So suggests an interesting article on the Financial Times website today.
The context: The current strength of the euro reveals that the markets are not overly concerned with the Portuguese debt crisis at present, or indeed with the eurozone debt problems in general. This remains the case despite almost daily news of credit downgrades to peripheral nations; most recently Greece and Portugal. With a decision on the EU bailout fund delayed until June, the debt crisis is unlikely to be resolved any time soon.
The unstable fiscal situation in Portugal is so bad that an interview on the Financial Times website mooted a highly controversial solution. It was argued that Brazil, Portugal’s former colony, should annex the struggling Iberian state. Portugal is a very low growth, high deficit economy with major governmental issues (currently doesn’t have one!). Brazil’s economy, by contrast, is set to boom again this year and is so large (in total GDP at least, not per capita) it could accommodate Portugal’s substantial and crippling debt with little trouble.
Granted, the comment was ‘tongue-in-cheek’ and was clearly designed to provoke a reaction. Such a solution is totally unprecedented and quite plainly there is no willingness from either nation to allow such a dilution to their national identities.
Nonetheless, the interview did treat the Portuguese issue with the urgency it warrants, and with the urgency we see returning to the markets. Our bet is that as soon as next week’s ECB rate rise is a thing of the past, market sentiment towards the debt issue will worsen and weigh on the euro accordingly. Already borrowing costs in the periphery are unsustainable; throwing in a 0.25% rise in the base interest rate is only going to send costs higher.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 30 March 2011
Tuesday, 29 March 2011
Conflict within the fed - what can we take from it all?
Monetary policy is incredibly loose in the US. Record-low interest rates paired with a second round of quantitative easing, have made the dollar a far less appealing prospect to investors. Now, in the past few sessions, noises coming out of the US central bank have started to change.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Several Federal Reserve policymakers have recently given indications that the Fed's second round of quantitative easing (QE2) will end in June. Some have hinted that QE2 could even be cut short before its scheduled June end-date, whilst others have remained coy – stating that they will assess economic conditions and the suitability of the policy closer to the time.
To clear up any confusion, US policymakers have all voted unanimously to maintain QE2 due to a convention of solidarity within the Fed. However, there are quite clearly differing opinions within the group. This contrasts with the situation in the BoE where we currently have a 6:3 split in favour of those voting to keep interest rates unchanged.
The dollar has underperformed all year; largely due to this loose monetary policy approach from the Fed. However, hawkish comments have boosted the greenback in recent sessions, pulling it up from multi-month lows against both the pound and the euro. So what are the long-term implications of this shift in rhetoric? Well, the US economy is looking in a significantly stronger positions than that of the eurozone and the UK. But crucially, the markets are not so interested in economic fundamentals at present; rather they remain focused on prospect interest rate differentials. .
Whilst comments made about curtailing QE2 have been dollar positive, the Fed has made no indications that it will raise rates this year. We can therefore only assume that it intends to tighten policy in early 2012. By contrast, both the ECB and the BoE are expected to raise their base interest rate twice - or even three times - in 2011, and for this reason we can only see the dollar underperforming, holding on to its steady downtrend over at least the medium term.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 28 March 2011
Startup Britain - the launch
I’ve just returned from the Startup Britain launch (good to see it trending on Twitter by the way). I have to say I was impressed. Not only is it a good idea, but there seems to be a real buy in from the Government too, clearly they can see the financial importance of small businesses to the UK economy- according to the FSB small firms contribute more than 49 per cent of the UK turnover!
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
The Government have made some real changes to the tax structure to help small businesses and entrepreneurs recently. They are doing all the right things by creating an environment that promotes private enterprise - and there are a number of great initiatives to get young people setting up companies. Before the budget I was saying that the Government needs to incentivise with tax and then get out of the way - which is exactly what they are now doing.
Having said that, what we want to hear more about is how we can get more experienced people setting up on their own - not just an obsession with youngsters and start ups. The real growth will come from the development of existing smaller businesses with experience.
Rupert Lee-Browne
CEO
Caxton FX
Ongoing cause for eurozone concern but sterling/euro levels set to remain until April 7th
In the wake of the EU Summit last week, and further eurozone developments over the weekend, now is a good time to discuss how on earth the euro can be performing so strongly and how long we can expect this continue.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
At present the euro is trading at a five-month high against sterling, and is continuing to hold above the key $1.40 level against the US dollar, just 1.4% from its recent high reached early last week. This strong performance has seen the single currency shake off a series of peripheral debt and bank downgrades, record-high Portuguese bond yields on the back of the country’s government collapse, and ongoing concerns over the region’s bailout fund.
Why such resilience? The key attraction to the euro is that the ECB is due to raise its base interest rate on April 7th, well ahead of a June (at the earliest) BoE rate rise and an expected 2012 Fed rate rise. In addition, the euro is continuing to benefit from solid Eastern sovereign commitment to diversify reserves via the euro. For the time being the markets appear confident that the German and French economies are strong enough to pull the eurozone through the worst-case scenarios in the periphery. Ahead of April 7th, we doubt that the single currency will come under any prolonged pressure. However, it could well prove to be a turning point.
Following the ECB rate rise, the market may refocus its attention on Portugal and the lack of progress being made towards an underlying resolution. The EU Summit was marked as a deadline for the eurozone bailout issue, but this decision has now been delayed until June. Market disappointment was actually muted to this delay but frustration could yet re-emerge. In addition, over the weekend German Chancellor Angela Merkel lost another key regional election; if this is repeated and the markets lose confidence in German political resolve to spearhead eurozone debt aid, then much of the single currency’s recent appreciation could be ceded.
We are still sterling-positive on a longer-term view, though recent UK economic data may delay improvements in the rate.
As for the US dollar, a change in rhetoric from the Fed in response to higher-than-expected fourth quarter economic growth may have improved the currency’s outlook. It was indicated that the Fed will definitely be ending QE2 in June (and perhaps earlier…), though no indications have been made as to an earlier-than-expected Fed rate rise. Unless a Fed rate rise is brought forward to this year, we do not foresee a strong dollar performance even with an increasingly positive US economic outlook.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Friday, 25 March 2011
A tough week for sterling fizzles out quietly, what’s coming next week?
After hopes for an early rate hike were raised by UK inflation levels at 4.4%, sterling has proceeded in the past four days to drop by 2% against the US dollar. Against the euro the pound has dropped by 1.6% to a five- month low. An unchanged voting pattern and dovish tones within the MPC’s minutes; a downward revision of projected UK GDP for 2011 (thank you Mr. Osborne); a threat of a UK rating cut, and some woeful retail sales figures all conspired to ensure sterling’s slide this week.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
We remain optimistic that sterling’s fortunes will improve in coming months but for the next week at least the elusive catalyst to turn things around remains unseen. We might have thought that disappointing news from the EU Summit or the multitude of credit downgrades within the eurozone may have soured sentiment toward the euro. However, the resilience to the peripheral debt problems that we are seeing from sovereign buyers in the Middle and Far East makes us confident that euro strength is here to stay at least until April 7th.
This date will surely see the ECB raise interest rates, offering investors a higher yield compared to both the BoE and Fed, where rates are still a record lows. However once this date passes, this major appeal from which the euro has benefitted so much in recent weeks may well be consigned to the past, opening the door for some sterling improvements.
The best opportunity for the UK to gain a foothold next week comes on Friday, when UK manufacturing PMI figures are released. Nothing spectacular is forecast so sterling could well struggle to regain ground lost. Next week also brings US Non-Farm employment results, which as usual will have a big influence on risk appetite by clarifying the health of the world’s largest economy.
In the meantime, England fans remain grateful to Gareth Bale for pulling his hamstring.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 24 March 2011
UK monthly retail figures vindicate MPC rate decision
Today’s UK retail sales data for the month of February suggest that the MPC was correct to keep the BoE interest rate fixed at 0.5%. The figure showed a 0.8% contraction in sales volumes, causing alarm bells to ring with regard to the UK economic recovery.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With consumer confidence at an all-time low (according to data compiled by Nationwide) and consumer prices at lofty heights, the poor sales figure is easily explained. Higher central interest rates would mean higher borrowing costs for the UK’s already heavily indebted consumer. So despite the shocking UK inflation data released on Tuesday, the MPC really cannot afford to tighten policy when the UK recovery is on a knife-edge. This may well convince those investors betting on a May BoE rate rise to adjust their positions.
What has this meant for sterling? Well, it has fallen across the board. A figure like this makes a rate rise for May all the less likely, particularly with yesterday’s MPC minutes displaying no significant increase in hawkish rhetoric. Furthermore it paints a gloomier picture of the UK economy moving forward, which was also brought into sharper focus yesterday as Osborne announced a downward-revision of the UK’s GDP projection for the year in during the annual Budget.
In addition to today’s sales figures, another factor adding to sterling’s decline has been some negative comments from Moody’s directed at the UK economy. The credit agency stated that the UK’s AAA rating could be cut if the government’s austerity measures threaten growth prospects. It seems a little cruel for the market to have responded so harshly to the comments given the rating cuts that have hit the eurozone left right and centre in recent months. Then again the pound does not enjoy the luxury of consistent demand from Far and Middle Eastern sovereigns looking to diversify their reserves.
Looking forward to next week, sterling has little on the horizon that looks likely to transform its appeal. We may have to wait until after the ECB rate rise (almost certainly on 7th April) for the pound’s potential to gain recognition. It will then be the BoE next in line.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Wednesday, 23 March 2011
MPC Minutes dishearten investors but high hopes for change were misplaced
After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 22 March 2011
UK Headline inflation hits 4.4%: Where does the MPC draw the line?
This morning’s data revealed that UK inflation rose to 4.4% in February, a jump of 0.4% on the month, to the highest level since November 2008. In exceeding expectations, the increase in inflation has renewed the possibility of the BoE shifting interest rates, which has helped lift sterling but the market response has still been cautious.
Why? Mervyn King has already warned that inflation will rise towards 5.0% this year, which has taken the edge of an otherwise shocking increase. The figure also failed to realise rumours circulating of an even larger. Perhaps more importantly though, the data is just one of a series of important UK announcements this week, including the MPC’s minutes and UK monthly retail figures. Investors are likely to want a clearer picture of Britain’s economic conditions before taking up positions.
King has set his stall out in past announcements: he has recognised inflation is alarmingly high but asserts that it’s down to temporary factors which will begin to subside within a year. Moreover, King maintains that the dangers posed by a premature rate cut (which could risk pushing the UK back into recession), outweigh those posed by the current levels of inflation.
The market has fully priced in an August BoE rate rise but some are now leaning to a rate rise as early as May. We find this hard to believe even in light of today’s data, though if tomorrow’s minutes reveal an unlikely hawkish recruitment within the MPC, this argument will be far stronger. A rate rise in June remains our view. The pressure really is mounting on the MPC to slow down inflation - they are at risk of losing their credibility - particularly as the ECB are almost certain to embarrass the BoE by raising rates in a fortnight (inflation in the eurozone is only running at 2.4%!).
Following today’s data, sterling is currently trading at a fourteen month high against the dollar (near $1.64), though this has more to do with dollar weakness than with sterling-positive news. Despite a good day, the pound is still struggling against the euro at lows around €1.15. Looking forward, the risks for sterling are actually skewed somewhat to the downside; tomorrow’s UK budget release is unlikely to inspire the markets and the euro may make some more ECB rate hike-related gains - though these may be limited now that such a move has been largely priced in. Investors may also use sterling’s recent gains as an opportunity to take some profit.
What the pound needs is for Thursday’s UK retail sales data to be positive in order to reignite some confidence in the UK’s recovery, which in turn may convince a couple more MPC members that our economy can withstand monetary tightening. However, this seems somewhat unlikely given the forecasted 0.4% monthly contraction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Why? Mervyn King has already warned that inflation will rise towards 5.0% this year, which has taken the edge of an otherwise shocking increase. The figure also failed to realise rumours circulating of an even larger. Perhaps more importantly though, the data is just one of a series of important UK announcements this week, including the MPC’s minutes and UK monthly retail figures. Investors are likely to want a clearer picture of Britain’s economic conditions before taking up positions.
King has set his stall out in past announcements: he has recognised inflation is alarmingly high but asserts that it’s down to temporary factors which will begin to subside within a year. Moreover, King maintains that the dangers posed by a premature rate cut (which could risk pushing the UK back into recession), outweigh those posed by the current levels of inflation.
The market has fully priced in an August BoE rate rise but some are now leaning to a rate rise as early as May. We find this hard to believe even in light of today’s data, though if tomorrow’s minutes reveal an unlikely hawkish recruitment within the MPC, this argument will be far stronger. A rate rise in June remains our view. The pressure really is mounting on the MPC to slow down inflation - they are at risk of losing their credibility - particularly as the ECB are almost certain to embarrass the BoE by raising rates in a fortnight (inflation in the eurozone is only running at 2.4%!).
Following today’s data, sterling is currently trading at a fourteen month high against the dollar (near $1.64), though this has more to do with dollar weakness than with sterling-positive news. Despite a good day, the pound is still struggling against the euro at lows around €1.15. Looking forward, the risks for sterling are actually skewed somewhat to the downside; tomorrow’s UK budget release is unlikely to inspire the markets and the euro may make some more ECB rate hike-related gains - though these may be limited now that such a move has been largely priced in. Investors may also use sterling’s recent gains as an opportunity to take some profit.
What the pound needs is for Thursday’s UK retail sales data to be positive in order to reignite some confidence in the UK’s recovery, which in turn may convince a couple more MPC members that our economy can withstand monetary tightening. However, this seems somewhat unlikely given the forecasted 0.4% monthly contraction.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 21 March 2011
Long-term yen outlook and what it means for the Antipodeans
Over the past fortnight we have seen the yen initially benefit from strong repatriation flows, which will be needed to rebuild tsunami-torn parts of the country. We then saw an unprecedented move from G7 central banks to intervene and stem the yen’s sharp appreciation (yen hit a post-war high vs the US dollar), which indeed it did. Intervening in the market has historically been unsuccessful in permanently redirecting a currencies momentum, but with the global coordination of this intervention, things will likely be different on this occasion. After all, Japan is the world’s third largest economy and the global recovery is fragile; if Japan suffers, we all suffer.
The yen has little going for it at present. Its growth prospects are poor, which means that its interest rates are extremely low, and the Bank of Japan showed last week that it will print money to boost the economy when necessary. The intervention confirms what we already knew- the BoJ will not allow the yen to appreciate any further. With uncertainty surrounding the effects of the national disaster on the Japanese economy, investors are likely to look elsewhere for safety, such as the ever-appealing Swiss franc or gold. Sterling has had an excellent 2011 against the yen and we do not see this trend reversing, even if market sentiment towards the UK economy is mixed to say the very least.
So what about the kiwi and aussie dollars? The kiwi is in a similar boat to the yen. With an underperforming economy and a recent rate cut, those brave enough to invest in riskier currencies are turning to more promising prospects such as the euro. We therefore see a continuation of the Kiwi’s underperformance for the foreseeable.
On the other hand, the Australian economy is by no means performing poorly, but there is a sense that the aussie may struggle to build upon the gains made in the past couple of years. The aussie has benefitted from aggressive monetary tightening, but this process has slowed and the likelihood is that we will see just one rate hike this year (less than the BoE and the ECB’s expectations for example). Combine this with prevailing risk adverse sentiment and the hit to Japan (Australia’s second largest export market) and we do not see the aussie dollar enjoying too much more appreciation this year.
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The yen has little going for it at present. Its growth prospects are poor, which means that its interest rates are extremely low, and the Bank of Japan showed last week that it will print money to boost the economy when necessary. The intervention confirms what we already knew- the BoJ will not allow the yen to appreciate any further. With uncertainty surrounding the effects of the national disaster on the Japanese economy, investors are likely to look elsewhere for safety, such as the ever-appealing Swiss franc or gold. Sterling has had an excellent 2011 against the yen and we do not see this trend reversing, even if market sentiment towards the UK economy is mixed to say the very least.
So what about the kiwi and aussie dollars? The kiwi is in a similar boat to the yen. With an underperforming economy and a recent rate cut, those brave enough to invest in riskier currencies are turning to more promising prospects such as the euro. We therefore see a continuation of the Kiwi’s underperformance for the foreseeable.
On the other hand, the Australian economy is by no means performing poorly, but there is a sense that the aussie may struggle to build upon the gains made in the past couple of years. The aussie has benefitted from aggressive monetary tightening, but this process has slowed and the likelihood is that we will see just one rate hike this year (less than the BoE and the ECB’s expectations for example). Combine this with prevailing risk adverse sentiment and the hit to Japan (Australia’s second largest export market) and we do not see the aussie dollar enjoying too much more appreciation this year.
Analyst – Caxton FX
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Friday, 18 March 2011
Crunch Time: EU Summit
Next Friday’s EU Summit marks a self-imposed deadline for eurozone leaders to reach an agreement on a “comprehensive package” to deal with the region’s fiscal problems. Progress was made earlier than expected at the preliminary Summit last weekend, and the markets responded positively – perhaps too positively if Trichet’s recent pessimistic comments are anything to go by.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Most significantly, EU leaders reached an agreement to expand the European Financial Stability Fund (EFSF). However, the more realistic tones coming out of the Summit are stressing that “the devil is in the detail” and whilst broad principles were agreed, the financial technicalities involved in actually implementing those principles pose a huge obstacle to concrete commitments.
Certainly, the enlarged bailout fund is a step in the right direction but it is more difficult for the EU member states to agree in what proportions they should contribute. One would assume larger states such as France and Germany would shoulder the burden but their national publics are growing tired of this ‘duty.’ Another issue surrounds the continuation of the ECB’s bond-buying role instead of allowing the EFSF to buy bonds on the secondary market, which Trichet feels particularly aggrieved about. Superseding all of this is the fact that the EFSF is set to expire in 2013, with the European Stability Mechanism to replace it, so agreement on the shape of this longer-term fund is paramount next week.
Coming into this month, the markets were cynical as to progress on EU debt issues. However, with Trichet turning up the heat on EU leaders (indicating borrowing costs would be increased in April with an ECB interest rate hike) we saw greater political commitment last weekend and increased market confidence followed. The euro has strengthened against the US dollar and sterling accordingly, despite several recent peripheral credit downgrades and very high bond yields.
It is possible that agreement on a “comprehensive package” next week will trigger a strong euro rally next week, persuading the markets that the eurozone debt problem can finally be put to rest. More likely though, in this risk adverse environment, is that the markets will greet an agreement positively but remain broadly cautious on the euro. Any gains will be incremental as markets await further proof that the situations in Portugal, Spain and Greece will improve. Sterling is likely to suffer against the single currency if the Summit is successful, at least in the short term, given that the ECB is almost certain to raise interest rates before the BoE. However, the pound should continue to outperform the US dollar, tracking euro strength.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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