The eurozone picture continues to brighten
Risk appetite returned with a vengeance last week. Global stocks rallied, and much of the dollar strength we have seen in recent weeks has been unwound. The key driver behind this is the heightened optimism surrounding the eurozone situation.
First, Merkel and Sarkozy promised to deliver a comprehensive plan to deal with the various fiscal and economic problems that have surfaced in the region. The weekend’s G20 meeting has produced a one week deadline to provide the package, which will deal with key issues such bank recapitalisation in Europe, Greece’s debt situation, eurozone growth and the region’s rescue fund. The market has been waiting for months for such an attempt at a long-term solution to the debt crisis, and sentiment has turned quite sharply positive in anticipation.
Greece’s second bailout deal, struck in July, allowed for a 21% haircut on the troubled nation’s debt. Germany’s finance minister has recently recommended that greater write downs be implemented, in order for Greece to be set upon a sustainable recovery. The haircuts could well head towards 50%, which demonstrates that there is still plenty of scope for sentiment to weaken in the near-term. Such a large-scale plan is highly unlikely to please everyone, the content and the extent to which it satisfies market players remains to be seen.
The German finance minister has today taken the edge off the euro’s climb, warning that this weekend’s summit would not come up with a “definitive solution” to the region’s crisis. Merkel’s spokesman has added that dreams of some sort of final solution are “unrealistic.” The commitment to decisive action has taken the euro a long way in the past fortnight, but these comments serve as a reminder that market optimism may be slightly overdone.
The week ahead brings some important German and eurozone economic sentiment figures, but as this morning has shown, really the focus is more likely to be upon unscheduled comments from EU officials.
The pound and dollar on the back foot
The dollar has come way off its highs in the past fortnight. Stronger US stocks invariably weaken the dollar and this has held true. The S&P 500 climbed by almost 6.0% last week. Some improved US retail sales figures have also contributed to improved confidence levels. Any major figure which suggests the world’s largest economy may avoid another recession will see funds redirected from the greenback.
Sterling’s status as a ‘safer’ currency, though far from a safe-haven, has seen it struggle in recent sessions. Concerns surrounding further UK quantitative easing have also weighed, but the pound’s decline has more to do with greater global risk appetite. The one positive for the pound though is that the extreme dollar to euro flows have seen GBP/USD climb almost five cents off its early-October lows.
Sterling is trading at €1.1450 today, and at 1.5750 against the US dollar. The euro/dollar pairing has retreated from this morning’s $1.39 high to trade a cent and a half lower. Another attempt at $1.40 looks likely to be made this week however, which should drag GBP/USD higher, and weigh on the GBP/EUR pairing.
End of week forecast
GBP / EUR 1.1375
GBP / USD 1.58
EUR / USD 1.3975
GBP / AUD 1.5250
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 17 October 2011
Thursday, 13 October 2011
Monthly Swedish Krona Report: Risk appetite returns
September was another month of low market confidence and risk averse trading. The worsening state of the European banking system, as a result of a continued lack of progress on the eurozone debt crisis, saw investors flooding out of higher-yielding currencies into safe-haven currencies. Concerns over global growth have also been very prominent in recent weeks, with increased speculation of a plunge back into recession for the eurozone, the US and the UK.
However, there have in recent sessions been some signs of progress in the eurozone however, which has been positive for risk appetite. Merkel and Sarkozy have ‘committed’ to providing a comprehensive plan to deal with the Greek issue, the recapitalisation of Europe’s banks, and poor growth in the eurozone. At present this just represents rhetoric and yet another promise, but it has been received enthusiastically by the market. The two EU leaders have set themselves a deadline of November 3rd. In addition, the eurozone bailout reform looks almost certain to be fully ratified by Slovakia, the last member state to accept the fund’s expanded powers.
The performance of the Swedish Krona is being dictated more than ever by international developments than by domestic issues. Accordingly, improved market confidence has helped the krona to recoup some decent ground in the past week or so, after spending September very much on the back foot.
EUR/SEK
The euro benefited from the ECB’s decision not to cut its 1.50% base rate in early October. Speculation was rife that the ECB would lend the ailing periphery a hand, particularly in light of an economic slowdown in the eurozone’s core nations, so the interest rate hold represented a relief. The Riksbank also decided to hold interest rates at 2.0%, which was in line with expectations. Growth has slowed down significantly in Sweden and inflationary pressures are subsiding; the Riksbank has recently confirmed that “the financial crisis has probably lowered the growth rate of potential GDP.”
In line with the Swedish krona’s riskier profile, this pair posted fresh 2011 highs up above 9.35 in late September as fears grew of a messy Greek default and a Lehman’s style fallout. These krona losses have since been corrected and this pair is actually trading flat on the month. Optimism surrounding the chances of some genuine and concrete action in Europe is prevailing at present and it certainly brightens the krona’s prospects.
In addition and importantly, the Troika (the ECB, IMF and EU) has indicated that Greece will receive its next emergency loan in November. Granting further aid to what many believe is a ‘lost cause’ may sound like madness, but the market is inherently concerned with the short-term. This next Greek aid tranche allows EU officials the time to avoid a near-term Greek default and to work on a credible long-term solution.
The market has certainly enjoyed some positive stories of late and risk appetite has clearly returned to favour the krona, but there will undoubtedly be some stumbling blocks to come with regard to eurozone progress (as demonstrated by Slovakia’s recent ‘no’ vote on the bailout fund reforms). Positive sentiment has taken this pair down to 9.16 and the coming weeks look likely to help the krona maintain these levels, though 9.10 will probably provide some fairly stiff support on the downside.
USD/SEK
The dollar performed excellently in September, benefitting from plummeting global stocks and the associated heightened demand for safe-haven assets. The dollar found even more favour because of ongoing issues surrounding the two other haven currencies; the swiss franc is suffering from currency intervention by the Swiss National Bank and threat of similar action surrounds the yen.
However, market confidence is on the up at present and the dollar strength that characterised September has been largely unwound. Still, the greenback will be the key beneficiary of any alarm bells that do emerge out of the eurozone.
The US dollar remains vulnerable to domestic events. At its meeting last month, the US Federal Reserve decided against introducing a third programme of quantitative easing (QE3). Instead, it introduced Operation Twist, in which it sells short-term bonds and buys long-term bonds. The market was noticeably unimpressed but hopes for QE3 remain very much on the table. Should the Fed decide to add further stimulus to the US economy, global stocks would spike and the dollar would suffer a further downward correction on top of what we have seen in recent sessions. We are betting that the QE3 measure will be saved by the Fed for the worst case scenario (another US recession). Consequently, we don’t see this downside risk event occurring in coming weeks, but it is still likely to weigh on investors’ minds.
The USD/SEK rate hit a 9-month high of almost 7.00 in early October, but this climb has been erased and the rate is back down below 6.70. Continued improvements in investor confidence levels may see the rate head down towards 6.50, but dollar losses beyond this look to be a bridge too far.
GBP/SEK
Sterling has suffered as a result of the Bank of England deciding to introduce additional quantitative easing. The MPC voted to increase asset-purchases by £75bn and predictably, sterling has come under severe pressure. Economic data from the UK has been poor of late; indeed the revised second quarterly figure for UK GDP was halved to a paltry 0.1%. It is an equally gloomy outlook for the third and fourth quarter GDP figures, combined with downside risks to inflation and an increasingly dovish-sounding MPC, which makes yet more quantitative easing a real possibility.
Again, the performance of this pair in the coming weeks is very much dependent on how risk appetite pans out. The current rate stands at 10.50, but the recent good news stories of action and commitment in the eurozone should see the krona hang on to its impressive recent gains. That said, sterling’s slide looks a little overdone and further downside too far below 10.50 should be capped.
NOK/SEK
This pair has remained range-bound between 1.16 and 1.19 levels for the past four months or so now, excluding a brief spike to 1.20 in early September as a result of panic related to the Swiss National Bank’s intervention. On a fundamental economic basis, the Norwegian krone shades its Swedish counterpart but there really is very little to choose between these two currencies at present.
The Norges Bank Iooks highly likely to leave interest rates on hold at 2.25% until the middle of next year and the Riksbank will be unwilling to resume hiking until the financial uncertainty in the eurozone has subsided. One major factor limiting the NOK’s upside is that he Norges Bank has made it quite clear that it will not allow the currency to strengthen significantly and is willing to cut interest rates to buffer against this.
This pair is currently trading around the 1.18 mark and it is highly likely that we will see it continue to fluctuate within the 1.16-1.19 range for the next few months.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
However, there have in recent sessions been some signs of progress in the eurozone however, which has been positive for risk appetite. Merkel and Sarkozy have ‘committed’ to providing a comprehensive plan to deal with the Greek issue, the recapitalisation of Europe’s banks, and poor growth in the eurozone. At present this just represents rhetoric and yet another promise, but it has been received enthusiastically by the market. The two EU leaders have set themselves a deadline of November 3rd. In addition, the eurozone bailout reform looks almost certain to be fully ratified by Slovakia, the last member state to accept the fund’s expanded powers.
The performance of the Swedish Krona is being dictated more than ever by international developments than by domestic issues. Accordingly, improved market confidence has helped the krona to recoup some decent ground in the past week or so, after spending September very much on the back foot.
EUR/SEK
The euro benefited from the ECB’s decision not to cut its 1.50% base rate in early October. Speculation was rife that the ECB would lend the ailing periphery a hand, particularly in light of an economic slowdown in the eurozone’s core nations, so the interest rate hold represented a relief. The Riksbank also decided to hold interest rates at 2.0%, which was in line with expectations. Growth has slowed down significantly in Sweden and inflationary pressures are subsiding; the Riksbank has recently confirmed that “the financial crisis has probably lowered the growth rate of potential GDP.”
In line with the Swedish krona’s riskier profile, this pair posted fresh 2011 highs up above 9.35 in late September as fears grew of a messy Greek default and a Lehman’s style fallout. These krona losses have since been corrected and this pair is actually trading flat on the month. Optimism surrounding the chances of some genuine and concrete action in Europe is prevailing at present and it certainly brightens the krona’s prospects.
In addition and importantly, the Troika (the ECB, IMF and EU) has indicated that Greece will receive its next emergency loan in November. Granting further aid to what many believe is a ‘lost cause’ may sound like madness, but the market is inherently concerned with the short-term. This next Greek aid tranche allows EU officials the time to avoid a near-term Greek default and to work on a credible long-term solution.
The market has certainly enjoyed some positive stories of late and risk appetite has clearly returned to favour the krona, but there will undoubtedly be some stumbling blocks to come with regard to eurozone progress (as demonstrated by Slovakia’s recent ‘no’ vote on the bailout fund reforms). Positive sentiment has taken this pair down to 9.16 and the coming weeks look likely to help the krona maintain these levels, though 9.10 will probably provide some fairly stiff support on the downside.
USD/SEK
The dollar performed excellently in September, benefitting from plummeting global stocks and the associated heightened demand for safe-haven assets. The dollar found even more favour because of ongoing issues surrounding the two other haven currencies; the swiss franc is suffering from currency intervention by the Swiss National Bank and threat of similar action surrounds the yen.
However, market confidence is on the up at present and the dollar strength that characterised September has been largely unwound. Still, the greenback will be the key beneficiary of any alarm bells that do emerge out of the eurozone.
The US dollar remains vulnerable to domestic events. At its meeting last month, the US Federal Reserve decided against introducing a third programme of quantitative easing (QE3). Instead, it introduced Operation Twist, in which it sells short-term bonds and buys long-term bonds. The market was noticeably unimpressed but hopes for QE3 remain very much on the table. Should the Fed decide to add further stimulus to the US economy, global stocks would spike and the dollar would suffer a further downward correction on top of what we have seen in recent sessions. We are betting that the QE3 measure will be saved by the Fed for the worst case scenario (another US recession). Consequently, we don’t see this downside risk event occurring in coming weeks, but it is still likely to weigh on investors’ minds.
The USD/SEK rate hit a 9-month high of almost 7.00 in early October, but this climb has been erased and the rate is back down below 6.70. Continued improvements in investor confidence levels may see the rate head down towards 6.50, but dollar losses beyond this look to be a bridge too far.
GBP/SEK
Sterling has suffered as a result of the Bank of England deciding to introduce additional quantitative easing. The MPC voted to increase asset-purchases by £75bn and predictably, sterling has come under severe pressure. Economic data from the UK has been poor of late; indeed the revised second quarterly figure for UK GDP was halved to a paltry 0.1%. It is an equally gloomy outlook for the third and fourth quarter GDP figures, combined with downside risks to inflation and an increasingly dovish-sounding MPC, which makes yet more quantitative easing a real possibility.
Again, the performance of this pair in the coming weeks is very much dependent on how risk appetite pans out. The current rate stands at 10.50, but the recent good news stories of action and commitment in the eurozone should see the krona hang on to its impressive recent gains. That said, sterling’s slide looks a little overdone and further downside too far below 10.50 should be capped.
NOK/SEK
This pair has remained range-bound between 1.16 and 1.19 levels for the past four months or so now, excluding a brief spike to 1.20 in early September as a result of panic related to the Swiss National Bank’s intervention. On a fundamental economic basis, the Norwegian krone shades its Swedish counterpart but there really is very little to choose between these two currencies at present.
The Norges Bank Iooks highly likely to leave interest rates on hold at 2.25% until the middle of next year and the Riksbank will be unwilling to resume hiking until the financial uncertainty in the eurozone has subsided. One major factor limiting the NOK’s upside is that he Norges Bank has made it quite clear that it will not allow the currency to strengthen significantly and is willing to cut interest rates to buffer against this.
This pair is currently trading around the 1.18 mark and it is highly likely that we will see it continue to fluctuate within the 1.16-1.19 range for the next few months.
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, 10 October 2011
Merkozy to the rescue...euro enjoys strong start to the week
Bank of England introduce QE3
The Bank of England decided to introduce further quantitative easing last Thursday. Another £75 billion of asset-purchases were announced in order to boost the UK’s struggling economy and safeguard it from potential shockwaves that may come as a result of financial stresses in the eurozone. Sterling dropped sharply across the board but losses were soon reversed. The market was confident that the measure would be adopted in coming months so there were no great surprises, though the size of the programme was slightly above consensus. The noises out of the MPC suggest that there is scope for further monetary stimulus in the UK, given the long-term downside risks to UK growth and inflation.
The recent sector-by-sector growth figures were actually reasonably encouraging; contrary to expectations of a slowdown, we saw expansion in the manufacturing and key services sectors accelerate, though the construction sector now only teeters above negative territory. In truth, it is going to be events outside the UK that determines sterling’s performance in coming months.
Merkel and Sarkozy ‘commit’ to action in three weeks
The euro has started this week very strongly, gaining two and a half cents against the dollar and over a cent against the pound. Merkel and Sarkozy have announced that they are going to take action to recapitalise Europe’s banks, settle the Greek issue and improve economic growth in the eurozone. There was no reiteration of the “Greece cannot fail” pledge of a fortnight ago, which perhaps shows that EU leaders have come to accept the need for Greek debt to be restructured (which will involve significant haircuts). Certainly the recapitalisation of Europe’s bank looks to be a prelude to a write down of Greek debt.
The news has been taken positively, with ‘Merkozy’ setting a November 3rd deadline at which they intend to deliver a comprehensive plan. The market has been disappointed time and again by missed deadlines, but the euro has rallied regardless. The single currency was also given a boost by the absence of a cut to the eurozone interest rate at last week’s ECB meeting.
With regards to the approval of changes to the bailout fund, only two countries are yet to ratify; Slovakia and Malta. There is a significant risk of a disappointment from the former nation, where the vote is finely balanced.
US non-farms help to boost risk appetite
Last week’s monthly US non-farm payroll figure posted twice as many new jobs than expected. This, combined with optimism with regard to the eurozone debt situation, has improved market confidence and boosted riskier assets. Accordingly, safe-haven assets such as the US dollar have weakened. The euro has reversed some significant losses to the dollar and the GBP/USD rate has bounced with it.
Sterling is trading below €1.15 this afternoon, whilst it is back up towards 1.57 against the US dollar. The EUR/USD pairing looks hard-pushed to make significant gains beyond its current $1.3650 level, which is likely to cap further gains for GBP/USD. Sterling looks oversold at 1.1460 against the euro, but with the optimism surrounding the euro today, we may have to look beyond this week for a bounce.
End of week forecast
GBP / EUR 1.1450
GBP / USD 1.57
EUR / USD 1.37
GBP / AUD 1.55
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The Bank of England decided to introduce further quantitative easing last Thursday. Another £75 billion of asset-purchases were announced in order to boost the UK’s struggling economy and safeguard it from potential shockwaves that may come as a result of financial stresses in the eurozone. Sterling dropped sharply across the board but losses were soon reversed. The market was confident that the measure would be adopted in coming months so there were no great surprises, though the size of the programme was slightly above consensus. The noises out of the MPC suggest that there is scope for further monetary stimulus in the UK, given the long-term downside risks to UK growth and inflation.
The recent sector-by-sector growth figures were actually reasonably encouraging; contrary to expectations of a slowdown, we saw expansion in the manufacturing and key services sectors accelerate, though the construction sector now only teeters above negative territory. In truth, it is going to be events outside the UK that determines sterling’s performance in coming months.
Merkel and Sarkozy ‘commit’ to action in three weeks
The euro has started this week very strongly, gaining two and a half cents against the dollar and over a cent against the pound. Merkel and Sarkozy have announced that they are going to take action to recapitalise Europe’s banks, settle the Greek issue and improve economic growth in the eurozone. There was no reiteration of the “Greece cannot fail” pledge of a fortnight ago, which perhaps shows that EU leaders have come to accept the need for Greek debt to be restructured (which will involve significant haircuts). Certainly the recapitalisation of Europe’s bank looks to be a prelude to a write down of Greek debt.
The news has been taken positively, with ‘Merkozy’ setting a November 3rd deadline at which they intend to deliver a comprehensive plan. The market has been disappointed time and again by missed deadlines, but the euro has rallied regardless. The single currency was also given a boost by the absence of a cut to the eurozone interest rate at last week’s ECB meeting.
With regards to the approval of changes to the bailout fund, only two countries are yet to ratify; Slovakia and Malta. There is a significant risk of a disappointment from the former nation, where the vote is finely balanced.
US non-farms help to boost risk appetite
Last week’s monthly US non-farm payroll figure posted twice as many new jobs than expected. This, combined with optimism with regard to the eurozone debt situation, has improved market confidence and boosted riskier assets. Accordingly, safe-haven assets such as the US dollar have weakened. The euro has reversed some significant losses to the dollar and the GBP/USD rate has bounced with it.
Sterling is trading below €1.15 this afternoon, whilst it is back up towards 1.57 against the US dollar. The EUR/USD pairing looks hard-pushed to make significant gains beyond its current $1.3650 level, which is likely to cap further gains for GBP/USD. Sterling looks oversold at 1.1460 against the euro, but with the optimism surrounding the euro today, we may have to look beyond this week for a bounce.
End of week forecast
GBP / EUR 1.1450
GBP / USD 1.57
EUR / USD 1.37
GBP / AUD 1.55
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Thursday, 6 October 2011
Monthly Report: US dollar goes from strength to strength
September failed to bring the bounce in global investor confidence and risk appetite that we were anticipating. We have a revised our longer-term forecast for euro strength and dollar weakness due to a sharp deterioration of the global financial environment. Market fears have gone from bad to worse in recent weeks; faith in eurozone officials’ ability to make any real progress on the debt issue is waning and economic data is pointing evermore towards a global economic slowdown. As a result, the equity markets have consolidated early August’s sharp sell-off and the dollar has strengthened significantly. The outlook has probably not looked this gloomy since the last global recession, which favours safe-haven assets considerably.
Perpetual weakness in the US economy, Standard & Poor’s downgrade of US debt and the certainty of ultra-loose Fed monetary policy for the foreseeable future has failed to hold the US dollar back. More pressing global matters have ensured major dollar gains. Added to this, the Swiss National Bank has intervened in the strength of the swiss franc, and the Bank of Japan has been posturing for a similar move, leaving the greenback as the safe haven currency of choice. Sterling is suffering against the dollar accordingly, but has made gains against riskier currencies such as the euro and the commodity currencies.
The euro has really suffered a downward correction over the past five weeks. A Greek default looks inevitable, the European banking system looks vulnerable to a major crisis and a concrete plan to ensure Italy and Spain are not sucked into the eurozone’s bailout cycle remains elusive. On top of this, eurozone growth has slowed to such an extent that a rate cut from the ECB looks is looking increasingly likely at coming meetings.
GBP/EUR
On its own merits, sterling remains an unappealing currency. This is unlikely to change any time soon; economic growth is only teetering above negative territory, which has caused investors to scale back Bank of England interest rate bets to 2013. Indeed, far from tightening monetary policy, the Monetary Policy Committee has pulled the trigger on further quantitative easing (QE2). £75bn in extra asset purchases has been announced in order to boost the UK economy and safeguard it from heightened volatility in the financial markets.
Nonetheless, the eurozone is suffering a comparable slowdown to that of the UK and although the ECB held interest rates at 1.50% this month, there is still a very significant risk of a rate cut in 2011. The debt crisis is clearly impacting activity in the region, as shown by two consecutive months of contraction in the eurozone’s services sector.
Importantly, the UK has maintained its AAA credit rating and is being seen to be ‘doing the right thing’ with regard to reducing its debt. Debt concerns have surrounded the euro all year, with Portugal, Ireland and Greece (for the second time) all seeking aid. However, concerns have reached such heights that the euro has finally borne the brunt of the market’s frustration. There is now a near certainty of some form of Greek default and growing speculation that private investors are going to have to accept a substantial hair cut on their Greek holdings. This has seen the EUR/USD pair decline by over twelve cents from late August’s rate of $1.45.
A key factor weighing on the euro is the inability of EU officials to convince the market that they have any genuine handle on the debt crisis consuming other, larger eurozone states such as Spain and Italy. There is quite clearly lack of any real consensus on any long-term solution, which has brought about the realisation that progress is likely to take months, not weeks. Crucially, Asian sovereign funds seem to be losing their appetite for the euro and have reduced their previously reliable support for the single currency.
Sterling has made some decent gains over the euro in recent weeks then, climbing from a low of €1.13 to trade at its current level two cents higher. We foresee little progress on the debt issue in the near-term, giving the GBP/EUR rate further upside potential. Indeed, the muted market responses to what were anticipated to be significant relief stories, such as the recent German ‘yes’ vote for the expansion of the bailout fund, suggest market sentiment is going to require a really major development to bounce back. Sterling could well edge up by one or two cents from its current trading level of €1.15 in the month ahead.
GBP/USD
The dollar has gone from strength to strength over the past month or so. Safe haven flows have increased as a result of the worsening global economic picture and in addition, the dollar has taken the lion’s share of these safe-haven flows due to the deteriorating appeal of the alternatives (the yen and the swiss franc).
The Fed decided against introducing a QE3 programme last month, instead opting for ‘Operation Twist,’ where by it sells short-term debt and buys long-term debt. The market was unimpressed and thus the dollar remained strong. Still, QE3 remains a possibility in coming months, though it is unlikely that Bernanke will pull the trigger just yet given the slight upturn in the growth data coming out of the US of late. If and when there is further quantitative easing in the US, expect the dollar to weaken off considerably. For this month at least, this looks unlikely.
Sterling has broken out of its long-term trading range against the dollar to the downside. In late August this pair was trading at $1.65, it is now trading at a thirteen month low of $1.53. Sterling has fallen a long way very fast against the dollar, but it is looking vulnerable to a further decline. The pound will continue to struggle against the dollar as long as funds continue to be redirected from the euro to the greenback, which is exactly what we foresee in the coming weeks.
Caxton FX one month forecast:
GBP / EUR: 1.17
GBP / USD: 1.51
EUR / USD: 1.29
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Perpetual weakness in the US economy, Standard & Poor’s downgrade of US debt and the certainty of ultra-loose Fed monetary policy for the foreseeable future has failed to hold the US dollar back. More pressing global matters have ensured major dollar gains. Added to this, the Swiss National Bank has intervened in the strength of the swiss franc, and the Bank of Japan has been posturing for a similar move, leaving the greenback as the safe haven currency of choice. Sterling is suffering against the dollar accordingly, but has made gains against riskier currencies such as the euro and the commodity currencies.
The euro has really suffered a downward correction over the past five weeks. A Greek default looks inevitable, the European banking system looks vulnerable to a major crisis and a concrete plan to ensure Italy and Spain are not sucked into the eurozone’s bailout cycle remains elusive. On top of this, eurozone growth has slowed to such an extent that a rate cut from the ECB looks is looking increasingly likely at coming meetings.
GBP/EUR
On its own merits, sterling remains an unappealing currency. This is unlikely to change any time soon; economic growth is only teetering above negative territory, which has caused investors to scale back Bank of England interest rate bets to 2013. Indeed, far from tightening monetary policy, the Monetary Policy Committee has pulled the trigger on further quantitative easing (QE2). £75bn in extra asset purchases has been announced in order to boost the UK economy and safeguard it from heightened volatility in the financial markets.
Nonetheless, the eurozone is suffering a comparable slowdown to that of the UK and although the ECB held interest rates at 1.50% this month, there is still a very significant risk of a rate cut in 2011. The debt crisis is clearly impacting activity in the region, as shown by two consecutive months of contraction in the eurozone’s services sector.
Importantly, the UK has maintained its AAA credit rating and is being seen to be ‘doing the right thing’ with regard to reducing its debt. Debt concerns have surrounded the euro all year, with Portugal, Ireland and Greece (for the second time) all seeking aid. However, concerns have reached such heights that the euro has finally borne the brunt of the market’s frustration. There is now a near certainty of some form of Greek default and growing speculation that private investors are going to have to accept a substantial hair cut on their Greek holdings. This has seen the EUR/USD pair decline by over twelve cents from late August’s rate of $1.45.
A key factor weighing on the euro is the inability of EU officials to convince the market that they have any genuine handle on the debt crisis consuming other, larger eurozone states such as Spain and Italy. There is quite clearly lack of any real consensus on any long-term solution, which has brought about the realisation that progress is likely to take months, not weeks. Crucially, Asian sovereign funds seem to be losing their appetite for the euro and have reduced their previously reliable support for the single currency.
Sterling has made some decent gains over the euro in recent weeks then, climbing from a low of €1.13 to trade at its current level two cents higher. We foresee little progress on the debt issue in the near-term, giving the GBP/EUR rate further upside potential. Indeed, the muted market responses to what were anticipated to be significant relief stories, such as the recent German ‘yes’ vote for the expansion of the bailout fund, suggest market sentiment is going to require a really major development to bounce back. Sterling could well edge up by one or two cents from its current trading level of €1.15 in the month ahead.
GBP/USD
The dollar has gone from strength to strength over the past month or so. Safe haven flows have increased as a result of the worsening global economic picture and in addition, the dollar has taken the lion’s share of these safe-haven flows due to the deteriorating appeal of the alternatives (the yen and the swiss franc).
The Fed decided against introducing a QE3 programme last month, instead opting for ‘Operation Twist,’ where by it sells short-term debt and buys long-term debt. The market was unimpressed and thus the dollar remained strong. Still, QE3 remains a possibility in coming months, though it is unlikely that Bernanke will pull the trigger just yet given the slight upturn in the growth data coming out of the US of late. If and when there is further quantitative easing in the US, expect the dollar to weaken off considerably. For this month at least, this looks unlikely.
Sterling has broken out of its long-term trading range against the dollar to the downside. In late August this pair was trading at $1.65, it is now trading at a thirteen month low of $1.53. Sterling has fallen a long way very fast against the dollar, but it is looking vulnerable to a further decline. The pound will continue to struggle against the dollar as long as funds continue to be redirected from the euro to the greenback, which is exactly what we foresee in the coming weeks.
Caxton FX one month forecast:
GBP / EUR: 1.17
GBP / USD: 1.51
EUR / USD: 1.29
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 26 September 2011
Caxton FX Weekly Round-Up: Dollar likey to remain strong
Yet more talk but little action on debt issue
Little has come out of the recent EcoFin and IMF meetings, which is really testing the market’s patience. There have been rumours of a bolstered bailout fund but nothing concrete has emerged. Talk of substantial haricuts to Greek debt has also dogged the single currency. There is quite clearly recognition amongst officials both in and outside the eurozone that a failure to act decisively could have a catastrophic impact on the global economy. However, there remains a distinct lack of consensus on the path to be taken to resolve the debt crisis.
The eurozone economy has certainly been affected by the crisis, last week’s PMI data suggests that the region as a whole is on the brink of recession. In line with this slowdown and downside risks to eurozone inflation, speculation is increasing that that the ECB will be cutting its 1.50% interest rate. There have been contrasting comments from policymakers on the issue, but next week’s ECB meeting should provide some clarity on the matter. With investors still lured by the higher yield, a rate cut would doubtless hurt the euro.
Sterling still vulnerable to QE
Sterling has stabilised against the dollar for the time being, having dropped by over ten cents in the past month. The outlook remains fairly bleak against the greenback, however, which will continue to benefit from safe-haven investment in the current environment. Only a credible plan of action is likely to alleviate debt fears (the market has been repeatedly disappointed on this issue), global growth only appears to be going one way (down), and the associated declines in global stocks is always going to benefit the safer dollar.
In terms of domestic UK currency issues, further quantitative easing is the key issue, and looks very likely to weigh on the pound moving forward. The measure could be introduced as soon as next week’s Bank of England meeting. Noises out of the MPC have been more dovish than ever and the minutes of September’s meeting smacked of a precursor to monetary easing.
Against the euro, sterling’s prospects look a little brighter regardless of the threat of QE. Market confidence in EU officials is really ebbing and perhaps just as important are the potential stumbling blocks over which they have no control. The second Greek bailout needs to be ratified by eurozone parliaments and the Greek parliament needs to ratify a fresh round of Greek austerity measures.
This week brings relatively little by way of scheduled data releases. Market focus will remain on the debt situation in the eurozone then, and this is likely to throw up some significant volatility. Nonetheless, we are betting on further ‘risk off’ trading and net dollar gains.
Sterling is trading at €1.15 today and while major gains seem unlikely ahead of the Bank of England’s meeting next week, there is still some upside potential. Against the dollar, sterling is likely to remain under pressure and we cannot envisage any substantial sterling bounce in the current environment. With the gravity of the debt crisis increasing almost by the day, we are betting that the market will have to wait longer for any relief headline that may eventually come.
End of week forecast
GBP / EUR 1.1575
GBP / USD 1.55
EUR / USD 1.34
GBP / AUD 1.6050
Little has come out of the recent EcoFin and IMF meetings, which is really testing the market’s patience. There have been rumours of a bolstered bailout fund but nothing concrete has emerged. Talk of substantial haricuts to Greek debt has also dogged the single currency. There is quite clearly recognition amongst officials both in and outside the eurozone that a failure to act decisively could have a catastrophic impact on the global economy. However, there remains a distinct lack of consensus on the path to be taken to resolve the debt crisis.
The eurozone economy has certainly been affected by the crisis, last week’s PMI data suggests that the region as a whole is on the brink of recession. In line with this slowdown and downside risks to eurozone inflation, speculation is increasing that that the ECB will be cutting its 1.50% interest rate. There have been contrasting comments from policymakers on the issue, but next week’s ECB meeting should provide some clarity on the matter. With investors still lured by the higher yield, a rate cut would doubtless hurt the euro.
Sterling still vulnerable to QE
Sterling has stabilised against the dollar for the time being, having dropped by over ten cents in the past month. The outlook remains fairly bleak against the greenback, however, which will continue to benefit from safe-haven investment in the current environment. Only a credible plan of action is likely to alleviate debt fears (the market has been repeatedly disappointed on this issue), global growth only appears to be going one way (down), and the associated declines in global stocks is always going to benefit the safer dollar.
In terms of domestic UK currency issues, further quantitative easing is the key issue, and looks very likely to weigh on the pound moving forward. The measure could be introduced as soon as next week’s Bank of England meeting. Noises out of the MPC have been more dovish than ever and the minutes of September’s meeting smacked of a precursor to monetary easing.
Against the euro, sterling’s prospects look a little brighter regardless of the threat of QE. Market confidence in EU officials is really ebbing and perhaps just as important are the potential stumbling blocks over which they have no control. The second Greek bailout needs to be ratified by eurozone parliaments and the Greek parliament needs to ratify a fresh round of Greek austerity measures.
This week brings relatively little by way of scheduled data releases. Market focus will remain on the debt situation in the eurozone then, and this is likely to throw up some significant volatility. Nonetheless, we are betting on further ‘risk off’ trading and net dollar gains.
Sterling is trading at €1.15 today and while major gains seem unlikely ahead of the Bank of England’s meeting next week, there is still some upside potential. Against the dollar, sterling is likely to remain under pressure and we cannot envisage any substantial sterling bounce in the current environment. With the gravity of the debt crisis increasing almost by the day, we are betting that the market will have to wait longer for any relief headline that may eventually come.
End of week forecast
GBP / EUR 1.1575
GBP / USD 1.55
EUR / USD 1.34
GBP / AUD 1.6050
Thursday, 22 September 2011
Dollar strength: Is it here to stay?
The pound has tumbled to a one year low against the dollar today. The pounds slide has been pretty staggering; we have seen GBP/USD fall from $1.65 to the current rate of $1.5350. Why?
The collapse is a result of several factors. First, sterling is fundamentally an immensely unappealing currency. The MPC last month voted in its entirety for a hold to the record low Bank of England interest rate of 0.5%, meaning the two remaining hawks had abandoned their quest for an interest rate hike. With inflation expected to fall fairly rapidly next year, and with UK growth clearly on a downtrend, the market has given any hopes of a higher UK interest rate. The recent MPC minutes reveal that they are very close indeed to pulling the trigger on introducing further quantitative easing.
Second, the euro/dollar pairing has collapsed. The GBP/USD rate to a large extent tracks the EUR/USD pairing, which has suffered a ten cent collapse in the past month. Concerns surrounding the eurozone debt crisis have finally taken their toll on the single currency with Greece seemingly certain to default at some point and with no long-term solution in sight. The UK’s proximity and exposure to a eurozone debt and a potential Lehman’s-style collapse in the European banking system, has also weighed on sterling and triggered huge euro-dollar flows.
Third, concerns over US and wider global growth have contributed to a hugely ‘risk off’ trading environment. Riskier currencies such as the Canadian, kiwi and Australian dollars are selling off as investors flee to the safety of the dollar. The huge losses in global equities that we are seeing will always benefit safe-havens such as the dollar. The fact that the US economy is in such a fragile state makes little difference, in fact the extent to which the world’s largest economy is struggling only intensifies the safe-haven flows which are benefiting the dollar.
Finally, the dollar is enjoying a greater share of the safe-haven pie. This is because the former safe-haven of choice, the swiss franc, has lost its appeal. The Swiss National Bank has intervened in the currency markets to curb the excessive strength of the swissie, so the market has been scared off. Though it has been unsuccessful in its interventions of late, the Bank of Japan nevertheless looks likely to take similar action to weaken the yen. USD/JPY is at record lows near 76.00, so the Bank of Japan’s patience is certainly being tested.
Do we see sterling making further losses to the dollar? Yes we do. There seems to be little on the horizon to fuel much of a sterling rebound. Contrastingly, fears over global growth look likely to persist. Likewise, the other major concern- the eurozone debt situation, looks unlikely see any significant progress in the near future. The outlook is very positive for the US dollar then, albeit the opposite is true for the US economy.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The collapse is a result of several factors. First, sterling is fundamentally an immensely unappealing currency. The MPC last month voted in its entirety for a hold to the record low Bank of England interest rate of 0.5%, meaning the two remaining hawks had abandoned their quest for an interest rate hike. With inflation expected to fall fairly rapidly next year, and with UK growth clearly on a downtrend, the market has given any hopes of a higher UK interest rate. The recent MPC minutes reveal that they are very close indeed to pulling the trigger on introducing further quantitative easing.
Second, the euro/dollar pairing has collapsed. The GBP/USD rate to a large extent tracks the EUR/USD pairing, which has suffered a ten cent collapse in the past month. Concerns surrounding the eurozone debt crisis have finally taken their toll on the single currency with Greece seemingly certain to default at some point and with no long-term solution in sight. The UK’s proximity and exposure to a eurozone debt and a potential Lehman’s-style collapse in the European banking system, has also weighed on sterling and triggered huge euro-dollar flows.
Third, concerns over US and wider global growth have contributed to a hugely ‘risk off’ trading environment. Riskier currencies such as the Canadian, kiwi and Australian dollars are selling off as investors flee to the safety of the dollar. The huge losses in global equities that we are seeing will always benefit safe-havens such as the dollar. The fact that the US economy is in such a fragile state makes little difference, in fact the extent to which the world’s largest economy is struggling only intensifies the safe-haven flows which are benefiting the dollar.
Finally, the dollar is enjoying a greater share of the safe-haven pie. This is because the former safe-haven of choice, the swiss franc, has lost its appeal. The Swiss National Bank has intervened in the currency markets to curb the excessive strength of the swissie, so the market has been scared off. Though it has been unsuccessful in its interventions of late, the Bank of Japan nevertheless looks likely to take similar action to weaken the yen. USD/JPY is at record lows near 76.00, so the Bank of Japan’s patience is certainly being tested.
Do we see sterling making further losses to the dollar? Yes we do. There seems to be little on the horizon to fuel much of a sterling rebound. Contrastingly, fears over global growth look likely to persist. Likewise, the other major concern- the eurozone debt situation, looks unlikely see any significant progress in the near future. The outlook is very positive for the US dollar then, albeit the opposite is true for the US economy.
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, 21 September 2011
MPC minutes reveal increased chance of UK QE.
This morning’s MPC minutes have weighed heavily on the pound today. The Bank of England’s rate-setting committee revealed that growth in the second half of this year is likely to be “materially weaker than forecast in August.” The minutes also indicated that a move towards additional UK quantitative easing “was finely balanced for most MPC members” and that “it was increasingly likely that [it] would be warranted at some point.”
Significantly, leading MPC dove Adam Posen was not joined by any of his colleagues in his call for an additional £50bn worth of asset purchases. However, the comments above really do look to be the precursor to further easing and the market has taken its cue to hurt the pound. Today’s news doesn’t come as too much of a surprise after the Bank of England’s third quarterly bulletin, which celebrated the effects of the last round of quantitative easing.
The market is now looking ahead to next month’s Bank of England meeting, where they may well finally pull the trigger on QE. The truth is that UK data is on a steady downtrend and most signs are really pointing towards a double-dip recession.
Sterling has come off highs up above €1.17, to trade at levels comfortably below €1.14 this afternoon. Do we see this lasting? Well, we find it difficult to envisage the euro maintaining this level of support in the medium term. There remains a sense that the next scare or damaging bad news headline from the eurozone is never far from view. Admittedly, the euro has traded robustly in the face of Italy’s debt downgrade yesterday but the Greek issue is still unresolved. In addition, sterling has suffered of late with the UK economy in the spotlight, but attention is likely to shift away until early October’s PMI data. This may give sterling a little breathing space over the coming week and a half or so.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Significantly, leading MPC dove Adam Posen was not joined by any of his colleagues in his call for an additional £50bn worth of asset purchases. However, the comments above really do look to be the precursor to further easing and the market has taken its cue to hurt the pound. Today’s news doesn’t come as too much of a surprise after the Bank of England’s third quarterly bulletin, which celebrated the effects of the last round of quantitative easing.
The market is now looking ahead to next month’s Bank of England meeting, where they may well finally pull the trigger on QE. The truth is that UK data is on a steady downtrend and most signs are really pointing towards a double-dip recession.
Sterling has come off highs up above €1.17, to trade at levels comfortably below €1.14 this afternoon. Do we see this lasting? Well, we find it difficult to envisage the euro maintaining this level of support in the medium term. There remains a sense that the next scare or damaging bad news headline from the eurozone is never far from view. Admittedly, the euro has traded robustly in the face of Italy’s debt downgrade yesterday but the Greek issue is still unresolved. In addition, sterling has suffered of late with the UK economy in the spotlight, but attention is likely to shift away until early October’s PMI data. This may give sterling a little breathing space over the coming week and a half or so.
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, 13 September 2011
Caxton FX Weekly Round-up
Eurozone concerns peak and the euro plummets
Concerns over the eurozone debt crisis have peaked in recent sessions, which has seen the key euro/dollar pairing decline by nine cents in the space of a fortnight. Fuelling this sell-off, which has also seen the euro hit a ten-year low against the yen, are intense fears of a Greek default. Greece is not meeting its deficit targets and unless sufficient austerity measures are implemented, then it may not receive its next tranche of aid.
German patience with Greece, which has been crucial in maintaining confidence in the euro, is clearly wearing very thin. Comments from politicians in the leading eurozone nation have alluded to a possible default and Greek exit. The market is now estimating that the probability of a Greek default within the next five years is 98%. A default and the effects it would almost certainly have throughout major eurozone nations such as Italy and Spain cannot yet be fully priced in. Accordingly, the euro has plenty of downside potential.
Importantly, we have seen Asian sovereigns withhold their previously reliable support for the single currency. Rumours of Chinese support for Italian debt stabilised the euro’s fall on Monday, but this seems highly unlikely to provide any sustained euro relief rally. Italian bond yields also soared at a debt auction today regardless. In addition, France’s main banks are facing further downgrades due to their exposure to Greek debt.
The ECB looks increasingly likely to cut its interest rate, which along with solid Asian support, has driven the single currency to such strong levels. The absence of these two factors and the worsening of the eurozone debt crisis have caused us to revise our relatively bullish outlook on the euro. The imminent threat of a Greek default and a collapse in the European banking system should ensure further euro weakening in both the short and longer term. The effect of eurozone officials’ habit of much talk and little action seems likely to ensure that any solution to the eurozone crisis will be very slow in coming and market scepticism is growing all the time.
Bank of England holds fire on QE
Last week saw the Bank of England decide against introducing further quantitative easing to the UK economy. Recent PMI data from the UK was very poor so the speculation for monetary easing certainly built ahead of last Thursday’s announcement. Next Wednesday’s MPC minutes will reveal just how close the BoE policymakers were to pulling the trigger. As ever, if figures continue to weaken, the measure will continue to threaten to weaken the pound.
Sterling is trading fairly strongly in the current risk-off environment, except against the dollar which has gained in safe-haven inflows since the Swiss National Bank’s intervention in the swiss franc’s strength.
After trading at €1.17 early on Monday morning, sterling is trading a cent and a half lower but the risks of further euro-weakening are all too clear. Against the dollar, sterling is trading down at $1.58 and is looking significantly more vulnerable. The key factor governing this outlook is an even weaker looking euro/dollar pairing, which looks hard pushed to make a sustained move back above $1.40 in the current environment.
End of week forecast
GBP / EUR 1.16
GBP / USD 1.57
EUR / USD 1.3550
GBP / AUD 1.5350
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Concerns over the eurozone debt crisis have peaked in recent sessions, which has seen the key euro/dollar pairing decline by nine cents in the space of a fortnight. Fuelling this sell-off, which has also seen the euro hit a ten-year low against the yen, are intense fears of a Greek default. Greece is not meeting its deficit targets and unless sufficient austerity measures are implemented, then it may not receive its next tranche of aid.
German patience with Greece, which has been crucial in maintaining confidence in the euro, is clearly wearing very thin. Comments from politicians in the leading eurozone nation have alluded to a possible default and Greek exit. The market is now estimating that the probability of a Greek default within the next five years is 98%. A default and the effects it would almost certainly have throughout major eurozone nations such as Italy and Spain cannot yet be fully priced in. Accordingly, the euro has plenty of downside potential.
Importantly, we have seen Asian sovereigns withhold their previously reliable support for the single currency. Rumours of Chinese support for Italian debt stabilised the euro’s fall on Monday, but this seems highly unlikely to provide any sustained euro relief rally. Italian bond yields also soared at a debt auction today regardless. In addition, France’s main banks are facing further downgrades due to their exposure to Greek debt.
The ECB looks increasingly likely to cut its interest rate, which along with solid Asian support, has driven the single currency to such strong levels. The absence of these two factors and the worsening of the eurozone debt crisis have caused us to revise our relatively bullish outlook on the euro. The imminent threat of a Greek default and a collapse in the European banking system should ensure further euro weakening in both the short and longer term. The effect of eurozone officials’ habit of much talk and little action seems likely to ensure that any solution to the eurozone crisis will be very slow in coming and market scepticism is growing all the time.
Bank of England holds fire on QE
Last week saw the Bank of England decide against introducing further quantitative easing to the UK economy. Recent PMI data from the UK was very poor so the speculation for monetary easing certainly built ahead of last Thursday’s announcement. Next Wednesday’s MPC minutes will reveal just how close the BoE policymakers were to pulling the trigger. As ever, if figures continue to weaken, the measure will continue to threaten to weaken the pound.
Sterling is trading fairly strongly in the current risk-off environment, except against the dollar which has gained in safe-haven inflows since the Swiss National Bank’s intervention in the swiss franc’s strength.
After trading at €1.17 early on Monday morning, sterling is trading a cent and a half lower but the risks of further euro-weakening are all too clear. Against the dollar, sterling is trading down at $1.58 and is looking significantly more vulnerable. The key factor governing this outlook is an even weaker looking euro/dollar pairing, which looks hard pushed to make a sustained move back above $1.40 in the current environment.
End of week forecast
GBP / EUR 1.16
GBP / USD 1.57
EUR / USD 1.3550
GBP / AUD 1.5350
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, 6 September 2011
Swiss National Bank Gets Aggressive
The SNB announced this morning that it intends to keep the EUR/CHF rate at a minimum of 1.20 - this is the 'floor' which it will be defending. This direct intervention in the currency market caused the swiss franc to understandably sell off sharply across the board in response.
With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.
Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.
The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.
Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.
Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.
The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.
Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.
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, 5 September 2011
Caxton FX Weekly Round-up
UK growth data disappoints
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Subscribe to:
Posts (Atom)