Why is the South African Rand so weak?

The rand has been on a downtrend for a while now; it was overvalued for a start but political uncertainty has really triggered quite an aggressive depreciation in recent months. Uprisings have sprung up across the country, with the death toll reaching fifty. Mineworkers are particularly prominent within the uprisings, with demands for wage increases the key driver of national anger.

President Zuma is under huge amounts of pressure and will struggle to be re-elected; latest approval rating suggests only 32% support the man in charge. Zuma has given himself a 5.5% pay increase recently – so it’s no surprise that he is under the cosh.

Naturally, this has limited the productivity of the country’s key economic growth contributors, such as its iron ore, platinum, trucking, wine and fruit industries. This is having a material impact on South African growth, GDP expectations have been repeatedly downgraded by the South African Reserve Bank. The outlook is pretty bleak too, with inflation high, unemployment likely to rise and global demand for South African exports likely to decline (particularly from the eurozone).

Unsurprisingly, investor confidence has taken a major hit; the use of armoured vehicles, rubber bullets and tear gas is not conducive to rampant commerce. With investors making for the exit, the rand has plumbed fresh multi-year lows across the exchange rates and with no real sign of the social and political unrest easing up, the rand is likely to remain on its downtrend for at least the next six months to a year. 

Richard Driver

Currency Analyst 

Caxton FX

King's "gloomy" outlook for UK growth hurts sterling

Sterling has had a tough session today on the back of this morning’s Bank of England Quarterly Inflation Report and subsequent press conference with Governor Mervyn King. King and his MPC colleagues were surprisingly pessimistic with respect to near-term UK growth. 

The Q3 UK GDP figure was very impressive - driven by temporary factors like Olympics - but it has been disappointing to see Mervyn King admit today that GDP is likely to contract again in Q4. We knew it would be weaker, significantly so, but we weren't expecting contraction. Beyond this and looking at next year, he expects growth to remain very sluggish, though he does foresee a gradual recovery. Unsurprisingly, the BoE views the eurozone downturn to be the biggest threat to UK growth.  

He does see UK inflation heading higher, which you might think would be positive for the pound given that it would make the Bank of England less inclined to add to its quantitative easing programme. However, when paired with weak growth, market nerves are jangling with respect to the dreaded ‘stagflation’ scenario. 

King said that he “has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.” This is hardly music to the markets ears and explains to a large degree why sterling has had such a rough session, more QE is not officially off the table as a policy option. However, we remain sceptical that we will see any more QE, at least in the coming months. What the market may have overlooked was King’s warning of the limits to what monetary policy can do to spur growth. We place more weight on this and accordingly, we see GBP/EUR recouping today's lost ground. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD.

GBP/EUR recovers the €1.25 level and should head higher

This week’s quarterly inflation report will be very closely watched for an insight into where the MPC is standing with respect to the option of introducing further quantitative easing. Much to the relief of the pound, the committee declined the opportunity to take this measure at its monthly meeting last week. The UK services growth figure for October was disappointing and triggered some speculation that the BoE would take a safety-first approach, but it seems they placed greater weight on the recent positive Q3 UK GDP figure (1.0%).

We think the MPC will be too concerned with upside risks to inflation (which should be highlighted by a tick higher in Tuesday’s monthly CPI figure), backed by an underlying faith that the UK economy is genuinely in recovery mode now. More clarity on this issue will be provided by this week’s major UK data releases; Wednesday brings what is likely to be yet another positive UK labour update, while Thursday’s retail sales figure may provide a little more cause for concern.

A retreat in BoE QE bets has helped sterling to regain a grip on the €1.25 level in recent sessions. Whilst this rate has headed lower than we expected in the aftermath of the ECB’s bond-buying pledge and subsequent period of market relief, we do maintain significantly higher targets for sterling over the coming weeks and months.

US fiscal cliff worries underline positive US dollar outlook

The fiscal cliff issue is really weighing on market sentiment at present. The recent elections maintained the political status quo in the US, which means we are no closer to breaking the deadlock that could deal a major blow to the global economy. Combined with nervousness surrounding Greece and the risks of default, the fiscal cliff issue has boosted the safe-haven US dollar, helping it to rally against both the euro and the dollar in recent sessions. We expect sterling’s downtrend against the greenback to persist in the coming weeks.

Eurozone growth and Greece combine to weaken the euro

The flow of below-par eurozone growth data has been ominously steady this month. Germany appears to be in some real trouble, which is likely to once again be highlighted by Tuesday’s key German economic sentiment survey. Thursday brings a whole raft of eurozone GDP data, which will further highlight the downturn seen in France and Germany in the third quarter, as well as revealing another quarterly contraction for the currency bloc as a whole.

Weak eurozone growth has been put to the bottom of the agenda throughout this year but it is definitely starting to hurt the single currency now, particularly with Germany seemingly being dragged into the quagmire.

Greece is the key eurozone issue hurting the euro at present. We have had some relieving developments in the past week with Greece’s parliament approving major austerity measures as well as more belt-tightening within PM Samaras’ budget for next year.  However, there is still a distinct air of uncertainty in the financial markets over the country’s debt situation and its future within the euro. Realistically, it will take the release of the next €31.5 aid tranche to really ease investor concerns of an imminent disaster. A bond repayment is due on Friday, one which Greece cannot at present afford, so market tensions will remain elevated in the coming sessions.

End of week forecast

GBP / EUR	1.2550
GBP / USD	1.5800
EUR / USD	1.26
GBP / AUD	1.5150

Richard Driver
Currency Analyst
CaxtonFX

Reserve Bank of Australia cuts growth prospects

The news as far as the aussie dollar has been concerned this week has been remarkably positive. We have to hold our hands up and say that we were expecting the RBA to cut its 3.25% interest rate again at its meeting this week, though we did warn that it was an incredibly close call. On top of this, data revealed that 10.7 thousand jobs were added to the Australian labour market, which was away ahead of expectation. The aussie unemployment rate also unexpectedly remained 5.4%.

What followed all this was last night’s RBA monetary policy statement. In it, the RBA warned that the aussie mining boom will peak earlier and at a lower level than has previously been thought. It was previously thought that the mining boom would peak at 9.0% of GDP, expectations are that it will now peak at 8.0%. The central bank also complained further about the strength of the Australian dollar (change the record!)and proceeded to downgrade aussie GDP projections for this year from around 3.00% to around 2.75%, though admittedly we might have expected this downgrade to be more drastic.

The RBA stated that the current interest rate is appropriate and that past rate cuts are still filtering through and benefiting the Australian economy. The statement also sounded confident that the Chinese economy has stabilised, anticipating a gradual recovery in growth from here.

We suspect that Governor Stevens may be getting ahead of himself with respect to Chinese growth and Australian growth. While this week’s strong aussie jobs data may see the RBA delay a rate cut in December, we’d be surprised if we had to wait past January for another cut. 

Richard Driver,

Currency Analyst

Caxton FX

Sterling rallies on BoE's "no QE" decision

The Bank of England has today decided against adding to its asset purchase facility (quantitative easing programme), which remains at £375 billion. The result has been some further support for the pound, so cleary there were some lingering suspicions that the MPC doves would do enough to persuade a majority to vote in favour of QE. The BoE base rate also remains at 0.50%, though this was universally expected.

Despite disappointing updates from the UK services and manufacturing sectors in the past week, the MPC was always likely to hold fire on the issue of further QE this month. The UK GDP figure for Q3 would have firmed up several MPC members’ positions and from the comments emanating from the committee, several members doubt not only the need for further QE but the capacity of the measure to actually make a material impact. In addition the BoE thinks that the 2.0% inflation target will be hit regardless of more QE, due to persistently high inflation.

Whether or not the BoE will decide that further QE is necessary in the coming months really depends on whether the recovery that was indicated in Q3 materialises. QE should be seen as an emergency measure and UK data has revealed a slight uptrend of late, so it really wasn’t necessary in the absence of any fresh shockwaves. If the debt crisis or the eurozone downturn drags the UK back into a triple-dip recession then there is little doubt that the BoE will once again come to the rescue. As it stands though, its case of wait and see how this recovery progresses. 

Richard Driver

Currency Analyst

Caxton FX

Weak growth outlook hurting the euro today

How quickly the market has moved on from President Obama’s re-election! Focus is back squarely on the eurozone and sterling has enjoyed another nudge higher against the euro as the latter has been sold-off quite aggressively.

What’s behind this fresh euro-weakness? German industrial production data for the month of September has come in at an alarming -1.8% this morning, which represents a five-month low. To make things worse, eurozone retail sales data also revealed an unexpected contraction this morning.

The EU Commission has also added extra weight to the single currency, by releasing pessimistic growth forecasts for the eurozone.  It sees eurozone GDP shrinking by 0.4% this year, before growing by just 0.1% next year. Greece is to contract by a staggering 6.0% this year and by another 4.2% next year. EU Commissioner Rehn sounded distinctly downbeat in his press conference today, citing tightening credit conditions and weakening demand.

GBP/EUR climbed to a five-week high of €1.2530, whilst EUR/USD fell to nearly a two-month low of $1.2735. We have been citing downside risks to the euro on the basis of the eurozone’s dire economic outlook for some time now. The increasing evidence of Germany’s decline is making the market stand up and take notice. Watch out for tonight’s Greek austerity vote, as the euro could get some relief if, as it should do (though only just), the Greek parliament approves the latest austerity proposals. 

Richard Driver,

Currency Analyst

Caxton FX

November Outlook: Euro set to decline

After some weak figures from the UK economy to kick October off, we have enjoyed a pretty steady flow of positive domestic news. The highlight has been the recent preliminary UK GDP figure for Q3, which indicated growth of 1.0%, almost doubling expectations. With headlines surrounding the UK economy’s emergence from recession, sterling has enjoyed some renewed interest, though with domestic growth so far this year almost completely flat, you don’t have to look far to find the sceptics.

As far as the US economy is concerned, conditions are certainly perking up. The recent advance US GDP figure for Q3 revealed annualised growth of 2.0%, so it was a case of anything the UK can do, the US can do better.  The Fed will also be encouraged by significant improvements in the US labour market. It appears that the recovery of the world’s No.1 economy from its mid-year slump, albeit later than expected, is well under way. Nonetheless, the risk of the US fiscal cliff continues to pose serious threats to US and indeed global growth in 2013.

It has been fairly quiet on the eurozone front in recent weeks. Spain remains frustratingly tight-lipped on the issue of a bailout request. However, we are heading into a crucial week in which the Greek parliament will decide whether or not to approve an austerity package that is essential to the release of the country’s next tranche of aid.

GBP/EUR

Sterling benefits as UK exits recession

Sterling spent much of October under pressure against the euro, with no major panic headlines emerging out of the debt crisis. Disappointing domestic data also kept sterling pinned well below the €1.25 level for long periods, with the services, construction and manufacturing sector updates all disappointing.

However, we have seen a decent turnaround in figures in the past fortnight or so, which has provided sterling with renewed support. The labour market continues to make impressive strides, as shown by the unexpected dip in the UK unemployment rate to a 13-month low of 7.9%, while retail sales were also in good shape in September. These figures were topped off by a 1.0% preliminary UK GDP figure, which was well above the 0.6% estimates that were prevailing in the build-up. With the data revealing that the negative growth that dominated the first half of the year has been recouped, the UK government enjoyed a rare sigh of relief.

MPC to vote against QE this month

This all leaves the Bank of England interestingly poised in terms of its next move. MPC members have been quick to warn that we can expect a much weaker growth figure from the fourth quarter, once the temporary factors of the Olympics and the bounce back from the extra Q2 Jubilee bank holiday are discounted. However, judging by the minutes from last month’s MPC meeting, not only is the MPC split on the desirability of another dose of quantitative easing, but there appears to be plenty of scepticsm with respect to the usefulness of such a move. In addition, there have been hints that the government’s Funding for Lending initiative, where bank lending is incentivised, is making a real difference.

There is plenty of reason to suspect that last quarter’s GDP figure was a temporary surge for an economy that still needs nurturing back to health. The latest updates from the services sector suggests the UK has made a soft start to Q4 but we nevertheless expect the MPC doves to fail to muster a majority vote in favour of QE this week.

Greece vote gets euro nerves jangling again

As far as the euro is concerned, focus has centred on the familiar issues of Greece, Spain and deteriorating eurozone growth. Greece will dominate the eurozone headlines this week, with PM Samaras presenting a controversial package of fresh austerity measures which will be voted on by the Greek parliament later this week. The vote will come right down to the wire, though we are expecting the package to be approved.

We are sticking to the ‘muddling through” assumption that Greece will do what is demanded of it and in turn will receive some concessions, along the lines of lower interest rates, extended loan maturities and extended austerity deadlines. The stakes are simply too high to allow the Greek saga to blow up again.

With Spanish bond yields coming away from the dangerous 7.0% mark in the aftermath of ECB President Draghi’s pledge to buy up unlimited peripheral debt, the pressure on PM Rajoy to request a bailout has eased somewhat. However, the market is likely to take an increasingly dim view of Rajoy’s ongoing procrastination through November (talk has emerged that he will wait until next year). Ratings agency Moody’s handed Spain some breathing space last month, sparing it the blow of downgrading its debt to ‘junk’ status but there is little doubt it will wield its axe once again if progress fails to emerge.

As ever, major concerns are stemming from the deteriorating state of eurozone growth, as the region is dealt round after round of austerity. Whilst the ECB now looks set to hold off from cutting interest rates until next year, declining demand from peripheral eurozone nations continues to filter into weakness in the eurozone’s core. German figures were yet again poor in October, compounding fears that the powerhouse economy is heading into recession. The region’s declining economy is really showing few bright spots, while the headlines out of the UK economy contrastingly highlight its re-emergence from recession.

Sterling is trading just below the key €1.25 (80p) level and direction from here over the coming weeks will really depend on whether the pound can make a sustained move north of this benchmark. We can’t discount another move back down towards €1.23 but we maintain expectations for this pair to move above €1.25 in the coming weeks.

GBP/USD

Dollar to benefit from upturn in US growth

Sterling has traded very positively against the USD in recent weeks but has finally suffered a downward correction in the past week. GBP/USD is still only a couple of cents off April’s multi-month highs above $1.62 with stronger UK data and diminishing risks of QE providing the pound with plenty of support at $1.60, just when a move back down to the $1.50s has looked on the cards.

The USD is attracting increased demand at present on the back of some strong US economic figures. The US unemployment rate fell to 7.8% in September, the lowest level seen in almost four years (though this bounced up to 7.9% in October). The advance US GDP figure for the third quarter came in above expectations at 2.0% (annualised), powered by a surge in consumer spending and a temporary boost from defence spending. November’s excellent employment update, suggests we can expect further improvements over Q4.

Global concerns to highlight dollar’s safe-haven status

With the fiscal cliff a month closer, so too are the risks of a massive hit to US growth. This in our view will increase appetite for the safe-haven US dollar as we approach year-end. Meanwhile, we are struggling for progress on the Spanish debt/growth problem and broader concerns with global growth should also underpin the greenback.

Whilst the US Federal Reserve is engaging in QE3, the US economy is still outpacing the UK by some distance and we believe this will soon be reflected in some dollar strength. The UK’s last GDP figure may have been impressive (1.0% in Q3) but looking at the year to date, growth has essentially flat lined and with the eurozone recession deepening, major risks to domestic growth remain.

This week’s US Presidential election makes short-term swings highly probable and highly unpredictable. Not only is it unclear how the dollar will react to whoever wins but there is also the issue of which party will control Congress. Our conservative bet is that the status quo will broadly remain, with Obama emerging victorious but with doubts remaining over his ability to strike a deal to avert the fiscal cliff. We maintain our position that that we will see this pair spend most of the rest of the year below $1.60. Sterling’s two-month low of $1.5920 should be tested soon and we believe this will ultimately be broken, paving the way for move back into the mid-$1.50s.

1-month Outlook

GBP/USD:  1.58

GBP/EUR: 1.2550

EUR/USD: 1.26

Richard Driver 

Currency Analyst

Caxton FX

Caxton FX Weekly Outlook: GBP/EUR/USD

UK GDP figure strong but reality check could be around the corner

Last week’s Q3 UK GDP figure beat expectations by some distance (1.0% vs 0.6%), which triggered plenty of sterling demand. The boost from the Olympics and the natural rebound from the extra bank holiday that weighed on growth in the second quarter suggest that the economy has recouped the 0.9% contraction that we saw in the first half of the year.

The much better than expected GDP figure is certainly good news but if we take a step back, the truth is that the UK economy has done little more than flat line in 2012 so far. Since the release, MPC members have been quick to manage our expectations for Q4. Indeed, we are likely to see some weak growth figures in the week ahead in the form of the monthly updates from the UK manufacturing and construction sectors, which threatens to knock the pound off its perch against the dollar in particular.

Despite the scepticism with which many are looking upon the GDP figure, we do see it as likely to convince the BoE not to announce another round of QE at its monthly meeting next week. Whilst there is clearly a pro-QE voice within the MPC, we just doubt that the doves will be able to form a majority next week.

US growth in better shape ahead of key monthly employment data

Friday brings October’s US non-farm payrolls figure, which is expected to show some further modest improvement. This, in combination with last week’s forecast-beating US GDP figure (which indicated that the US economy grew at an annualized pace of 2.0% in Q3) may well give global stock markets a lift, taking away some demand from the safe-haven US dollar. As things stand however, fears over Hurricane Sandy have instilled in the markets a distinctly cautious tone at the start of this week, which has kept the EUR/USD pair pinned down below $1.30.

The US dollar has certainly been on the ascendancy in the past week, as frustrations over a lack of progress in Spain and Greece have set in. The former country appears no closer to requesting a bailout, something which is clearly testing the markets’ patience by the look of rising Spanish bond yields. Also weighing on the euro last week were some very disappointing German economic figures – this weak growth story running behind the debt crisis is a key driver behind our negative outlook for the euro in the coming months. We have had some poor German employment data out this morning, which has been a source of concern, though the euro has been given a helping hand today by a positive Italian bond auction.

End of week forecast

GBP / EUR	1.2400
GBP / USD	1.5950
EUR / USD	1.2860
GBP / AUD	1.5550

Sterling is trading at €1.24 this morning and faces a difficult end to the week in the form of domestic growth data at the end of the week. We see EUR/USD paring back from its current $1.2950 level, which should help GBP/EUR fall no lower than €1.2350. We still fancy a move above €1.25 in the coming month or so, which could actually bring a move significantly higher into sight provided the BoE holds off from further QE.

GBP/USD’s rallies are running out of steam at early stages and a sustained move below $1.60 is still our best bet.

Richard Driver
Currency Analyst
Caxton FX

US GDP beats expectations but dollar fails to rally

US GDP data has impressed this afternoon, revealing that the world’s number one economy grew by 2.0% in the third quarter, ahead of market expectations in the 1.8 -1.9% area. This is just a preliminary reading but good news nonetheless.

A temporary surge in defence spending appears responsible for the figure’s stronger than expected showing, though this is unlikely to be sustained. What is good to see is that conditions in the US housing market are improving, as is consumer spending. We know that the US labour market is also seeing some progress, though data next Friday will reveal whether last month's improvements were a flash in the pan.

On the downside, US business investment is on the wane for the first time since Q1 2011. This really does suggest that concerns over the US fiscal cliff, which could do as much as halve US growth next year, are weighing on US confidence.

The UK economy grew by 1.0% in Q3, according to preliminary data released yesterday. This was considerably better than expected and triggered a much more noticeable reaction in the FX markets, with sterling making impressive gains as a result. The dollar has failed to capitalise on today’s data; it has had the effect of lifting market confidence and reducing demand for the safe-haven dollar. Nonetheless, the dollar has had a strong week regardless and we maintain a pretty rosy outlook for the greenback. The next big event, as far as the US is concerned, is the Presidential election result. The jury is out over whether a red or a blue victory would be best/worst for the greenback. 

Richard Driver

Currency Analyst

Caxton FX

Germany succumbing to peripheral eurozone weakness

Today’s session has seen some nasty eurozone growth data emerge, which has put the euro under even more selling pressure. Yesterday’s was a tough enough session for the single currency thanks to Moody’s credit downgrade to five Spanish regions; sterling/euro has helped itself to some very welcome gains again today.

Attention as far as the euro has been concerned has been focused on Spain’s “imminent” bailout request and Greece’s slow progress towards an agreement on further austerity measures that will unlock the next tranche of aid. Focus switched back to economic fundamentals today, which is not an environment in which the euro has thrived in recent months thanks to the regional downturn in economic growth. Brutal austerity measures throughout the eurozone periphery are not just hurting those struggling economies, the weakening demand is hitting the eurozone’s core, as shown by today’s German and French growth data.

September’s German manufacturing data suggested the weakness we have seen in the sector this year had bottomed out but October’s downturn casts a shadow over this theory. France’s manufacturing number came in below expectations, as did that of the German services sector.

A key gauge of the German business climate showed a sixth consecutive monthly decline, giving its worst showing since March 2010. What is interesting is that Ifo, the institute which produces the business climate survey, does not see any need for the European Central Bank to cut interest rates and does not see Germany heading into recession.

We are rather more bearish on the prospects of the European powerhouse. The composite measure of eurozone output has fallen to a 40-month low and points to an even sharper contraction in Q4 compared with Q3. Germany’s resilience to the eurozone region’s decline is a thing of the past and we are expecting a rate cut from the ECB in the coming months. The ECB might be doing its bit to ease concerns over eurozone contagion and a break-up, but growth in the region is crying out for help. 

Richard Driver

Currency Analyst

Caxton FX