt that the Fed’s hand will be forced on the issue. US consumer confidence data this afternoon was incredibly poor, hitting its lowest point in over two years, at which point the US economy was deep in recession. The signs are all there and we remain bearish on the dollar in the longer-term, though safe-haven flows have been plentiful today.
Tonight’s Fed’s meeting minutes are unlikely to reveal much we don’t already know, further easing is not quite necessary at present but the Fed will act accordingly if US data continues to disappoint. Many will be turning their heads towards next month’s Fed meeting.
Friday also saw the release of the all-important quarterly US growth figure, which undershot consensus forecasts to show 1.0% growth (annualised). This week’s major release is the monthly update from the US labour market, a poor figure here will certainly increase QE3 bets.
Sterling on the back foot amid improved risk appetite
Sterling has performed well in recent weeks, benefiting from increased safe-haven appeal but risk appetite has improved in recent sessions. Global stocks are recovering and safe-haven flows are being redirected from the pound.
This week brings the monthly growth updates from the UK manufacturing, construction and services sectors. The services sector spearheaded growth last month and the same will need to be true this time if concerns of further UK quantitative easing are to be kept at bay.
Euro trading strongly despite usual issues
We have seen fairly weak demand for Italian debt at an auction today, suggesting that it could be the subject of the next episode in the eurozone debt saga. The issue of demands from Finland for collateral in return for Greek aid has re-entered the headlines today, which has put the single currency under pressure today.
Nonetheless, the euro is back at a seven week high against an out-of-favour pound, and is towards the higher-end of its range against the dollar. As ever, Asian investment is keeping the euro fairly well-bid.
On the downside for the euro though, the ECB interest rate outlook has come into question. With data last week revealing a further slowdown in the eurozone (though not as bad as many expected), speculation is growing that we may see interest rate cuts in coming months. Our bet is that this speculation underestimates just how hawkish the ECB is and will continue to be.
Sterling is trading under €1.13 and under $1.63 this afternoon. This GBP/USD level looks a little too weak and we could see it bounce back in coming sessions. Against the euro, sterling looks a little more vulnerable but losses below €1.12 look a stretch.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.64
EUR / USD 1.45
GBP / AUD 1.5150
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.
Friday, 26 August 2011
Bernanke fails to indicate QE3
Bernanke's speech at Jackson Hole, where at the same point last year he introduced QE2, has disappointed those hoping for a further programme of monetary easing, which would boost confidence, help to safeguard the US economic recovery, and improve the US stock market.
In truth, Bernanke's failure to pull the trigger on QE3 should not come as a surprise. The US economy is certainly in dire straits; its second quarter US GDP figure (annualised) was announced this afternoon to be a disappointing 1.0%. However, we may have to see the US recession dip back into recession, or at least come closer to doing so, in order for Bernanke to introduce QE3.
One key issue is that of US inflation. When QE2 was signalled, US inflation was falling, but at present the figure is rising and further monetary easing would exacerbate this. Another issue is that of dissent within the US Federal Reserve; the central bank is more prone to decisions by consensus and it would have been unusual for Bernanke to go ahead with the collection of high-profile, dissenting, fellow US policymakers we have heard from in recent weeks.
Bernanke stated that he is focusing on ways to promote US growth and improvements in the US labour market. However, this is not the end of the issue. The Fed is quite clearly willing to implement more quantitative easing, it is just setting the bar a little higher than many in the equity markets would prefer. The Fed's meeting minutes demonstrate that they are discussing the measure seriously as an issue.
So what's happened in the currency markets? Well, the US dollar rallied initially but gains have been erased. The was no new information provided by Bernanke. Do we the dollar hanging on to this week’s gains in the longer-term? No, we remain bearish on the greenback. Not even safe-haven flows seem likely to provide long-lasting support. An outlook characterised by low growth (and possible recession), high unemployment, ultra-low interest rates (and QE3?) and possibly further debt downgrades should ensure dollar-weakness.
Richard Driver
Caxton FX Anlayst
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
In truth, Bernanke's failure to pull the trigger on QE3 should not come as a surprise. The US economy is certainly in dire straits; its second quarter US GDP figure (annualised) was announced this afternoon to be a disappointing 1.0%. However, we may have to see the US recession dip back into recession, or at least come closer to doing so, in order for Bernanke to introduce QE3.
One key issue is that of US inflation. When QE2 was signalled, US inflation was falling, but at present the figure is rising and further monetary easing would exacerbate this. Another issue is that of dissent within the US Federal Reserve; the central bank is more prone to decisions by consensus and it would have been unusual for Bernanke to go ahead with the collection of high-profile, dissenting, fellow US policymakers we have heard from in recent weeks.
Bernanke stated that he is focusing on ways to promote US growth and improvements in the US labour market. However, this is not the end of the issue. The Fed is quite clearly willing to implement more quantitative easing, it is just setting the bar a little higher than many in the equity markets would prefer. The Fed's meeting minutes demonstrate that they are discussing the measure seriously as an issue.
So what's happened in the currency markets? Well, the US dollar rallied initially but gains have been erased. The was no new information provided by Bernanke. Do we the dollar hanging on to this week’s gains in the longer-term? No, we remain bearish on the greenback. Not even safe-haven flows seem likely to provide long-lasting support. An outlook characterised by low growth (and possible recession), high unemployment, ultra-low interest rates (and QE3?) and possibly further debt downgrades should ensure dollar-weakness.
Richard Driver
Caxton FX Anlayst
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 24 August 2011
Can the Bank of Japan's curb the yen's strength?
The Japanese economy is in recession, it is still recovering from a devastating natural disaster, Japan’s interest rate is at rock bottom and what is more, Moody’s has just downgrades Japanese debt. So why has the Japanese yen strengthened to record levels in recent weeks and months?
The answer is simple: the yen’s safe-haven status. The past six months have thrown up a huge amount of uncertainty in the financial markets. The Japanese earthquake disrupted international trade patterns, oil prices are sky high, global growth has slowed down, the eurozone debt crisis threatens the global banking system, and the US has had its debt downgraded and could be heading into another recession.
What do investors do in this climate? Head out of riskier assets such as commodity-linked currencies and equities, and into traditional safe haven assets such as government bonds (such as UK or US, not Greek!), gold, and the yen and swiss franc. The fact that the Japanese economy is struggling matters not a jot, the yen’s safe-haven status trumps all.
Turmoil in the financial markets looks unlikely to let up any time soon; it will probably take months for a long-term solution to the eurozone debt crisis to emerge, not to mention the increasing likelihood of a US recession and further debt downgrade next year. So what can stop the yen from strengthening?
Certainly the Japanese government and the Bank of Japan are very uncomfortable with the yen at current levels. There has been much jawboning about intervention in the currency markets in order to weaken the yen. The Bank of Japan conducted some unilateral intervention on Aug 4th, injecting around $3bn into the Japanese economy. Going on the yen’s climb in the time that has passed, this was unsuccessful.
Japan has very recently announced a $100bn credit line to encourage domestic firms to sell yen and invest overseas. Japanese officials may be coming to terms with the fact that they cannot to disrupt the yen’s longer-term strengthening. Further intervention efforts can be expected however, if for no other reason than to slow the yen’s appreciation. 75 yen to the dollar may well be the next benchmark which triggers further action from the Bank of Japan.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The answer is simple: the yen’s safe-haven status. The past six months have thrown up a huge amount of uncertainty in the financial markets. The Japanese earthquake disrupted international trade patterns, oil prices are sky high, global growth has slowed down, the eurozone debt crisis threatens the global banking system, and the US has had its debt downgraded and could be heading into another recession.
What do investors do in this climate? Head out of riskier assets such as commodity-linked currencies and equities, and into traditional safe haven assets such as government bonds (such as UK or US, not Greek!), gold, and the yen and swiss franc. The fact that the Japanese economy is struggling matters not a jot, the yen’s safe-haven status trumps all.
Turmoil in the financial markets looks unlikely to let up any time soon; it will probably take months for a long-term solution to the eurozone debt crisis to emerge, not to mention the increasing likelihood of a US recession and further debt downgrade next year. So what can stop the yen from strengthening?
Certainly the Japanese government and the Bank of Japan are very uncomfortable with the yen at current levels. There has been much jawboning about intervention in the currency markets in order to weaken the yen. The Bank of Japan conducted some unilateral intervention on Aug 4th, injecting around $3bn into the Japanese economy. Going on the yen’s climb in the time that has passed, this was unsuccessful.
Japan has very recently announced a $100bn credit line to encourage domestic firms to sell yen and invest overseas. Japanese officials may be coming to terms with the fact that they cannot to disrupt the yen’s longer-term strengthening. Further intervention efforts can be expected however, if for no other reason than to slow the yen’s appreciation. 75 yen to the dollar may well be the next benchmark which triggers further action from the Bank of Japan.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 22 August 2011
Weekly Round-Up: Sterling the new safe haven currency?
Merkel and Sarkozy offer little action
Last week’s meeting between Merkel and Sarkozy failed to provide any concrete action on the eurozone debt issue. The introduction of a eurozone bond was discarded as an option and the EFSF is not to be expanded. Vague commitments to common governance and a Tobin tax were the main results, neither of which inspired much confidence.
The euro is still trading fairly strongly tough, particularly against the dollar. This is largely attributable to increasing dollar-weakness and a degree of relief that the ECB are buying eurozone debt to stabilise peripheral bond yields.
US recession looms
The Philly Fed manufacturing index revealed an alarming contraction last week, intensifying speculation that the US economy is heading back into recession. The index gave its worst reading since the recession levels of March 2009. Global stocks suffered a major slide as a result, and riskier commodity-linked currencies sold off sharply, but the euro remains stable.
The US GDP figure is expected to be revised down by 0.2% to 1.1% (annualised) on Friday. Also on Friday is the key focus of the week, Fed Chairman Ben Bernanke’s speech. The prospects of a third programme of quantitative easing are improving with every poor piece of US data and Bernanke’s comments this week could be crucial for the dollar’s longer-term direction.
Sterling gains some safe-haven status
News from the UK economy was by no means positive last week. The monthly UK retail sales figure came in below expectations and UK unemployment data was particularly poor. In addition, the MPC minutes were very dovish indeed. The two remaining MPC hawks, Charles Bean and Spencer Dale abandoned their quest for higher UK interest rates and joined the rest of the 9 member committee in voting for an interest rate hold at 0.5%. This all but eliminates the chances of monetary tightening this year and pushes back bets towards the back end of next year, if at all.
Nonetheless, sterling is trading very strongly against both the euro and particularly the US dollar. Much of this is due to the pound receiving an increased share of safe-haven flows. With doubts over the US credit rating and building concerns of another US recession, as well as fears of currency intervention with regard to the yen and the swiss franc (major safe haven currencies), sterling has acquired its own haven status.
With the dollar likely to remain weak in the long-term, particularly if further QE is signalled by Bernanke on Friday, sterling’s prospects have improved significantly across the board.
There is plenty of risk with regard to eurozone data this week; we have a raft of PMI data released tomorrow, as well as forward-looking German economic sentiment and business climate data. The economic picture in Germany and the eurozone as a whole has taken a turn for the worse in light of last week’s poor GDP figures (0.1% and 0.2% respectively). If weak eurozone data puts eurozone debt back under pressure, then market nerves will rise once again.
Sterling is trading at $1.65 and €1.1450 at present. Risks on both pairings this week are to the upside, while the EUR/USD pairing should remain somewhere near current levels of $1.44.
End of week forecast
GBP / EUR 1.15
GBP / USD 1.66
EUR / USD 1.4430
GBP / AUD 1.57
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Last week’s meeting between Merkel and Sarkozy failed to provide any concrete action on the eurozone debt issue. The introduction of a eurozone bond was discarded as an option and the EFSF is not to be expanded. Vague commitments to common governance and a Tobin tax were the main results, neither of which inspired much confidence.
The euro is still trading fairly strongly tough, particularly against the dollar. This is largely attributable to increasing dollar-weakness and a degree of relief that the ECB are buying eurozone debt to stabilise peripheral bond yields.
US recession looms
The Philly Fed manufacturing index revealed an alarming contraction last week, intensifying speculation that the US economy is heading back into recession. The index gave its worst reading since the recession levels of March 2009. Global stocks suffered a major slide as a result, and riskier commodity-linked currencies sold off sharply, but the euro remains stable.
The US GDP figure is expected to be revised down by 0.2% to 1.1% (annualised) on Friday. Also on Friday is the key focus of the week, Fed Chairman Ben Bernanke’s speech. The prospects of a third programme of quantitative easing are improving with every poor piece of US data and Bernanke’s comments this week could be crucial for the dollar’s longer-term direction.
Sterling gains some safe-haven status
News from the UK economy was by no means positive last week. The monthly UK retail sales figure came in below expectations and UK unemployment data was particularly poor. In addition, the MPC minutes were very dovish indeed. The two remaining MPC hawks, Charles Bean and Spencer Dale abandoned their quest for higher UK interest rates and joined the rest of the 9 member committee in voting for an interest rate hold at 0.5%. This all but eliminates the chances of monetary tightening this year and pushes back bets towards the back end of next year, if at all.
Nonetheless, sterling is trading very strongly against both the euro and particularly the US dollar. Much of this is due to the pound receiving an increased share of safe-haven flows. With doubts over the US credit rating and building concerns of another US recession, as well as fears of currency intervention with regard to the yen and the swiss franc (major safe haven currencies), sterling has acquired its own haven status.
With the dollar likely to remain weak in the long-term, particularly if further QE is signalled by Bernanke on Friday, sterling’s prospects have improved significantly across the board.
There is plenty of risk with regard to eurozone data this week; we have a raft of PMI data released tomorrow, as well as forward-looking German economic sentiment and business climate data. The economic picture in Germany and the eurozone as a whole has taken a turn for the worse in light of last week’s poor GDP figures (0.1% and 0.2% respectively). If weak eurozone data puts eurozone debt back under pressure, then market nerves will rise once again.
Sterling is trading at $1.65 and €1.1450 at present. Risks on both pairings this week are to the upside, while the EUR/USD pairing should remain somewhere near current levels of $1.44.
End of week forecast
GBP / EUR 1.15
GBP / USD 1.66
EUR / USD 1.4430
GBP / AUD 1.57
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 17 August 2011
MPC hawks fly the nest
The MPC minutes have revealed that all nine members of the Bank of England’s rate-setting committee voted to keep the base rate on hold at the current 0.5% level. Adam Posen remains the sole policymaker voting for further quantitative easing, despite some awful UK employment data released this morning.
The fact that Martin Weale and Charles Bean have dropped their rate hike calls is highly significant; it drives home the message that UK economic prospects are highly uncertain. In light of last week’s quarterly inflation report, Weale and Bean’s defection is not wholly surprising. With medium-term inflation risks very much skewed to the downside, there is now little pushing the BoE to hike rates. The picture is similar to what we are seeing in the US -low growth and a subdued inflation outlook -which is reversing near and medium-term rate hike bets on both sides of the Atlantic.
Another factor persuading the former hawks to change tack is the threat that the eurozone debt crisis poses to the UK economy. Central banks all over the world are reluctant to raise rates amid the current uncertainty in the financial markets; they really don’t know what’s going to happen. Merkel and Sarkozy’s meeting yesterday provided little clarity as to a viable solution to the debt crisis.
The recent second quarterly UK growth figure was undeniably poor and has increased speculation of quantitative easing. However, there is a degree of optimism surrounding underlying growth. The Office of National Statistics estimates that growth would have been half a percent higher in the absence of temporary factors such as the Royal Wedding. The bar for further quantitative easing is set pretty high and July’s services PMI figure will have eased concerns for the time being.
Today’s data from the UK labour market supports the MPC’s dovish stance; at 30k, jobless claims are at the highest we have seen in over two years. At 7.9%, the unemployment rate also erased improvements made over recent months.
Sterling’s losses in response to this morning’s MPC minutes and poor employment data were short-lived across the board. In truth, bets on a near-term BoE rate hike were pretty much non-existent and expectations for a move early next year were sparse. The minutes just confirmed suspicions that the MPC will remain dovish for the foreseeable future. At $1.6550 on the interbank rate, sterling is now at a ten-week high against the greenback, which represents an excellent opportunity to buy dollars.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The fact that Martin Weale and Charles Bean have dropped their rate hike calls is highly significant; it drives home the message that UK economic prospects are highly uncertain. In light of last week’s quarterly inflation report, Weale and Bean’s defection is not wholly surprising. With medium-term inflation risks very much skewed to the downside, there is now little pushing the BoE to hike rates. The picture is similar to what we are seeing in the US -low growth and a subdued inflation outlook -which is reversing near and medium-term rate hike bets on both sides of the Atlantic.
Another factor persuading the former hawks to change tack is the threat that the eurozone debt crisis poses to the UK economy. Central banks all over the world are reluctant to raise rates amid the current uncertainty in the financial markets; they really don’t know what’s going to happen. Merkel and Sarkozy’s meeting yesterday provided little clarity as to a viable solution to the debt crisis.
The recent second quarterly UK growth figure was undeniably poor and has increased speculation of quantitative easing. However, there is a degree of optimism surrounding underlying growth. The Office of National Statistics estimates that growth would have been half a percent higher in the absence of temporary factors such as the Royal Wedding. The bar for further quantitative easing is set pretty high and July’s services PMI figure will have eased concerns for the time being.
Today’s data from the UK labour market supports the MPC’s dovish stance; at 30k, jobless claims are at the highest we have seen in over two years. At 7.9%, the unemployment rate also erased improvements made over recent months.
Sterling’s losses in response to this morning’s MPC minutes and poor employment data were short-lived across the board. In truth, bets on a near-term BoE rate hike were pretty much non-existent and expectations for a move early next year were sparse. The minutes just confirmed suspicions that the MPC will remain dovish for the foreseeable future. At $1.6550 on the interbank rate, sterling is now at a ten-week high against the greenback, which represents an excellent opportunity to buy dollars.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 16 August 2011
German GDP slows, alarm bells ringing?
Second quarter German GDP was released this morning and it showed an alarming slowdown in growth in the European powerhouse. The German economy grew by just 0.1% from April to July, below expectations of a 0.5% figure, and well below a first quarterly growth figure of 1.3%. In addition, the eurozone’s second quarter GDP figure as a whole came in at 0.2% (from a Q1 figure of 0.8%). What is more, forward-looking data suggests there Germany can expect ongoing slower growth in the second half of the year.
The euro has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?
Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.
It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The euro has rebounded from losses (against the dollar at least, though not against the pound) incurred as a result of these figures, so the market does not appear to be too concerned. But shouldn’t it?
Germany’s sharp slowdown will only adds further evidence that the global economy is stalling. We are seeing it in America, the UK, France; even Chinese growth slowed down last quarter. However, it may actually be because economies such as the UK and US teetering on the brink of a double dip recession that the euro has no suffered from today’s data. There is a real shortage of appealing currencies at present. Even the outperforming swiss franc is coming under pressure as a result of the Swiss National Bank’s plans to curb its strength.
It is no secret that a healthy German economy is essential if it is to drag the eurozone’s debt-laden nations out of their current crises. The German economy is export led and needs global demand to pick up, which seems unlikely at present. Germany’s willingness to continually bailout the ailing eurozone periphery, and perhaps even core nations such as Italy and France, will be tested to the absolute limit if Germany plunges back into recession. The market is typically less sensitive to eurozone data than to that of the UK and US, but with German growth now under the microscope this may now cease to be the case. Germany is currently the eurozone’s safety net, without this economy propelling it forward; bets on a euro collapse will undoubtedly increase.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 15 August 2011
A Weekly Round-Up: Sterling, Euro, Dollar
Stocks tumble but the major pairings remain in range
Attention last week was very much centred on activities in the stock market. The US debt downgrade, combined with ongoing concerns surrounding global growth and the absence of a long-term solution to the eurozone debt situation, triggered major declines in global equities. Market confidence was as low as we have seen it all year. Nonetheless, the US dollar failed to capitalise from heightened demand for safe-haven assets.
However, there have not been major moves amongst the major currency pairings; sterling remains fairly unchanged against both the euro and the dollar. The truth remains that the US, UK and eurozone economies have such serious economic problems that they cannot muster the support to sustain a rally.
The main event this week as far as the euro is concerned is tomorrow’s meeting between Merkel and Sarkozy. The two heavyweights will be looking at a long-term solution to the euro-regions debt situation which is now threatening major eurozone nations such as Spain, Italy and France.
The Fed promises record-low rates until mid-2013
Last week’s US Federal Reserve meeting was highly significant. Chairman Ben Bernanke announced that the US interest rate will remain at its current record-low level of <0.25% for the next two years, in a bid to nurture the US economy’s struggling recovery. The removal of any rate hike bets weakens the US dollar’s prospects in the long-term. However, prevailing concerns surrounding another global recession are likely to keep the greenback supported via its safe-haven demand.
In terms of the US economy, we had more mixed data last week. Monthly US retail sales figures showed an encouraging uptick, but some awful US consumer sentiment data suggests future figures could disappoint. This week’s data calendar is a quiet one from the US economy, we have had some awful manufacturing data out this afternoon which will only cement pessimistic bets for growth.
MPC minutes in focus
This week brings some important UK-related news. The UK consumer price index (headline inflation) is announced tomorrow. This is forecast to show an uptick but last week’s BoE quarterly inflation report was distinctly dovish on this issue. It suggested that inflation will still spike up to 5.0% in coming months, before falling fairly rapidly back down towards the official 2.0% target next year.
The MPC minutes are released on Wednesday and it will be very interesting to see whether quantitative easing gained further air-time, and whether one of the two remaining MPC hawks defected to the dovish camp. One thing can be safely assumed, there will be no UK interest rate hike for many months to come. Thursday sees the release of the monthly UK retail sales figure, which is expected to show some further modest growth.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.6330
EUR / USD 1.4450
GBP / AUD 1.55
Richard Driver
Currency Analyst
Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Attention last week was very much centred on activities in the stock market. The US debt downgrade, combined with ongoing concerns surrounding global growth and the absence of a long-term solution to the eurozone debt situation, triggered major declines in global equities. Market confidence was as low as we have seen it all year. Nonetheless, the US dollar failed to capitalise from heightened demand for safe-haven assets.
However, there have not been major moves amongst the major currency pairings; sterling remains fairly unchanged against both the euro and the dollar. The truth remains that the US, UK and eurozone economies have such serious economic problems that they cannot muster the support to sustain a rally.
The main event this week as far as the euro is concerned is tomorrow’s meeting between Merkel and Sarkozy. The two heavyweights will be looking at a long-term solution to the euro-regions debt situation which is now threatening major eurozone nations such as Spain, Italy and France.
The Fed promises record-low rates until mid-2013
Last week’s US Federal Reserve meeting was highly significant. Chairman Ben Bernanke announced that the US interest rate will remain at its current record-low level of <0.25% for the next two years, in a bid to nurture the US economy’s struggling recovery. The removal of any rate hike bets weakens the US dollar’s prospects in the long-term. However, prevailing concerns surrounding another global recession are likely to keep the greenback supported via its safe-haven demand.
In terms of the US economy, we had more mixed data last week. Monthly US retail sales figures showed an encouraging uptick, but some awful US consumer sentiment data suggests future figures could disappoint. This week’s data calendar is a quiet one from the US economy, we have had some awful manufacturing data out this afternoon which will only cement pessimistic bets for growth.
MPC minutes in focus
This week brings some important UK-related news. The UK consumer price index (headline inflation) is announced tomorrow. This is forecast to show an uptick but last week’s BoE quarterly inflation report was distinctly dovish on this issue. It suggested that inflation will still spike up to 5.0% in coming months, before falling fairly rapidly back down towards the official 2.0% target next year.
The MPC minutes are released on Wednesday and it will be very interesting to see whether quantitative easing gained further air-time, and whether one of the two remaining MPC hawks defected to the dovish camp. One thing can be safely assumed, there will be no UK interest rate hike for many months to come. Thursday sees the release of the monthly UK retail sales figure, which is expected to show some further modest growth.
End of week forecast
GBP / EUR 1.13
GBP / USD 1.6330
EUR / USD 1.4450
GBP / AUD 1.55
Richard Driver
Currency Analyst
Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 11 August 2011
France could be the tipping point to euro collapse
The equity markets came under further downward pressure today. The fresh concerns that have arisen in the last couple of session have been directed at France.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
There was speculation yesterday that France, the eurozone’s second largest economy, would lose its AAA credit rating (as the US had done in the past week). Three main rating agencies (Standard & Poor’s, Moody’s and Fitch’s) have all announced this week that France’s top credit rating is secure, and have confirmed the allocation of a ‘stable’ outlook.
As a result of these fresh eurozone concerns and ongoing fears of another global recession, European stocks opened poorly this morning. The share prices of major French banks such as BNP Paribas, Credit Agricole and Societe Generale fell by as much as 20% in a day. The FTSE 100 dipped below the key 5000 benchmark and the French index, the CAC 40 has made major losses as well, as you might expect. However, a strong start to the US session has boosted market confidence a little, suggesting equities had been oversold.
So what’s all the fuss about? Well, France has high debt, a huge deficit and major exposure to peripheral debt. The market is incredibly nervous at present and highly sensitive to rumours, and the French banks fell foul in a major way.
What would happen if France lost its AA credit rating? Well, this would almost certainly be a catastrophe. The absence of the top rating will discount France as a guarantor for loans to the periphery. This leaves Germany to bailout Spain and Italy (if...or as some are predicting, when this becomes necessary) pretty much on its own. Can Merkel really justify this to the German people, bankrolling the rest of the eurozone because they could not help but to irresponsibly accumulate totally unsustainable debt?
France’s credit rating then, could well be the tipping point to the Armageddon situation that so many commentators are forecasting- the end of the euro. This could well explain why the stock market hit French banks so hard this week.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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