UK enters a technical recession but sterling still flying high
The preliminary reading of the UK’s Q1 GDP figure came in last week to reveal a 0.2% contraction, which triggered a wave of headlines regarding the UK economy having entered a double-dip recession. Still though, the pound is on the offensive across the board, which is really a reflection of its growing safe-haven demand.
There is widespread scepticism with regard to the latest GDP figure and many, including us, are expecting an upward revision towards the end of May. What’s more, the figure does little to change the Bank of England’s monetary policy outlook as the MPC had already recognized the risks of Q1 contraction and appear confident that growth will pick up this year. The UK government’s response has been to reaffirm its unwavering commitment to keep the UK’s international borrowing costs low through ongoing austerity measures - a popular stance with the market.
The UK’s monthly set of growth figures will roll out over the next few days and readings of the manufacturing, construction and services sector are expected to show a slowdown. Judging by the performance of sterling in the past fortnight though, next Thursday’s BoE quantitative easing decision represents the next major domestic risk event. The MPC is likely to remain in wait and see mode next week, regardless of the UK’s economic slump in the past three months.
US growth slows down to strengthen Bernanke’s dovish position
The first quarter US GDP figure came in at 2.2% (annualized) last week, well below the 2.6% reading that was anticipated. Whilst clearly outpacing the UK economy, this slowdown is playing into the hands of the more dovish members of the US Federal Reserve, particularly Chairman Ben Bernanke. Bernanke stated that US monetary policy is “more or less in the right place” at the moment and interest rate hikes aren’t expected for at least another couple of years. However, Bernanke has once again emphasized that the door remains well and truly open to a third round of quantitative easing and it is this factor that continues to hurt the US dollar.
This Friday brings the monthly US non-farm payrolls figure, the most important indicator of growth in the world’s leading economy. A weaker number is expected, so it is unlikely that the US dollar, in the short-term, will return to strength on the basis of domestic economic strength. However, the US dollar will remain a safe-haven target if eurozone nerves jangle again, as they may well do as the weekend approaches.
French and Greek elections come into focus
Eurozone jitters are likely to increase ahead of the weekend’s final French and Greek elections. Sarkozy’s rival Hollande is looking favourite to win the French presidential election, while there is chance that Greece’s two major parties (the current coalition) will fail to secure a majority. Amid this huge political uncertainty, we may well see the euro struggle this week.
Sterling is trading up towards €1.23 this week, which is the result of a 2.5% climb for this pair in the past month. Further gains for GBP/EUR look probable. Sterling is trading marginally off an eight-month high of $1.63, which is still an excellent level at which to purchase USD. There may be room for a little more upside in the short-term but a weaker EUR/USD should eventually drag on GBP/USD.
End of week forecast
GBP / EUR 1.24
GBP / USD 1.6350
EUR / USD 1.31
GBP / AUD 1.57
Richard Driver
Currency Analyst
Caxton FX
Monday, 30 April 2012
Tuesday, 24 April 2012
Caxton FX Weekly Round-up: Sterling Rallies
IMF boost emergency fund by $430bn but EUR remains pressurized
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
The weekend’s IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading around the dangerous 6.00% level, and Italy’s equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically skeptical.
The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekend’s initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the government’s collapse after failing to agree measures to slash its budget deficit.
As well as the weekend’s political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.
MPC's Posen gives sterling a boost
Sterling enjoyed a staggeringly strong week last week and has started the current one where it left off. MPC policymaker Adam Posen provided the main catalyst for the rally, with the minutes from the MPC’s April meeting revealing that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPC’s next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.
UK Q1 GDP figure to show some growth, albeit scant
Wednesday brings the release of the first quarter UK GDP figure. After last week’s excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).
Sterling is trading at almost a six-month high of $1.6150 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqué this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.2250 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesday’s GDP figure.
End of week forecast
GBP / EUR 1.23
GBP / USD 1.6050
EUR / USD 1.3050
GBP / AUD 1.5750
Richard Driver
Currency Analyst
Caxton FX
Friday, 20 April 2012
Less Dovish MPC Minutes Give Sterling a Major Boost
The recent release of the MPC minutes has given the pound an excellent boost. Adam Posen, the policymaker who has so often stood alone as the Bank of England’s arch dove, has seemingly abandoned his quest for further quantitative easing. Two votes became one in the MPC’s April meeting then, with only David Miles seeing fit to vote for a further £25bn in asset-purchases, though he stressed the decision was “finely balanced.”
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
The last quarterly inflation report assumed a fairly steady downtrend in UK inflation but the MPC is now noting higher medium-term inflation risks, which reduces the attractiveness of further QE. Higher inflation requires tighter monetary policy. For David Miles, the threat of a third consecutive decline in UK growth and another technical recession looms too large and he voted for extra £25bn of QE accordingly. Clearly, next week’s Q1 UK GDP figure will be crucial and the risks of another negative reading are not insignificant. However, April’s PMI surveys from the UK’s manufacturing, construction and services sectors were very encouraging and the recent UK labour statistics also provide room for optimism. The recent UK retail sales figure, which revealed stunning 1.8% growth in March, should ensure a positive GDP number on April 25th.
The BoE does appear to be moving away further monetary easing at present but the UK economy remains distinctly fragile. Many market players will be assuming further QE is now off the table but if inflation eases towards the end of the year and growth remains weak, dovish arguments will once again come to the fore. What’s more, the eurozone debt crisis could force the BoE’s hand if the situation in Spain and Italy deteriorates rapidly.
There is also the issue of Adam Posen’s thinking – whether he has really given up on more asset-purchases. Posen has indicated that he merely saw fit to let the current round of QE run its course. Posen will be able to reassess the need for a top-up in May, by which time the BoE’s inflation projections will have been formally updated and we will know whether the British economy has suffered the dreaded ‘double-dip.’ Only time will tell on this issue, but it’s fair to say the market may have jumped the gun in respect to Posen’s ‘change of stance.’ Our bet is that we will see Posen vote for more QE before the end of 2012.
Regardless, the majority of the MPC appear far too concerned with upside risks to inflation, and perhaps with preserving the BoE’s credibility on the issue of maintaining price stability, to step up QE at its next meeting in May or any time soon.
Whilst sterling’s safe-haven status has enabled it to weather the constant threat of QE hanging over it, it has undoubtedly weighed on demand in recent months. Sterling has now been freed up to rally in the aftermath of the minutes, climbing to a 20-month high against the euro and a six month high against the US dollar. Even higher levels will be seen against an increasingly weak single currency, though we maintain a negative outlook for the pound against the US dollar.
Richard Driver
Currency Anlayst
Caxton FX
Tuesday, 10 April 2012
Rising Spanish bond yields highlight market nerves
UK services sector growth suggests no UK double-dip recession
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
In addition to last week’s strong March growth figures from the UK manufacturing and construction sectors, the services sector joined the party by coming in well above forecasts as well. This probably means that the UK has avoided a entering a technical recession (two consecutive quarters of negative growth), albeit by what is likely to be just the narrowest of margins. Indeed contrary to the OECD’s forecasts, this is what the NIESR have argued in the past week (0.1% growth in Q1).
A second gauge of the UK manufacturing sector was more disappointing last week and has taken the edge off some of the positive sentiment surrounding the UK economy. It certainly is true that this sector has underperformed badly in the past six months and needs to pick up if the UK’s fledging recovery is to pick up any pace. The services sector cannot be the sole source of growth. In terms of important growth figures coming up this month, the 24th April preliminary Q1 GDP figure is the real focus, though next week brings the release of the MPC meeting minutes, as well as the monthly updates from the UK labor market and the retail sector.
US Non-farm payrolls disappoint but no need to panic
Last Friday’s key monthly update from the US labour market revealed that half as many jobs (120k) were added in March, compared to February’s showing. This gives credence to Ben Bernanke’s refusal celebrate the US recovery from the financial crisis. The coming week is noticeably quieter on the data front, with Friday afternoon’s US consumer sentiment figure (forecast to improve) likely to be a highlight.
The dollar struggled a little on the back of Friday’s US jobs figure but it has since recovered. This data will encourage greater caution in the market but it alone won’t trigger large scale revisions of US dollar bets. Global stocks and commodity prices are in decline at present, which is keeping the safe-haven dollar in pretty robust demand, though it is having to wait for significant gains against the pound.
Spanish bond yields on the rise
Nerves surrounding the Spanish and overall eurozone debt situation are clearly on the rise, as shown by the general risk-off tone to present trading conditions. Spain’s Economy Minister today refused to rule out the need for a Spanish financial rescue. PM Rajoy has announced a further €10bn of budget cuts but as Spanish 10-year bond yields climb towards 6.0%, it is evident that market nerves are on the up.
If concerns continue to heat up, the ECB may be persuaded to cut interest rates again to restore sentiment, which is unlikely to be euro-positive. At the very least, an exit from the ECB’s current liquidity measures (monetary easing) is unlikely to come soon; Draghi indicated as much last week. The euro looks poised for a move lower.
Sterling was the third best performing currency against the US dollar in the first quarter of 2012 and it continues to hold up pretty well. GBP/USD’s current levels of $1.5850 remain a good level at which to buy US dollars. Against the euro, sterling is also performing very well. GBP/EUR is trading not too far away from a 19-month high, though it could suffer a short-term downward correction if it fails to push higher from here.
End of week forecast
GBP / EUR 1.2050
GBP / USD 1.5750
EUR / USD 1.3025
GBP / AUD 1.5550
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 27 March 2012
Weekly Round-Up: Bernanke sparks more hopes for QE3
Bernanke unimpressed by US upturn
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
The upturn we have seen in the US economy has peppered the financial headlines over the past few months. The US grew at an annualized pace of 3.0% in the further quarter of 2011, a figure which could well be revised upwards on Thursday. When the first quarter 2012 GDP figure emerges, this pace of growth is likely to have increased.
Nonetheless, US Federal Reserve Chairman Ben Bernanke remains distinctly cautious in his analysis of the US recovery. In a speech on Monday, Bernanke acknowledged that US data has been positive but refused to describe it as impressive. The US economy enjoyed similarly positive starts to 2010 and 2011 and failed to kick on, which may explain the Fed Chairman’s more guarded approach. The market seems to need little encouragement to jump on dovish rhetoric from the Fed and speculation as to QE3 has been reignited this week as a result.
There have been some increasingly hawkish comments from some US Federal Reserve Policymakers but Bernanke’s ever-dovish remarks have kept the greenback very much hemmed in. He will certainly take more convincing before QE3 is truly taken off the table. We believe the Fed is very much in wait and see mode and prepared to pull the trigger on QE3 should conditions worsen significantly, whilst we do not view the central bank to be close to doing so at present.
Today’s session brings a key US consumer confidence figure and the aforementioned revised US GDP figure will be announced on Thursday. If the dollar is to bounce back in the near-term, these figures really need to be positive.
The dollar’s recent poor performance does little to change our position that 2012 will be a strong year for the greenback, as the US economic divergence with the slowdown being seen across other major global economies takes effect.
Two MPC members vote for further QE and retail sector disappoints
Last week’s MPC minutes revealed that two members voted for a further increase to the Bank of England’s quantitative easing programme. The increased possibility of further QE in the UK is never going to be positive for GBP but as it has done in the last few months, it weathered the news well.
The two MPC doves, Miles and Posen, may have felt vindicated by last week’s poor UK retail sales, which undershot expectations to show a 0.8% monthly contraction. Nonetheless, the retail number was expected to be pretty soft after such a strong start to the year and again sterling recovered.
Elsewhere, eurozone growth data was very disappointing last week. Manufacturing and services figures for Germany, France and the eurozone as a whole all undershot expectations. This only firms our bet that the eurozone has entered what is likely to be a deep and painful recession.
Sterling is trading just below the psychological $1.60 level today, having recently found resistance at this key level. Whilst there is now a significant risk this level will be breached, we are still betting sterling will stall. Against the euro, sterling is well-supported in the €1.1950-€1.20 area, though it may require some strong UK growth figures at the beginning of next month for sterling to push much higher.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.59
EUR / USD 1.3250
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 20 March 2012
Caxton FX Weekly Round-up: MPC minutes and UK budget in focus
Dollar struggling to sustain the gains that data would indicate
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
The US dollar has recently posted ten and eighteen-day low against both the euro and the pound respectively. This belies the excellent growth data that has been surfacing from the US throughout March.
The highlights from last week included some strong US retail sales numbers, a positive US bank stress test result and some further impressive US manufacturing growth figures. The dollar sold-off on Friday however, largely a as a result of the softer-than-expected US inflation figure, which caused some players to revise their bets on the likelihood of ‘QE3’ from the US Federal Reserve.
Fed Chairman has indicated that QE3 is unlikely to be adopted and we maintain this view, which should aid the dollar this year. As the Fed’s Dudley reminded us yesterday, this is all contingent on the maintenance of the uptrend we are seeing in the US economy. Despite Friday’s poor US consumer confidence figure, there is little need to revise our bullish expectations for US GDP in 2012.
MPC minutes and UK annual budget comes into view
Bouncing back from last week’s poor UK unemployment figures and Fitch’s downgrade to the UK’s rating outlook, the pound has made an excellent start to the week. Taken against a basket of 13 major currencies, GBP is trading at its strongest level in over a year. However, the release of the minutes from the Monetary Policy Committee’s March meeting represents a risk event for the pound.
The impact of the minutes on the pound will be dictated by the tone struck with regard to the UK economy and the voting pattern with regard to increasing the Bank of England’s ongoing quantitative easing programme. Today’s UK inflation data revealed a further decline in price pressures to 3.4% (y/y), which highlights the scope for further QE should the MPC feel it necessary. King has indicated that enough QE has been done but the uncertain outlook for the UK economy will certainly keep UK data (such as Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the slight uptrend in UK growth should improve the chances of a less dovish, sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George Osborne will also be eyed closely on Wednesday lunchtime. In light of Fitch’s warning that the UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince the markets that he can fuel UK growth amid ongoing belt-tightening. While significant domestically, there may well have to be some major headlines out of Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday but once again fell short, which could signal another move lower for GBP/USD, which currently trades just below $1.59. Against the euro, sterling is trading firmly around €1.20, though once again progress is stalling at these levels close to multi-month highs. With eurozone growth data likely to be weak on Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD levels.
End of week forecast
GBP / EUR 1.2075
GBP / USD 1.5675
EUR / USD 1.31
GBP / AUD 1.5250
Richard Driver
Currency Analyst
Caxton FX
Thursday, 15 March 2012
NOK/JPY Overview and Outlook for 2012
The Norwegian krone has made an extremely impressive start to 2012. It was the top performing currency in February, which is largely due to a combination of domestic economic strength and soaring oil prices.
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.
On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.
The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.
Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
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There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
There are two pieces of bad news from the UK economy, after what has been a pretty good run of positive headlines. Ratings agency Fitch has warned that it may downgrade the UK’s AAA credit rating in the next two years, revising down its outlook to negative. UK unemployment figures were also poor yesterday but sterling is standing up reasonably well for now.
After what could be a quiet morning, this afternoon brings some important manufacturing figures from the US.
STERLING/EURO: Weak UK claimant count data has stalled this pair’s climb past €1.20.
STERLING/US DOLLAR: Sterling remains under pressure against the USD, which is very well bid amid impressive data.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
EURO/US DOLLAR: This pair continued to creep down lower and today’s US manufacturing data may add further weight.
STERLING/AUSTRALIAN DOLLAR: This pair continues to climb as sentiment remains weak towards the aussie dollar.
STERLING/NEW ZEALAND DOLLAR: Sterling found some easy gains against the kiwi dollar yesterday, despite some excellent NZ manufacturing data.
STERLING/CANADIAN DOLLAR: The 1.55 level is providing some support at these low levels against the Canadian dollar.
Wednesday, 14 March 2012
EUR/JPY Overview: Japanese yen to continue weakening
The yen has weakened off by around 11.5% against the euro in the past two months. This is largely attributable to the convergence of performance between the US and Japan economies and monetary easing from the Bank of Japan.
The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.
The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.
The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.
Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.
February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.
There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.
Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.
Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.
Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.
We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.
The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.
The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.
Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.
February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.
There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.
Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.
Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.
Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.
We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.
Richard Driver
Currency Analyst
Caxton FX
Tuesday, 13 March 2012
Caxton FX Weekly Round-up: US economy goes from strength to strength
Private creditors finally participate in Greek debt swap
Greece managed to convince 85% of its private creditors to participate in the long-awaited debt-swap deal. This was converted into 95% participation when the collective action clauses were triggered to force some creditors to sign up. The deal represents the biggest sovereign debt restructuring in history.
The euro suffered from a classic case of ‘buy the rumour, sell the fact’ after the debt swap deal was agreed. The International Swaps and Derivatives Association has classified the Greek debt exchange as a ‘credit event,’ in which $3bn worth of credit default swaps are triggered. This places plenty of financial uncertainty back on the table, though the banking system is better placed to deal with in light of the ECB’s liquidity measures (3-year LTRO’s).
It is fair to say that the market is certain that this debt-swap is not the last time we’ll see Greece occupying the headlines this year. Many players expect Greece to be back in bailout territory before the end of 2012, which explains the rather muted response to the latest development. With regard to the second Greek bailout, Eurogroup head Juncker has indicated that it will be signed off this week and should include a significant IMF contribution.
US jobs figures impress once again and the dollar benefits
227 thousand jobs were added to the US non-farm payrolls in February, another excellent showing that highlights the pace of growth that is accumulating in the world’s largest economy.
The market will also have been impressed to see February’s growth in the US non-manufacturing sector pick up to its fastest pace in almost a year. In a recent speech, US Federal Reserve Chairman Ben Bernanke seemed to respond to the upturn in US growth by omitting reference to further US quantitative easing, to which the US dollar has responded positively.
The week ahead brings a statement from US Federal Reserve (Tuesday evening). If further optimism surrounding the US economy is revealed (which seems likely) then sentiment towards the USD should remain positive. This afternoon should bring some strong US retail sales figures to support this.
The relationship between the US dollar and US economic data is an unpredictable one but at present the two are demonstrating a positive correlation. Later on in the week, we will see some monthly consumer sentiment and manufacturing figures, all of which are also expected to be strong.
Sterling is trading just below €1.1950. Anything below €1.19, or above 84p, is looking a little too rich for the euro, bearing in mind that economic fundamentals seem to be turning the corner in the UK, whilst the eurozone economy continues to deteriorate. We are still having to patient for the GBP/EUR to kick on past €1.20 but in the longer-term we are sticking to this forecast.
Sterling has suffered a major downside move against the US dollar in the past fortnight, falling from just below $1.60 to the current level just below $1.57. We continue to look for lower levels as the US economy streaks ahead and as other safe-haven assets such as the Japanese yen lose their appeal.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.56
EUR / USD 1.30
GBP / AUD 1.4950
Richard Driver
Currency Analyst for Caxton FX
Greece managed to convince 85% of its private creditors to participate in the long-awaited debt-swap deal. This was converted into 95% participation when the collective action clauses were triggered to force some creditors to sign up. The deal represents the biggest sovereign debt restructuring in history.
The euro suffered from a classic case of ‘buy the rumour, sell the fact’ after the debt swap deal was agreed. The International Swaps and Derivatives Association has classified the Greek debt exchange as a ‘credit event,’ in which $3bn worth of credit default swaps are triggered. This places plenty of financial uncertainty back on the table, though the banking system is better placed to deal with in light of the ECB’s liquidity measures (3-year LTRO’s).
It is fair to say that the market is certain that this debt-swap is not the last time we’ll see Greece occupying the headlines this year. Many players expect Greece to be back in bailout territory before the end of 2012, which explains the rather muted response to the latest development. With regard to the second Greek bailout, Eurogroup head Juncker has indicated that it will be signed off this week and should include a significant IMF contribution.
US jobs figures impress once again and the dollar benefits
227 thousand jobs were added to the US non-farm payrolls in February, another excellent showing that highlights the pace of growth that is accumulating in the world’s largest economy.
The market will also have been impressed to see February’s growth in the US non-manufacturing sector pick up to its fastest pace in almost a year. In a recent speech, US Federal Reserve Chairman Ben Bernanke seemed to respond to the upturn in US growth by omitting reference to further US quantitative easing, to which the US dollar has responded positively.
The week ahead brings a statement from US Federal Reserve (Tuesday evening). If further optimism surrounding the US economy is revealed (which seems likely) then sentiment towards the USD should remain positive. This afternoon should bring some strong US retail sales figures to support this.
The relationship between the US dollar and US economic data is an unpredictable one but at present the two are demonstrating a positive correlation. Later on in the week, we will see some monthly consumer sentiment and manufacturing figures, all of which are also expected to be strong.
Sterling is trading just below €1.1950. Anything below €1.19, or above 84p, is looking a little too rich for the euro, bearing in mind that economic fundamentals seem to be turning the corner in the UK, whilst the eurozone economy continues to deteriorate. We are still having to patient for the GBP/EUR to kick on past €1.20 but in the longer-term we are sticking to this forecast.
Sterling has suffered a major downside move against the US dollar in the past fortnight, falling from just below $1.60 to the current level just below $1.57. We continue to look for lower levels as the US economy streaks ahead and as other safe-haven assets such as the Japanese yen lose their appeal.
End of week forecast
GBP / EUR 1.20
GBP / USD 1.56
EUR / USD 1.30
GBP / AUD 1.4950
Richard Driver
Currency Analyst for Caxton FX
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