Caxton FX January Outlook: GBP/EUR/USD

December was an awful month for the single currency; the crucial EU Summit failed to satisfy market expectations and the euro was punished accordingly. Preceding the Summit, hopes for a holistic, assertive and credible plan to deal with the region’s debt profile were elevated higher than ever. Unfortunately the fiscal compact on budgetary discipline and various other commitments that were made did little to convince the market that EU leaders are on the right track. The region’s debt dynamics are finally taking their toll on the euro in a very material way.

Sentiment towards the UK economy has been at a particularly low ebb in recent weeks; growth figures have been disappointing and sights have been set very low for 2012 growth. Nonetheless, with the UK government remaining committed to its deficit reduction plan, there continues to be strong (and sterling-supportive) demand for UK gilts and there remains minimal scope for Bank of England intervention.

The focal points for this month are inevitably eurozone-related. Investors will be looking to the EU Summit on 30th of January with hopes for major decisions to deal with the debt situation. Growth will also be discussed and this has up until now remained a largely unaddressed problem. The eurozone looks likely to head back into a technical recession this year, and it goes without saying that the region cannot solve this crisis without economic growth.

Sterling/Euro

Slow progress and poor leadership are hurting the euro almost across the board at present. Sterling has climbed to a sixteen-month high of €1.2150 against the euro, which says far more about waning confidence levels towards the single currency than it does about the UK’s economic growth prospects.
Out of last month’s EU Summit came an agreement to top up the eurozone’s bailout resources by €200bn in IMF loans. Typically, and almost symbolic of EU leaders’ inability to take action, this figure was later revised down to €150bn. Agreements to bring forward the introduction of the European Stability Mechanism (the permanent bailout fund) by a year to the middle of 2012 and to enforce stricter budget discipline are valuable long-term developments, but they do little to deal with the region’s very pressing short-term issues. The market is short-termist by nature; investors are far less concerned with avoiding future crises, they are preoccupied with the threat that the current crisis poses to the very existence of the euro.

Rating agency action (or the threat of it) is worrying the market at present. The bodies responded to the latest EU Summit inaction by downgrading the ratings of eurozone states such as Belgium and put several key nations such as Spain and Italy on ‘negative watch.’ Fitch’s even came to the damning conclusion that a comprehensive solution to the debt problem is “technically and politically beyond reach.” Standard & Poor’s are yet to wield their axe but are likely to do so in coming weeks, and this represents a major threat to the euro and risk appetite more generally.

Bond auctions in the eurozone are also in sharp contrast. Debt sales have been attracting diminishing demand and, alarmingly, this even applies to the core countries of France and Germany. Bond spreads are widening throughout the eurozone (Germany excepted) and further bond auctions this month will keep the pressure on the euro.

Greece remains the first head on the chopping block and its government has already stated this week that they will be forced to exit the euro in the event that they do not receive a second bailout by March. We can expect nerves to build steadily ahead of this deadline.

The prospects for the UK economy, despite a couple of encouraging growth figures from the UK services and construction sectors this week, are distinctly gloomy. Flat to minimal (around 0.5%) growth seems likely this year, and the risks of a recession are very significant. However in truth, developments in the eurozone will have a greater say over the UK’s recovery prospects than domestic policy.

Risks for this pair are quite clearly to the upside from our standpoint; the uptrend may be stalled by bouts of profit-taking on sterling’s rallies, but we see this pair climbing a further cent towards €1.22.

Sterling/US dollar

Sterling has been trading within a three cent range of $1.54 - $1.57 since late November and although this pair has threatened a move to the downside several times, sterling has managed to maintain sufficient support.
The US recovery is finding some real transaction at present, we haven’t seen such consistently positive economic data flow in almost a year. US manufacturing, consumer confidence and employment gauges are all on the up. The labour market, which remains both the US government and the US Federal Reserve’s number one concern, in particular appears to be making some progress, with January’s key monthly employment change figure hitting an eight month high.

In comparison to slowdowns in economies such as the UK, the eurozone, China and many others, the upturn in the US is attracting plenty of investment besides safe-haven flows. Often strong US data will weaken the dollar but at present, the opposite is true. In addition, the upturn in the US is diminishing the case for further quantitative easing from the Fed, which again is a positive for the US dollar.

Safe-haven flows are still the number one driver of the greenback’s strength however. The eurozone situation continues to peg back risk appetite and we are confident it will do so for many months to come. With fears of central bank intervention hanging over the yen and particularly the swiss franc, demand for the US dollar is high.

With market confidence on a noticeable downtrend, we see this pair breaking its current range to the downside in coming weeks. A move towards $1.53 is our bet.

Caxton FX one month forecast:
GBP / EUR 1.22
GBP / USD 1.53
EUR / USD 1.26

Richard Driver
Senior Analyst – Caxton FX


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Morning Report

Richard Driver, Analyst Last week finished with yet more positive US data, with the unemployment rate dipping to its lowest level since March 2009 and probably more significantly, 200k jobs were added to the payrolls. There was further poor eurozone data to ensure that the euro/US dollar pair headed yet lower. Today’s session will see Merkel and Sarkozy meet to iron out further details on the fiscal compact on budget discipline that was agreed at last month’s EU Summit. A press conference will also follow and will no doubt dominate the headlines.
STERLING/EURO: Having climbed by over a cent last week, this pair continues to edge higher as the eurozone’s weak growth outlook heightens concerns. Despite some better than expected UK services and construction figures last week, sterling is not making the current gains over the euro down to a change in sentiment towards the domestic economy. It is intensifying concerns surrounding the eurozone’s growth and debt that is the key driver here. Further data releases and bond auctions this week provides further scope for euro losses. Sterling is trading at €1.2050 this morning and the outlook remains pretty bright for this pair. It is a sparser week in terms of UK data, which means the focus will be on the eurozone more than ever, which judging by last week isn’t a positive thing for the single currency.	FORECAST
STERLING/US DOLLAR: Sterling found it tough going against the USD last week, but is benefiting from support at these multi-month lows. Current levels close to $1.54 broadly represent the bottom of a trading range that has been in place for several months. UK gilts were the top performing government bonds in 2011 and this has given sterling plenty of support, even against the stronger US dollar. However, not even this factor was able to guard against a two cent weekly decline for this pair. The US recovery is really picking up some pace now. The greenback is the pick of the currencies at present, and with the US economy outperforming the UK, we may see this pair break its trading range to the downside.	FORECAST
EURO/US DOLLAR: Further lows are being posted by the pair, with strong US data triggering a rally in the greenback. The euro’s sharp downtrend against the US dollar remains in place and there are no signs of it bottoming out just yet. US employment data was excellent on Friday and the non-farm payrolls data revealed exactly double as many extra jobs than initially expected. The positive US news did not weaken the USD as was the case throughout 2011, rather it strengthened it considerably. This pair is now trading at $1.2750; performance today depends on comments made by Merkel and Sarkozy today. Investor confidence and German industrial production may put the euro on the defensive early on.	FORECAST
STERLING/AUSTRALIAN DOLLAR: This pair remains fairly range-bound; though a poor Australian retail sales figure may see sterling make some gains today. For the first time in five months, the Australian retail sector failed to grow in December. This is exactly the sort of data that will convince the Reserve Bank of Australia to cut its interest rate once again (in addition to the two 0.25% cuts at the end of 2011). Eurozone nerves remain elevated and are doing a good job of suppressing risk appetite, regardless of Friday’s strong US jobs figures. Sterling is trading at 1.51 this morning and risks are still to the upside this week. Eurozone bond auctions throughout this week should trigger some safe-haven sterling gains.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is struggling rather more against the New Zealand dollar, despite losses in Asian stocks. Unlike the aussie dollar, the kiwi dollar is outperforming the pound at present, probably because the market is less fearful of a Reserve Bank of New Zealand rate cut than from the RBA. This pair is trading at a ten-week low under 1.97 now, but we are sticking to our position that sterling will bounce against the kiwi dollar before long.	FORECAST
STERLING/CANADIAN DOLLAR:  Remarkably, the Canadian dollar failed to kick on after the excellent US jobs figure, not helped by a poorer domestic figure. Data revealed that the US economic picture is going from strength to strength and Brent crude prices are still elevated towards $114 per barrel, but sterling actually made gains over the Canadian dollar on Friday. The domestic Canadian economic picture is far less impressive, with the unemployment rate rising to 7.5% and fewer jobs being added to the payrolls in December than expected. Sterling is trading at 1.5875 this morning, and we are still looking for further upside for this pair. Eurozone concerns are likely to intensify further this week and the loonie may feel the pressure as a result.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report

The euro came under further selling pressure yesterday and posted fresh lows against several currencies. For us, it is quite clear that the euro is going to depreciate, fundamentals have been pointing this way for some time now and market sentiment is worsening every month. The key obstacle to further euro downside is profit-taking, but this is only short-term by nature. Today’s session bring the all-important non-farm payroll data from the US, which could have a considerable impact on the mood in the market. The US growth story is the only real positive headline out there at the moment.
STERLING/EURO: Sterling climbed higher still against the euro, perhaps helped by some better than expected UK services data. The key instalment of monthly UK growth data, the Services Purchasing Managers’ Index, came in well above expectations yesterday to reveal the strongest figure in five months. The market will not get overexcited about this week’s stronger than expected manufacturing, construction and services sector figures, but it does provide a little hope that 2012 could be slightly less gloomy than anticipated. This will also strengthen arguments that further QE can wait, which is a positive for sterling. Sterling is trading up above €1.21 this morning and after strong gains this week, there is scope for profit-taking to take the wind out of this pair’s sails. Nonetheless, the outlook remains positive here.	FORECAST
STERLING/US DOLLAR: Sterling came under further pressure against the safe-haven US dollar, amid some more positive US jobs data. Yesterday was one of those rare occasions where positive US data (a monthly jobs indicator) actually benefited the US dollar. Expectations will be elevated for a good result from this afternoon’s non-farm payrolls figures, which could very well mean the market will be disappointed. Amid strong euro-dollar flows, this pair headed a cent lower to its current level of $1.55. Further dollar strength looks likely.	FORECAST
EURO/US DOLLAR: The euro is suffering further declines ahead of some important eurozone confidence data and a meeting between Sarkozy and Monti. There are plenty more downside risks for the euro today. The EU commission will publish some consumer confidence data this afternoon and French President Sarkozy and Italian PM Mario Monti will meet today and provide a statement. Eurozone retail sales data is also likely to reveal a monthly contraction. Judging by yesterday’s response to positive US employment data, the US dollar could benefit whatever the result from today’s US non-farm payrolls figure. For now though, this pair is trading down at $1.28.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling failed to kick on after some early gains, but remains off its lows against the aussie dollar. Deteriorating eurozone confidence will surely send this pair higher eventually, but gains were limited yesterday. France and Germany have sold bonds this week, to limited success. Next week brings further bond sales from Germany, Greece, Spain and Italy, so market nerves are likely to continue to strangle risk appetite. Sterling is trading at 1.5125 against the AUD. We continue to prefer sterling to the riskier commodity currencies.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Despite strong UK services data and weak Asian stocks, sterling failed to hang on to yesterday morning’s early gains. It is not clear whether a positive number from this afternoon’s US non-farm payrolls figure will give a boost to risk appetite and help the kiwi dollar, or whether the market will see fit to invest in the US dollar in line with their improving economic fundamentals. Our bet is on the latter after yesterday’s trading pattern. Sterling continues to trade at a fairly uninspiring 1.9850, but we should see better levels to buy the kiwi dollar at soon.	FORECAST
STERLING/CANADIAN DOLLAR: A third consecutive day in the green for US stocks was sufficient to keep the Canadian dollar in demand.   US services sector growth ticked upwards last month, and jobs data was positive. In addition, Canada’s domestic economic picture was bright, with a monthly growth indicator hitting a seven-month high. Clearly America’s economic upturn is filtering into its northern neighbour. This pair is trading down below 1.58 today, and could test its multi-month lows again today, with both US and Canadian jobs data likely to be positive.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Richard Driver, Analyst The early optimism that characterised Tuesday’s session has already run out of steam, and the euro is once again feeling the heat as you would expect. There was no major catalyst for the euro’s poor day, but mediocre demand at a German bond auction was unlikely to help. Accordingly, there will be nerves ahead of today’s French bond auction. UK gilts continue to benefit the pound but this morning’s growth figure from the UK services sector has the capacity weigh on sterling. This afternoon brings some key US services and unemployment data, but the market will probably hold off until after tomorrow’s US non-farm payrolls.
STERLING/EURO: Sterling is now trading at sixteen month high against the euro as familiar eurozone concerns take their toll. A UK gilt auction found plenty of demand yesterday, which helped to force this pair higher. By contrast, a German bund auction was rather less successful yesterday, which the market may have taken as a prelude to a poor French auction today. There are plenty of risk factors on the horizon, Spain and Italy will be auctioning their debt next week, so bond yields will remain in focus. Standard & Poor’s has still not passed judgement on the credit rating of various eurozone states, again highlighting euro risks. Sterling is trading at 1.2070 this morning, and risks are skewed to the upside ahead of today’s French debt sale, regardless of what could well be a poor UK services figure.	FORECAST
STERLING/US DOLLAR: This pair is edging lower ahead of December’s UK services figure; safe-haven trades should also boost the US dollar.   Today’s session brings some further data from the US. US services growth is expected to tick up and unemployment figures are also likely to be encouraging today. Still, eurozone concerns returned to the fore yesterday and are likely to outweigh positivity relating to the building growth momentum we are clearly seeing in the US. We continue to favour the US dollar in the current environment. This pair is trading at $1.56, having lost half a cent yesterday, sterling could come under further pressure.	FORECAST
EURO/US DOLLAR: The euro suffered a major slide yesterday, not helped by concerns over a Spanish request for emergency loans. The euro is suffering from speculation that Spain will be applying for emergency loans soon. There were also comments from Italy’s largest bank which indicated the region’s funding crisis is worsening. German retail sales data was poor this morning, revealing a monthly contraction of 0.9%. December’s data for the eurozone services sector also revealed another contraction. With the US recovery gaining pace and the plethora of issues facing the eurozone, the US dollar is the clear outperformer here and another downside move seems a matter of time.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling is edging up against the aussie dollar this morning, helped by poor Australian trade balance data. Australia’s trade balance came in well below expectations to show its fourth consecutive monthly narrowing. Exports are the foundation of Australia’s economy and evidence such as this gives investors good reason to get out of a currency that looks overextended at the moment. Data also showed Australia’s services sector has contracted again in December. Sterling bounced up off support levels close to 1.50 as expected, and has since climbed up above 1.5150. Further sterling gains are possible.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is on the climb against the kiwi dollar, with the market nervy ahead of today’s French bond auction. The New Zealand dollar is feeling the squeeze in risk off trading, now that eurozone bond auctions are back dominating the headlines. Asian stocks declined by a percent last night, which is demonstrative of the regional investment tone. The likelihood is that today’s French bond auction will also disappoint and risk aversion will intensify. This pair is trading up towards 1.99, and we shouldn’t have to wait too much longer for a return up above 2.00.	FORECAST
STERLING/CANADIAN DOLLAR: This pair saw some fairly range-bound trading as some strong US factory orders data offset heightened eurozone concerns.   US factory orders were at their highest in four months in December, which was a positive for Canadian export demand prospects. Positive US services sector data is likely to provide some further support to the loonie today. Still, eurozone worries are likely to see sterling avoid any losses today. Sterling is trading just above 1.58 and further range-bound trading seems likely today, though we should not have to wait too long for an upwards move.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Morning Report 04.01.2012

With positive manufacturing data out of the US and the UK, confidence levels continued to rebound, as evidenced by major gains in global stocks. There was good news out of Germany too, with unemployment levels dropping to a staggering twenty-year low. UK construction data came in above expectations this morning, showing some pretty reasonable growth. However, the market is unlikely to respond until tomorrow’s key UK services sector growth figure is announced.
STERLING/EURO: Sterling continues to trade close to the €1.20 level despite alarming warning from the Greek government.   The Guardian have reported that the Greek government have warned that without a new bailout within three months, the troubled state will be forced to leave the single currency. The euro has avoided a sell off so far, in line with a decent level of risk appetite to kick off the year, however the risks of a Greek euro-exit are increasing with every month of inaction from EU leaders. Sterling failed to benefit from a better than expected UK manufacturing growth figure. The data still reveals the sector spent a third consecutive month in contraction, albeit only marginally last month. No major movements are expected today.	FORECAST
STERLING/US DOLLAR: The US dollar continued to weaken off yesterday as strong US economic data spurred on riskier trades away. Impressive US manufacturing data saw investors exit the US dollar in search of higher-yielding currencies. With the figure climbing to an impressive 6-month high, it seems that the US economy is really recovering from mid-2011’s ‘soft patch.’ Hopes are high for this Friday’s key US non-farms figure. Last night’s US Federal Reserve meeting minutes revealed a predictably dovish tone, and failed to make too much impact on the rates. Sterling is trading just above $1.56 this morning, and a move up a cent higher in coming sessions is possible.	FORECAST
EURO/US DOLLAR: The euro benefited from further dollar-weakness and risk appetite, but the threat of S&P downgrades continue to loom. This pair often tracks movements in US stocks, and it was no surprise to see the euro make strides on a day where US stock indices were gaining by 1.50%. Impressive German employment data also helped the euro but data out of Spain was not so encouraging, showing a fifth monthly increase in unemployment. After stronger figures from China and the US, the dominant theme in the market at present is of renewed optimism about the prospects for global economic growth. However, rating agency Standard and Poor’s is still due to make its voice heard, and risk appetite is bound to take a hit. For now, the euro is trading up at $1.3050 and it could find further traction today.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Despite risk-positive news from the US, support levels close to 1.50 kicked in for this pair. The aussie dollar failed to march on yesterday, despite major gains in regional and indeed global stocks. This pair has dipped to these levels close to 1.50 twice before in recent months, and an upward correction ten cents higher is still very much on the cards. The aussie dollar remains very vulnerable to bad news out of the eurozone and to further monetary easing (interest rate cuts) from the Reserve Bank of Australia. Sterling is trading at 1.51 this morning and despite the cautious return of a market confidence, sterling should begin to bounce soon.	FORECAST
STERLING/NEW ZEALAND DOLLAR: This pair remains at a two-month low but with so much uncertainty still remaining, these levels look due an upward correction. Much like the aussie dollar, the New Zealand currency looks vulnerable to a pullback in coming weeks. The confidence we have seen of late is related to the improved global growth picture. News from the eurozone debt situation has gone quiet, but when headlines begin to flow again, sterling will be well-placed to climb back above the 2.00 level against the kiwi dollar. This pair is currently trading at 1.98 and sterling should be able to guard against a further downside move.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling benefited from some decent support levels yesterday, stopping the Canadian dollar from capitalising on such a strong US manufacturing figure. Regardless of what the exchange rates did yesterday, the improved economic picture in the US is a crucial development for the Canadian economy. Without US growth, Canada is in deep trouble, such is the closeness of their trading relationship. Oil prices also continued to climb yesterday, with Brent reaching $112 per barrel. Sterling nonetheless is trading half a cent higher at 1.5850, though a good US non-farm payrolls figure on Friday could see sterling give back these gains.	FORECAST
This post is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

Richard Driver, Analyst Happy New Year! The team here at Caxton FX would like to wish you the very best of luck for 2012, we hope the exchange rates go your way! The outlook for early 2012 remains unchanged as far as we are concerned, we continue to favour safer currencies in anticipation of further alarm bells from the eurozone. The week ahead brings the monthly growth updates from the UK construction and services sectors, in addition to this morning’s improved UK manufacturing figure. Expectations are not high, but sterling has been fairly resistant to poor data in recent weeks.
STERLING/EURO: Sterling continues to trade at the lofty heights of €1.20, as investors turn the heads towards a tough start to the year for the euro. Key events this month are a Jan 9th meeting between Mekrel and Sarkozy which is likely to focus on budget discipline rules, and an EU Summit on Jan 23rd. The threat of wide scale debt downgrades throughout the eurozone will continue to weigh on appetite for the single currency until major progress is reached. UK debt has found favour in recent months, as investors look for alternatives to risky European bonds. However, if UK growth continues to deteriorate, it could lose its AAA credit rating and this pillar of sterling-support will be removed. It is crucial that the UK maintains its AAA credit rating. How likely this is depends on growth figures like this morning’s monthly manufacturing update. Sterling actually benefited from a welcome upside surprise, though the sector still remains marginally in contraction.	FORECAST
STERLING/US DOLLAR: The dollar has made a poor start to the week as some positive news emerged out of the global growth story. Chinese manufacturing improved significantly last month, and data this afternoon is expected to show that US growth did the same. US figures have been on a clear uptrend in recent weeks, but other giants such as China will have to follow suit if market confidence in the global recovery is going to make a truly sustained resurgence. Sterling is trading at $1.5550, a weak level that reflects the ongoing demand for the safe-haven US dollar.	FORECAST
EURO/US DOLLAR: The euro is trading at a 12-month low against the US dollar and we are betting on further declines. The eurozone’s high debt and low growth dynamics should see the US dollar make further gains over a vulnerable-looking euro. For today though, the euro may benefit from gains in European stocks. The FTSE 100 is already up by over 1.0%, and with US manufacturing growth expected to tick up this afternoon, euro losses may be avoided for today. Eurozone bond yields are still being watched carefully, Italy remains close to the dreaded 7.0% mark, though the pressure on Spanish debt has eased somewhat for the time being. The euro is trading at $1.30 this morning.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling is posting losses against the aussie dollar amid strong gains in Asian stocks. The improved Chinese manufacturing growth headline is complimenting an already upbeat mood in Asia, from which the aussie dollar is naturally benefitting. There is some early positivity in the market at present, but this is likely to be short-lived. Sterling is trading at 1.51, and there is some further downside potential until some key support levels kick in at 1.50. Beyond this, we could well see sterling head significantly higher.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling is suffering a downward correction against the kiwi dollar, but a return to levels well above 2.00 should come this month.    The positivity surrounding the Chinese manufacturing figure has fed into demand for the kiwi dollar as well. However, nerves over the eurozone debt situation will surely come back to haunt riskier currencies, and will continue to do so for at least the first half of this year. With this in mind, we see sterling heading back up above the 2.00 mark before long. For today though, sterling is trading down at 1.98 and this rally in risk could have some more legs by the look of European equities this morning.	FORECAST
STERLING/CANADIAN DOLLAR: This pair is still under pressure as sentiment towards the US economy continues to warm up to the benefit of the loonie. A good start to the year for risk appetite sees the Canadian dollar on the front foot against safer currencies like the pound. If US manufacturing data shows the improvements that are expected, we should see the loonie make further advances. Sterling is trading down at 1.58 this morning, which is not too far off a three month low. Oil prices are also making hefty gains, brent is up at $110 per barrel. This pair may head lower today.	FORECAST

Richard Driver, Analyst With many traders off on their Christmas holidays already, markets are very thin indeed now. US GDP was surprisingly revised downwards for Q3 of this year, revealing growth at an annualised rate of 1.8%. Still the market was not too bothered, comforted by the pick-up in US growth we have seen in the final quarter of the year and the improved outlook for 2012. Today’s session brings plenty of US data but if yesterday’s GDP figure failed to leave an impact, today’s releases will also go unnoticed. From all the team at Caxton FX, have a great Christmas.
STERLING/EURO: Sterling’s safe haven bid continues to provide support against the single currency, helped by improved UK GDP figure. UK GDP hit 0.6% in the third quarter of 2011, which was slightly better than expected. The market will be all too aware that the outlook for the UK economy leaves little to get excited about, but the GDP figure was still a nice surprise. Less positive was news that the UK’s current account deficit widened to its worst level in almost a year and a half. The safe-haven attraction of UK gilts, and sterling by association, has taken sterling up above €1.20, its highest point since early January 2011. Further gains are likely to come, but perhaps not today.	FORECAST
STERLING/US DOLLAR: This pair remains range bound as data fails to leave its mark and as the flow of headlines dries up. US GDP was revised downwards to 1.8% (annualised) for Q3 2011. This 0.2% downward revision is actually pretty disappointing but the markets didn’t respond. The Wall Street Journal has reported that the US Federal Reserve could leave interest rates at their current record lows of 0.25% until 2014 and beyond. This is dollar-negative in the long-term but will not worry the markets in the short and medium term. Sterling is trading at $1.57, which represents a stronger finish to the year than we expected. Despite a warning from Moody’s about the UK’s treasured triple-A rating, sterling has done traded very well in the past fortnight or so.	FORECAST
EURO/US DOLLAR: The euro continues to hover above the psychological $1.30 mark but we are still anticipating another push lower. ECB policymaker Smaghi has called for quantitative easing to boost the eurozone economy if deflation risks emerge moving forward. With QE consistently ruled out by the ECB, this is an interesting development and will certainly have caught the market’s eye. Unfortunately for the market, which would welcome eurozone QE strongly, Smaghi’s tenure at the ECB ends very soon so hopefully he will persuade some of his colleagues before doing so. The euro is trading at $1.3075 this morning, European stocks have opened strongly, so a push below $1.30 may have to wait until after Christmas and perhaps the New Year.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Aussie trading positively, helped by demand for Australian government bonds. Australia has also managed to maintain its AAA credit rating, and demand for its government bonds is giving the aussie dollar some decent support. This club of top-rated government debt will continue to shrink and for those nations that hang on to it, the associated currencies will reap the rewards. Sterling is trading at 1.5450 this morning, and no major movements seem likely.	FORECAST
STERLING/NEW ZEALAND DOLLAR: Sterling edged lower against the kiwi dollar despite the worrying news of another earthquake in Christchurch. Christchurch is still bouncing back from the destructive earthquake we saw in the city earlier on in the year. Another quake will strengthen the case for another interest rate cut from the Reserve Bank of New Zealand. The kiwi dollar still managed to strengthen against sterling however, helped by some positive weekly jobs data. Despite losses in Asian stocks last night, this pair is trading down at 2.0250, and we may see a session of range-bound trading.	FORECAST
STERLING/CANADIAN DOLLAR: The loonie continued to make gains over sterling yesterday, helped by a decent bounce in the US stock market. Positive US risk sentiment drove the Canadian dollar forward yesterday, traders turned a blind eye to the downward revision of the US GDP figure and focused on some improvements in the US labour market. US unemployment continues to be the number one concern in the US economy. This pair is trading at 1.60 this morning. We have a monthly Canadian GDP figure later today, which expected to show growth of just 0.1%, but as ever US GDP will probably overshadow.	FORECAST

Financial recovery stalls in 2011 but will next year be any better?

An article from James Hickman, MD of Caxton FX, reviewing the past year and what we can expect in 2012.


What a year 2011 has been: the uprisings in the Arab world, earthquakes in Japan and New Zealand and not to mention the deaths of three dictators, the Royal Wedding and the London riots.

In terms of the financial environment, if we look back to the end of 2010 we were still waiting for conditions to improve for the global economic recovery and as we approach the end of 2011, we still cannot see the wood for the trees.

2011 was meant to be a year where we took bigger steps towards the goal of economic improvement but in my mind, there have been two key factors which have prevented this from happening.

Firstly, there has been a top-down liquidity squeeze which has had a significant impact on everyone from countries and large banks right down to individuals and small businesses.

In short, no-one can easily borrow money and as we all know, accessing affordable loans is key to a vibrant and growing economy, whether you are the government or a small shop keeper.

What this has resulted in at the top end – which is the really worrying part – is that some countries have been unable to repay existing loans and debts. Consequently, some loans have been written off causing share values to plummet and the very real situation of some of those countries staring default in the face.

The second key factor in the global economic recovery, or lack of it, has been the financial mess within the eurozone.

The European Central Bank (ECB), working alongside the central banks of the 17-member states of the eurozone, have been too slow to react to the debt crisis over 2011 and have constantly been playing catch-up, despite several crucial summits over the year.

This has seen the markets respond negatively towards this inertia and subsequent bailouts have required strict austerity measures, which as we have seen in the UK, are not looked on in a favourable light by the local populous, as well as being hard to implement.

The knock-on effect of this has seen the euro, which has been pretty strong since 2007, depreciate against most major currencies since the summer. While a cheaper currency is a good thing for exporters, importers looking to bring in goods from economies linked to stronger performing currencies, such as the USA and UK, will find it tough to buy goods and services when the dollar and sterling are performing so well.

So what’s in store for 2012? Unfortunately doom and gloom still holds centre court and we predict that the issues that we have talked about so far will continue to rear their ugly heads well into 2012.

There is a strong possibility that the euro will continue to weaken well into Q1 and Q2 and we might also see some of the periphery eurozone states start to drop out of the single currency.

If I were a betting man, Greece would be a good shout for being the first to drop out of the single currency as they will find it hard to stick to the ECB’s fiscal measures which are proving deeply unpopular at home.

Greece’s departure could also cause a domino effect with other weak eurozone states also dropping out of the single currency.

But I think it’s incredibly important to note that we don’t see the euro completely collapsing any time soon – so there’s no need to panic. There appears to be the political will to keep the single currency project alive and with weaker countries dropping out, the remaining countries will see a reverse in fortunes and could actually see the euro strengthen again.

Closer to home, we see sterling maintaining its current position as being one of the stronger currencies. While a strong pound is an advantage for importers, taking advantage of being able to bring in cheaper goods, it will be expensive to export British goods - especially to the eurozone – which raises further concerns about the UK’s trade deficit.

Considering our high debt levels and the fact that everyone wants to see a weaker pound, we might see further Bank of England (BoE) intervention to try and weaken sterling, as well keeping interest rates at a record low of 0.5%.

Another question at the front of peoples’ minds is whether we will experience a recession in 2012. While the markets have responded warmly to the Government’s austerity measures and growth is flat rather than negative, all of this will be blown out of the water if there is a recession in the eurozone, an event which is more than likely.

The eurozone is our most important trading partner and if there is recession on the continent, this will interrupt trade flows and hinder the amount of business UK companies can carry out.

Nonetheless, if we do see the weaker eurozone nations drop out, the consequences will be only felt by the UK in the short-term and we will eventually see a balancing act where the eurozone will regain its strength.

In terms of currency and considering that our outlook for both the global economy and the eurozone debt crisis is negative, as a final thought, we see the euro losing ground against both the dollar and sterling in 2012. Additionally, the dollar should outperform the pound in risk averse circumstances next year and maintain its position as a safe-haven currency.

Produced by Steven Fifer, Caxton FX

Richard Driver, Analyst There was huge demand for the ECB’s cheap three-year loans to European banks -the almost €500bn figure was double what was widely anticipated. The euro rallied briefly, until the market came to its sense and concluded a greater need to take loans is hardly confidence-inspiring. The euro subsequently came under a great deal of pressure. Today’s session brings some UK current account data, the final quarterly GDP figures from the UK and the US, which are not expected to be revised. These figures are unlikely to trigger much volatility, and safe-haven currencies will probably be preferred.
STERLING/EURO: Sterling made the move above the psychological €1.20 level yesterday as market fails to see bright side of ECB lending. The ECB’s €489bn tender to Europe’s banks has failed to trigger a euro rally. There is scepticism as to whether European banks will use the additional funds to purchase Italian and Spanish bonds. They seem more likely to sit on the extra capital and protect themselves. Yesterday’s MPC minutes revealed there is plenty of support for further QE in February, but this is to be expected. The growth outlook for the UK economy is flat in the first two quarters of next year, though there are hopes for a pick-up in the second half of 2012. Today’s finalised third quarter UK GDP figure was revised up to 0.6% from 0.5%, this pair is trading at €1.20 and there is scope for another upward move.	FORECAST
STERLING/US DOLLAR: US stocks are trying to recover at present, which is taking funds away from the US dollar.  The S&P stock index gained by 3.0% yesterday, funded to a large extent by US dollar. US data again ticked up in the form of improved existing home sales (though not by as much as hoped). Finalised US third quarter GDP is expected to remain at an annualised rate of 2.0% this afternoon. Sterling is trading up above $1.57 this morning despite rating agency Moody’s hinting that the UK’s AAA credit rating is vulnerable to downgrade. If this were to come to fruition, sterling would surely take a hit, but for now the market has turned a blind eye.	FORECAST
EURO/US DOLLAR: A volatile day’s trading saw this pair climb to $1.32 before dipping almost two cents lower, as market concerns over eurozone bond yields persist. How eurozone bond yields are going to be brought down in the short-term was neglected at the EU Summit earlier this month, and yesterday’s ECB loan tender may have been an attempt to fill this void. European banks need to increase their capital ratios by the middle of next year in line with the Basel III criteria, so there is a good chance that yesterday’s high demand will be used for this, rather than to bring eurozone bond yields down. The euro is trading up at $1.31 thanks to a positive start for European stocks. This level looks a little high and could be corrected lower.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling lost considerable ground against the aussie dollar in risk-positive trading conditions. Asian stock indices rallied last night by 1.5-2.0%, and took the aussie dollar with it. The aussie dollar rocketed back up through parity against the US dollar as a result. The ECB loan story is the key factor driving this improvement in global investor confidence and this relief rally looks to have some more legs in it yet. Sterling is trading down at 1.5450 against the aussie dollar, and we are likely to see the pound remain under pressure today as well.	FORECAST
STERLING/NEW ZEALAND DOLLAR: A volatile session saw this pair edge higher as regional market confidence dried up, though kiwi GDP data was impressive. Appetite for the kiwi was weaker yesterday, but the third quarter New Zealand growth figure beat expectations to the upside, ticking up to 0.8% from Q2’s 0.1%. The strong showing can be put down to this autumn’s Rugby World Cup, but underlying growth was actually less impressive so the kiwi failed to rally. Sterling is trading at 2.03 this morning and although this pair has been losing ground this morning, risks are to the upside.	FORECAST
STERLING/CANADIAN DOLLAR: Strong Canadian retail sales helped the loonie trade positively against the pound. Canadian retail sales came in well above expectations, climbing to an eight month high. Oil prices also continuing to climb, as are US stocks, which all played into the hands of the loonie yesterday. Taking a longer-term view of the Canadian dollar’s performance in 2011, it has actually been one of the worst performers, largely down to a US economic slowdown and worsening eurozone crisis. Sterling has lost ground to risky currencies in early trading but we should see a rebound as the session progresses.	FORECAST

Richard Driver, Analyst Markets turned remarkably positive yesterday in light of a positive German business climate data and a successful Spanish debt auction. Global stocks rallied and dragged riskier currencies with them, leaving the dollar on the back foot in mid-week trading. The MPC minutes have been released this morning, revealing a unanimous vote in favour of holding the UK interest rate at 0.5% and leaving the Bank of England’s asset-purchasing programme (QE) unchanged at 275bn. The door was unsurprisingly left open to further QE.
STERLING/EURO: Sterling continues to creep higher against the single currency, but ECB loan offer could help the euro in the short-term.   The ECB today will be offering three-year loans to struggling European banks in a bid to ease the liquidity squeeze that is building as a result of the debt crisis. Demand is expected to be high for the ECB’s loans and market tensions surrounding an impending credit crunch have lifted considerably in the past session. This morning’s MPC minutes revealed UK policymakers are firmly in wait and see mode. The Bank of England’s Broadbent yesterday reminded investors that the UK economy is in a painful period of transition, but cautiously asserted that our banks are better equipped to cope with financial shockwaves than before the financial crisis. Sterling is approaching the €1.20 mark this morning but the euro may have a stronger day in light of positivity surrounding the ECB’s liquidity commitments.	FORECAST
STERLING/US DOLLAR: The US dollar is weakening off fairly aggressively in risk-positive conditions, but our preference for the greenback remains unchanged. Sterling has climbed by almost two and a half cents from Monday’s closing price, which is a reflection of the considerable injection of risk appetite we saw yesterday. US housing data added to the positive sentiment on display yesterday, and more is likely to come this afternoon. We may see risk assets continue to recover today, after many sessions under pressure, which is likely to keep the US dollar on the back foot. Still, even with the ECB’s three-year loan offer, we favour the US dollar as the prime safe-haven in an uncertain start to 2012. Nonetheless, sterling is trading up towards $1.5750 this morning, which represents a one-month high and a good rate to buy the dollar.	FORECAST
EURO/US DOLLAR: The euro is trading a cent and a half higher against the US dollar as Spain enjoys a positive bond auction.   Yesterday’s Spanish bond auction drew solid demand and the ECB’s loan offer is only likely to help bond yields in the eurozone, with banks more willing to buy peripheral debt. Yesterday’s strong German business climate survey also helped the euro, and a German consumer climate was also better than expected, all suggesting that the German economy could bounce back from here. Global equities rallied and the euro predictably tracked these gains, climbing to a much more comfortable level of 1.3150 against the US dollar. Further gains seem fairly likely as sentiment continues to improve.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling lost considerable ground against the aussie dollar in risk-positive trading conditions. Asian stock indices rallied last night by 1.5-2.0%, and took the aussie dollar with it. The aussie dollar rocketed back up through parity against the US dollar as a result. The ECB loan story is the key factor driving this improvement in global investor confidence and this relief rally looks to have some more legs in it yet. Sterling is trading down at 1.5450 against the aussie dollar, and we are likely to see the pound remain under pressure today as well.	FORECAST
STERLING/NEW ZEALAND DOLLAR: The kiwi dollar made some hefty gains despite a widened NZ current account deficit. Data last night revealed that New Zealand’s current account deficit worsened to its worst level in a year. However, as usual international developments proved far more important and the kiwi dollar joined in on the rally in riskier assets that we saw yesterday. Sterling is trading down below 2.03 this morning, and a bounce back may have to wait for today and perhaps even this week, but sterling should return to higher levels before long, with major concerns over the eurozone likely to resurface.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling erased some early gains against the loonie as US stocks rallied on positive headlines from the eurozone and the US economy. The Canadian dollar recouped some ground as the eurozone’s short-term situation improved. Further positive signs from the US economy, this time in the form of the housing market, also added to the improved outlook for demand for Canadian exports. Still, this is a less volatile pair than GBP/AUD or GBP/NZD, and sterling’s losses were capped. Sterling continues to trade close to 1.61.	FORECAST