March 2013 Currency Report: Italy highlights euro vulnerabilities

 It was a case of more of the same for the pound in February; it posted fresh multi-month and multi-year lows against a host of currencies. Domestic growth data has consistently disappointed and as a result there has been a significant shift in rhetoric from the Bank of England, which is sounding more dovish than ever. The Monetary Policy Committee looks highly likely to set aside concerns over the UK’s higher inflation outlook and focus once again on kick-starting the recovery with further quantitative easing, perhaps as soon as this month. With UK data unlikely to inspire much confidence in the weeks ahead and Moody’s having finally downgraded the UK’s AAA credit rating, there is little domestic news that seems likely to come to GBP’s support. However, to an extent all the bad news is out in the open as far as sterling is concerned, which really isn’t the case with other currencies like the euro.

As seen in the aftermath of the recent worrying Italian election result, sterling will still benefit from rising demand amid periods of eurozone panic. This really is likely to prove the key if sterling is to turn its fortunes around because when market sentiment is stable and risk appetite is in play, GBP looks in poor shape. Given recent developments, it won’t come as much of a surprise that Italy is likely to be the focal point of eurozone tensions in the coming weeks and months.

We are some way from knowing whether an Italian coalition government can be formed, or whether a fresh election will have to be called. Neither scenario is likely to produce a very convincing end-result in terms of maintaining Italy’s commitment to economic reform, so we could well be entering a fairly lengthy period of market uncertainty. This should at halt GBP/EUR’s decline and could yet instil sufficient euro-negativity to trigger a sustained bounce.

GBP/EUR

GBP/EUR finally stops the rot

The pound’s dire start to 2013 continued in February, amid negative economic news, rating agency action and ultra-dovish commentary from our friends in the Monetary Policy Committee. Taking a look at the economic data to begin with, the UK PMI figures have far from eased concerns. A weak set of January figures was put down largely to the impact of the snowy weather. However, February’s manufacturing and construction updates were shockingly poor and hopes are not high for tomorrow morning’s services figure.

Moody’s finally wielded its axe in the direction of the UK’s AAA credit rating, the result of which was a two cent knee-jerk lower (though this was quickly recovered). We shouldn’t have to wait too long (perhaps a couple of months or so) before Fitch and S&P have followed suit but this doesn’t pose much of a threat to sterling in our view. The first move was always likely to be the most damaging and even this didn’t produce a sustained sell-off – the news will now be fully priced in. George Osborne seems set to stick to his guns with respect to austerity, though more details will emerge in this regard when he delivers his March 20^th Spring Budget.

More QE likely from MPC

On the monetary policy front, we have an extremely interesting week ahead. The MPC meets on Thursday and we are now expecting a majority decision in favour of quantitative easing. The shift in dovish rhetoric has been pretty drastic in recent weeks. First of all and significantly, last month’s MPC meeting minutes revealed that Mervyn King and Paul Fisher voted in favour of more QE in addition to the previously lone dove David Miles. In his ten years in office as Governor of the Bank of England, only four times has King been in the minority and each time he has found himself in the majority soon after, such is his influence. We expect the same to be true this time.

Last month’s UK inflation report downgraded economic growth prospects and recent data has been surprisingly weak, which suggests now is the time for emergency action. In addition, there has been plenty of rhetoric with respect to a more flexible approach to UK inflation. In other words, the MPC has made its peace with the fact that UK inflation will be well above target for the next three years but boosting UK growth is more important. This means more QE. If the MPC do not decide in favour of QE this week, we’d be surprised if we had to wait beyond May.

Italian elections shake the markets

From the eurozone, Italy has finally given the market reason to pause and question whether the euro really should be the ‘hot pick’ that it has represented over the past six months. A messy election result has produced more questions than answers as to what is next in terms of Italian government. Bersani’s Democratic Party failed to secure a parliamentary majority with Berlusconi’s centre-right coalition making a late surge into second place. Meanwhile, comedian-turned-politician Grillo’s anti-austerity 5 Star Movement came in third, which shows what Italy thought of Monti’s pro-austerity tenure.

Both Berlusconi and Grillo achieved blocking minorities in the Senate. Bersani has rejected the most obvious path of a grand coalition between his party and Berlusconi’s, while Grillo has ruled out offering Bersani his support. Bersani seems intent on forming a government on his own but the chances of another election later on this year look very high indeed now. The bottom line is that Italian efforts towards economic reform and debt-reduction will likely fall back, which should see pressure in the bond markets rise in the months ahead.

On the data front, actual eurozone growth indicators have failed to track improvements in confidence figures. Sentiment gauges out of Germany have been very encouraging indeed but manufacturing and services growth data from the powerhouse economy were disappointing in February, as they were from France and the eurozone as a whole. As shown by this week’s poor eurozone consumer confidence figure, concerns over Italy are likely to weigh for some time now. On top of these weak Q1 figures, data confirmed that almost all eurozone nations contracted at a sharper rate than expected in Q4 2012 – Germany included. Eurozone growth will clearly remain a concern for the European Central Bank but we do not expect an interest rate cut for at least the next few months, though the risks of a cut this year are rising with every month of economic contraction.

There remains a host of other eurozone concerns, from Cyprus’ bailout needs to Portugal’s demands for a renegotiation of its bailout terms, and plenty more besides. Regardless, sterling is seeing a diminished share of the safe-haven flows. Sentiment towards the UK economy remains extremely and unsurprisingly weak, which means we cannot discount another test of February’s lows around €1.1350 in the short-term. On balance, we would expect those lows to hold firm and for this pair to avoid any further major declines in the coming month. In fact, another visit to the €1.1835 high we saw a month ago is still a very realistic target once the dust has settled on this week’s weak UK growth figures and probable QE top-up.

GBP/USD

Greenback still on the up

This pair’s February and year-to-date charts are very ugly indeed as far as sterling sellers are concerned. Growth data has been very disappointing and we cannot discount a triple-dip recession. Moody’s downgraded the UK’s triple-A credit rating and the MPC has been particularly dovish, to which the market has responded by pricing in a pro-QE decision this Thursday.

Meanwhile, the US dollar has been very dominant indeed right across the board, not just against the pound. Firstly, there was positive economic news in the form an upward revision to the initial US GDP figure for Q4, which indicated a contraction. Some meagre growth has now been reported from a rather stagnant end to 2012, which was dominated by concerns over the US fiscal cliff. Data from the US in February remained on an uptrend by and large; consumer sentiment, housing data and manufacturing growth provided some highlights. There are well-placed hopes for a firm rebound in Q1.

Bernanke remains dovish on QE3

What the market is perpetually concerned with is what implications this firmer data has on the future of the Fed’s QE3 programme. Judging by Bernanke’s recent semi-annual testimony before the US House of Representatives, a move to taper QE3 off is not imminent. However, there remains significant support from within the Fed to do so and we expect that as the US recovery continues and uncertainty surrounding US fiscal policy fades, QE3 can begin to be wound down in the second half of this year. If so, this will be very good news for the dollar.

A reversal of the EUR/USD pair’s Q4 2012 rally has been a major weight on the GBP/USD, as was always likely. We expect the euro to lose further ground below $1.30 against the greenback, which should contribute to further pressure on GBP/USD in the coming weeks. There is scope for a bounce back up to the $1.5150 area but really we are expecting to see a sustained move below the $1.50 benchmark in the next few weeks. 

Richard Driver

Currency Analyst 

Caxton FX

Caxton FX Weekly Round-Up: Italy shocks markets

Italian elections ease the heat off the pound for now
Italy has really dropped a bomb on the financial markets with the results of its parliamentary elections this week. No party secured an overall majority.  Centre –left pre-election favourite Bersani secured a majority in the lower house but things are a lot messier in the Senate, where Berlusconi secured enough seats for a blocking minority.

Market tensions are bound to rise; Monti – the man who has delivered significant economic reforms and calmed market fears since he took over at the end of 2011 – received only 10% of the votes, while anti-austerity leader  Berlusconi took almost 30% of the vote.

All eyes are now on the coalition-building process and how Italian bond yields respond. Benchmark 10-year Italian bond yields have risen by almost 9.0% today. The key concern in the financial markets is that Italy can form a government which sticks to its reform programme. It remains to be seen whether or not Bersani can conjure a coalition but market sentiment towards the Italian political situation is likely to remain shaky for weeks to come.

Moody’s finally downgrades the UK’s credit rating
Friday night brought the long-awaited loss of the UK’s AAA credit rating. The move was so well sign-posted that it can’t have caught any market players as a genuine surprise, though it still gave them an excuse to punish the pound further. Fortunately for GBP, the Italian election results have understandably stolen focus.

Looking ahead, the UK PMIs are coming up in the next week; Friday’s manufacturing gauge is expected to pick up slightly on Friday, while no change is expected within the second estimate of UK GDP in Q4 2012.

MPC policymaker Paul Tucker revealed today that no one in the committee thinks that quantitative easing has reached the end of the road, confirming that more can be expected later this year. Sentiment towards the pound remains very weak and it will likely take further panic headlines out of the eurozone for GBP to build on this week’s gains.

Bernanke remains dovish but dollar still rises
Bernanke’s speech today has confirmed that he still lies on the distinctly dovish side of the debate within the US Federal Reserve. The Fed Chairman stressed the benefits of quantitative easing and the costs of high unemployment. This suggests more evidence of momentum in the US recovery will be necessary before Bernanke begins to taper off QE3.

The safe-haven US dollar, along with the yen and Swiss franc, has been a key beneficiary of the tensions coming out of Italy. Firmer US data has also been supportive of the greenback, with consumer confidence and home sales figures coming in well above expectations.

End of week forecast

GBP / EUR	1.1550
GBP / USD	1.5025
EUR / USD	1.3000
GBP / AUD	1.4775

Sterling is trading at €1.16 today and while there is a significant chance of a further bounce up to the €1.18 level, on balance we expect this pair’s downward bias will take hold once again. In terms of GBP/USD, we are predictably comfortable with targeting lower levels.  A move closer to $1.50 is likely before the next mini bounce. Meanwhile we are expecting lower levels in the EUR/USD pair, which currently trades at $1.3050.

Richard Driver
Currency Analyst
Caxton FX

BoE edges towards QE, Fed edges away, while the eurozone remains firmly in recession

We have to hold our hands up and admit that we were caught well and truly offside with respect yesterday’s MPC minutes. We did not even fully expect David Miles to continue voting for QE but not only did he stand firm, he recruited to additional doves to his cause in the shape of Paul Fisher and (more significantly) Sir Mervyn King. With the merits of an interest rate cut also carefully discussed, it was no surprise to see sterling take a beating as a result. We have to now change our position on the BoE’s monetary policy outlook and expect an additional top-up of QE around May time. Not good news for sterling, which continues to suffer from weak growth and the high probability of a UK debt downgrade.

By contrast, the minutes from the US Federal Reserve’s recent meeting gave a real boost to the US dollar last night. They revealed that Bernanke & Co are assessing when and how to scale back their QE3 operations, which was a major driver of dollar-weakness in the last few months of 2012. There have been hints that substantial improvements to the US unemployment rate would be needed before QE3 was wound down but the minutes revealed there was some support for doing so before such improvements are seen. It goes without saying that there remains majority support for maintaining QE3 as it is until greater progress is made with the US recovery and no change to this looks particularly imminent. However, the discussion and the divergence of views within the Fed could lead to a tapering off of QE3 later on in the year. This is why the dollar has rallied.

From the eurozone, we have had yet more weak growth data. A German economic sentiment survey was excellent earlier on in the week but this morning’s PMI figures pointed to a slowdown in the powerhouse economy this month. The German manufacturing sector remained in growth territory by only the smallest margin. Meanwhile, French figures pointed to a sharp dip further into contraction, against expectations of stabilisation. The same is true for the eurozone as a whole, which is set to contract again this quarter.  This is being reflected in a weaker euro today, though GBP remains very vulnerable. 

Richard Driver
Currency Analyst
Caxton FX

Caxton FX Weekly Round-up and Outlook

Weak UK data puts further downward pressure on the pound

The prospects for a strong return to growth for the UK retail sector in January seemed very reasonable based on anecdotal evidence but Friday’s -0.6% stopped us dead in our tracks. When you combine this with the Bank of England’s Quarterly Inflation Report, which highlighted an outlook of weak growth and persistently high inflation over the next few years, it is little wonder that sterling has failed to bounce back in the past few sessions.

The MPC minutes are released on Wednesday and despite poor economic figures, we believe it is more likely that the lone QE voter David Miles dropped his vote than actually recruiting other members to his cause. The high inflation outlook really doesn’t seem consistent with additional QE, particularly while the Funding for Lending Scheme is providing the UK economy with support. Whilst Sir Mervyn King did state last week that the MPC stands ready to do more QE if necessary, we still believe his doubts over how much more this can achieve will dominate the voting in the coming months.

What hasn’t been helpful to the pound today have been Martin Weale’s weekend comments supporting a weaker pound to aid exports and address the UK’s current account deficit. Some might have interpreted this as a rare foray into the dangerous field of verbal intervention but we doubt it was much more than an example of wishful thinking.

Euro gets away with awful eurozone GDP figures

GDP data from throughout the eurozone, which significantly included Germany, was very disappointing last week. The euro is trading at a three-week low against the US dollar as a result of this confirmation that the eurozone recession is worse than many had feared, but levels above $1.33 are still pretty firm. Meanwhile, the euro continues to bully the pound down below €1.16.  

News out of the eurozone may have been bad last week but hopes are rather higher for this week’s eurozone data. Further improvements are expected within this week’s key German economic sentiment and business climate gauges. Meanwhile, Thursday’s eurozone PMI figures are expected to point to stabilization, even if the region does remain in recession territory.

US dollar enjoying plenty of demand amid firmer data

Recent headlines out of the US have been upbeat; weekly unemployment claims data improved sharply, while manufacturing and consumer sentiment figures also impressed. This provided a timely contrast with awful data out of the UK and the eurozone and may well have reminded many players why the USD should, in our view, be preferred to the EUR and GBP (in spite of QE3). The week ahead brings the minutes from the last Fed meeting (Wednesday), which could well reveal some discussion as to when QE3 can start to be scaled back. The bar remains pretty high in respect to this but discussion alone should be USD-positive.

End of week forecast

GBP / EUR	1.1500
GBP / USD	1.5400
EUR / USD	1.3400
GBP / AUD	1.5100

Sterling is trading below €1.16 this afternoon and we suspect the rate will head lower from here, with levels close to €1.15 representing a realistic target. It continues to prove tricky to call a bottom on GBP/USD’s slide but we think the pair will take a close look at $1.54 before a bounce is in sight.

Richard Driver
Currency Analyst
Caxton FX

Eurozone growth data comes back to haunt the euro

Data this morning has confirmed that the eurozone remains very much in recession. We knew that this was the case, but we didn’t know quite conditions were quite this bad. In the final three months of 2012, the French economy contracted by 0.3%, Germany’s by 0.6% and Italy’s by 0.9%, with all three GDP figures coming in worse than market expectations. The euro weakened on all of these data releases. Perhaps surprisingly, given that the market had the above figures already out in the open, the euro also weakened as a result of the overall eurozone GDP figure, which revealed a 0.6% contraction. Meanwhile, Portugal also posted a 1.8% contraction, while the Netherlands shrank by 0.2%. Spain we know contracted by 0.7%. Suddenly the UK’s Q4 GDP figure of -0.3% doesn't seem quite so disastrous. 

The market has been content to ignore weak eurozone data in recent months and as a result the euro has had an easy ride. Super Mario (Draghi) said he would do whatever it takes to keep the euro afloat, Greece managed to kick the can further down the road, and bond yields have been brought under control. All is well? All is not well - these eurozone figures are a reality check and really bring home what the market has seemingly been willing to sweep under the carpet. 

Perhaps the market is not ignoring it and perhaps they are looking beyond at a recovery in 2014, basking in the relief that the debt crisis no longer threatens the very existence of the euro. Either way, if data like today's continues to filter through in 2013 without significant improvement, then the ECB will be forced to act by cutting interest rates and you can be sure that the market will sit up and take notice when that happens. Germany has posted some encouraging figures so far in 2013 but it is anything but plain sailing for the euro from here.

The strong eurozone exchange rate over the past few months will surely have contributed to these awful eurozone GDP figures. The ECB remains reluctant to intervene to weaken the euro but they will have limits to what sorts of levels they are willing to tolerate. This is a key factor behind EUR/USD’s stalling ahead of $1.40. Next up, the Italian elections - expect the nerves to continue jangling over the next week or so. 

Richard Driver

Currency Analyst

Caxton FX

February Currency Outlook: GBP, USD, EUR

February 2013 Corporate Report:  Sterling friendless

January was another rough month for the pound, against almost every major currency, and the coming weeks do not look likely to be particularly fertile for a recovery. Sterling has been among the poorest performing currencies in the market, with a wide range of concerns over the UK economy weighing heavily. There are risks of a triple-dip UK recession, which in turn raise the probability of further quantitative easing from the Bank of England and a loss of the UK’s AAA credit rating. Until UK growth shows some signs of a recovery, the pound is likely to remain under pressure.

The euro’s remarkable rally continued in January, helped by further market calm in the eurozone and subsequent improvements to global market sentiment. ECB President Draghi gave the euro plenty of support by quashing speculation that his central bank would opt to cut interest rates (watch out tomorrow for further rhetoric). This optimistic approach has actually been bolstered by significant improvements to German economic data, even if growth in Italy, Spain and France remains very weak indeed. It only takes one look at bond yields in Italy and Spain to realise that nerves towards the debt crisis are at a low ebb and that confidence is pretty stable. That said, the past week has seen tensions rise ahead of Italy’s election this month.

Other than against the euro, the US dollar is also in pretty good shape. However, the recent weak US GDP figure for Q4 2012 hasn’t done the greenback any favours and will play into the hands of Ben Bernanke and the other dovish leaning policymakers within the US Federal Reserve. Positive sentiment towards the euro looks likely to limit the dollar’s gains in the coming weeks, but we still expect the USD to have a strong 2013.

GBP/EUR

Triple-dip fears dog the pound

Sterling is hugely out of favour at present; depreciation was so drastic in January that sterling’s trade-weighted index dropped by the most since February 2010. Economic weakness, speculation of more UK monetary easing and a more general loss of faith in the GBP as a safe-haven are all issues which have weighed heavily. The warnings as to a UK debt downgrade have been understandable and whilst predicting the timing of a downgrade is tricky, it would surprise us if the move was delayed beyond June.

Does sterling really deserve the battering it has received? Well, it certainly deserved some punishment; negative growth and a lack of progress on the UK’s debt situation are always issues likely to make themselves felt on the exchange rates.

There remain some brighter spots within the UK economy; the Funding for Lending Scheme appears to be bearing some fruit - bank lending is on an uptrend. The UK labour market continues to defy the wider domestic downturn. However, these rare good news stories have been of little use to sterling, with investors questioning how positive these factors can really be if they are not resulting in any genuine economic growth.

Unfortunately it’s quite clear that it will not be a particularly robust start to 2013, thanks to January’s snowy weather. The truth is that last summer’s Olympics concealed very weak underlying growth, which will become even more apparent over the rest of Q1. Sterling has at least been granted the relief that the UK services sector returned to growth in January but the risks of a triple-dip recession are still finely balanced.

Despite weak growth, we do not expect the Bank of England to opt for another dose of quantitative easing at its February meeting on Thursday, with most members satisfied with the Funding for Lending Scheme as an alternative to QE. David Miles is likely to remain the only voter in favour of QE in the February 7^th meeting; we expect the MPC under Sir Mervyn King to continue opting against further easing.

What will be more interesting on February 7^th will be Mark Carney’s appearance in front of the Treasury Select Committee. The market will be watching very closely for clues as to how Carney, who will take over from King as BoE Governor on July 1^st, will approach monetary policy. Unlike King’s comparatively hawkish doubts over the efficacy of more QE, Carney has been vocal on the utility of further easing and has pointed to other “unconventional instruments” which suggests he will strike a more dovish tone on Thursday. This is unlikely to be good news for the pound.

Germany perks up to help the euro

Once again, it’s been fairly quiet on the eurozone front, which has been a major factor behind the ongoing gains being made by the euro across the board. The weak investor sentiment towards the eurozone that characterised so much of 2012 is being unwound, as the risks of a eurozone break-up recede.

German data has been particularly encouraging in recent weeks with forward-looking sentiment and confidence surveys hitting multi-month highs. Still, the PMIs out of the eurozone as a whole continue to point to further economic contraction, which should lead to euro-weakness later on in the year. However, at present the market appears content to overlook awful growth and celebrate the signs that the worst of the debt crisis is behind us. This is really why GBP/EUR’s decline has been so aggressive.

There is evidence of burgeoning political tensions in the eurozone. Italy’s elections are scheduled for February 24-25 and considerable uncertainty lingers with respect to the outcome, particularly with the latest polls suggesting that Berlusconi is closing the gap. In addition, there is scope for Berlusconi’s PdL party to block the governing coalition’s laws in the upper house. Elsewhere, there are calls for Spanish PM Rajoy to resign after having been embroiled in a corruption scandal. This could potentially derail Spain’s reform programme and damage the stability we have seen in peripheral bond yields.

On the monetary policy front, ECB President Draghi has been very helpful to the euro, sending strong signals that he will not elect to cut interest rates once again, regardless of weak eurozone growth and record-high unemployment. Also propping up the euro has been Draghi’s refusal to express concern at the euro’s impressive rally to 15-month highs against the pound and US dollar. Euro bears will be watching this Thursday’s press conference very Draghi closely for signs that he is uncomfortable with the euro at current levels. We suspect they may be disappointed.

Sterling has depreciated by around 6.0% from where it started the year (marginally above €1.23). Amid the ongoing anti-sterling sentiment that is still simmering away, we don’t expect that this pair’s trough of €1.1470 will be as low as it goes. If Draghi sounds in confident mood on Thursday, we’d expect the downside to be tested once again in the coming weeks, with significant risks of a move down to €1.1364 (88p). However, we do expect this pair to bottom out soon and remain confident of a sterling recovery thereafter.

GBP/USD

Dollar flexes its muscles despite stalling US growth

The news out of the US economy has been typically mixed over recent weeks and there was no real change in stance from Ben Bernanke and the US Federal Reserve as a result. The fourth quarter US GDP figure for 2012 actually confirmed a surprise 0.1% contraction, rather than the modest 1.1% growth that was expected. In addition, the US unemployment rate jumped back up to 7.9%, which considering Bernanke’s obsession with bringing the jobless rate right down before ending QE3, was not good news for the US dollar.

The market has been correct not to panic at the US economy’s weakness at the end of last year, much of which can be put down to the effects of Hurricane Sandy. The Fed was clear that it was a case of growth pausing as opposed to it representing the beginning of another dip back into recession.

The GBP/USD pair’s sharp decline in the year to date has finally started to reflect the contrasting conditions and outlooks for the UK and US economies. Whilst the US has suffered some temporary weakness, 

underlying growth is still in decent shape and this will continue to be the case in 2013. The UK, by contrast, did not grow in 2012 and will struggle to eke out much growth in 2013.

An interesting theme over recent weeks has been the US dollar’s strong performance against currencies like the GBP, despite its extreme weakness against the EUR (EUR/USD climbed to a 15-month high only last week). We are already seeing concerns over the political situation in Spain and Italy spark doubts over how much higher EUR/USD can go. If we see the downward correction in EUR/USD that we continue to expect, then we expect GBP/USD to suffer as a result. Sterling is struggling with weak domestic news as it is, without major euro-dollar flows adding further pressure. This may well be delayed until later on in the year but it would be no real surprise if it came sooner. 

We may see GBP make another attempt above the $1.57 level in February but we expect that would represent an attractive level at which to sell. This should signal another move lower and potentially take this pair to fresh 6-month lows below the recently hit $1.5650 level.

GBP/EUR: €1.14

GBP/USD: $1.55

EUR/USD: $1.3650

2013 set to be another good year for the Norwegian Krone

The Norwegian krone was among the very top performing currencies in 2012 and the currency has started 2013 in similar style. The NOK has spent January making hefty gains against the USD and GBP, though has given away some ground to the EUR, which has rallied across the board in recent weeks.

The Norwegian economy certainly still looks set to warrant plenty of investment in 2013. With a budget surplus of 15% of GDP in 2012, the largest of any AAA nation, Norway is a shining example of fiscal discipline against a backdrop of soaring global debt levels. Norway’s debt is as safe from default as can be.

The country’s booming oil and gas sectors will continue to support Norwegian growth levels this year, while rising employment and wage growth will also contribute to progress. That said, the latest unemployment update from Norway showed a surprise rise to 3.5% but this is likely to be a mere blip. The Norwegian manufacturing sector has suffered as a result of waning external demand (from the eurozone) and a strong currency but rising investment in the oil sector will more than compensate for this. Norwegian GDP could be as high as 3.0% this year, which would surely be the strongest among the G10 economies.

In terms of the Norges Bank’s monetary policy, firm Norwegian growth over the past year has not translated into higher interest rates thanks to very subdued inflation levels and a strong currency. Norges Bank Governor Olsen has expressed concern over rising household debt levels and rising house prices and there have been clear suggestions that a hike to the current 1.50% interest rate is on the horizon; we are expecting a hike to 1.75% in May. 

We expect the NOK to outperform GBP, USD, SEK and most probably the EUR this year.

Richard Driver
Currency Analyst
Caxton FX

Caxton FX Weekly Round-Up: GBP, EUR, USD

There’s no let up for sterling after weak GDP number 

Friday’s UK GDP figure for the final quarter of 2012 came in towards the
bottom end of expectations, revealing a 0.3% contraction. Understandably,
the triple-dip headlines have been in full flow. It wasn’t all bad news for
sterling last week though; the MPC minutes indicated that the BoE is not
looking to respond to last quarter’s weak growth with more QE. However,
recent comments from incoming BoE Governor Mark Carney suggest he may
be willing to shake things up in the summer. In addition, data confirmed that
the UK labour market added to its remarkable record of making strides amid
wider domestic economic weakness.

The minutes and positive UK unemployment data gave GBP only a very brief
respite before taking another dive lower. Sterling gets a bit of a break from
bad UK news over the coming few sessions, with only UK manufacturing PMI
catching the eye on Friday morning.

The pound seems to have lost a significant amount of its safe-haven status in
the recent weeks, with the market losing confidence in the UK government’s
ability to steer us through this crisis. The loss of the UK’s triple-A credit rating
looks almost certain in the coming months. Cameron’s pledge to hold a
referendum on the UK’s EU membership in late 2017 is a concern but is
unlikely to be a major weight on GBP given that it is almost five years and a
UK general election away.

US dollar firm ahead of Fed meeting 

Putting to one side the dollar’s weakness against the euro (which itself is very
much in favour), the greenback is actually performing very well across the
board. This is clear from GBP/USD’s collapse to a 5-month low below $1.57.  
We are not expecting major changes within the US Federal Reserve’s
statement on Wednesday night. The market may be disappointed to see a
lack of improvement to the Fed’s projections on US growth and
unemployment. This is likely to keep any possible amendments to the Fed’s
QE3 operations well and truly postponed until the second half of 2013, which
may be a comfort.

Wednesday will most likely see the advance US GDP figure confirm that the
US economy slowed down drastically in the final quarter of 2012, largely due
to the damaging effects of Hurricane Sandy. A slowdown from 3.1% to 1.3%
quarterly growth is expected. As ever, it is extremely tricky to predict how the
US dollar will respond to domestic economic events; whether good data will
strengthen the dollar by bringing forward expectations of an end to QE3 or
whether it will boosts risk appetite enough to weaken the dollar.
Sentiment towards the euro remains very positive indeed; officials by and
large (including Draghi, importantly) remain content with the euro’s strength
and refuse to be involved in the ‘currency wars.’ Meanwhile growth data
from Germany has made an excellent start to the year, with business climate,
economic sentiment and PMI growth figures all fuelling euro gains.

End of week forecast
GBP / EUR 1.1630
GBP / USD  1.5650
EUR / USD 1.3500
GBP / AUD  1.4900
 
Sterling is trading down below €1.17 and we are not calling a bottom on this
pair just yet.  A move towards €1.1650 looks likely in the near-term. As noted
above, the pound continues to look vulnerable against the greenback, while
the EUR/USD looks set to make an attempt at $1.35.

Richard Driver
Currency Analyst
Caxton FX

Bank of Canada deals the loonie a blow

The Bank of Canada is ahead of almost every other developed nation central bank in terms of when it expects to normalise monetary policy (raise interest rates). The fact that it is even discussing it is your first clue, as conversations within central banks such as the Bank of England, Reserve Bank of Australia, the European Central Bank and the Riskbank are slanted towards rate cuts, not rate hikes. If it’s not rate cuts, then it’s more QE from the likes of the US Federal Reserve and the Bank of Japan, whose base rates are already at rock bottom levels.

Last year’s Bank of Canada rhetoric pointed towards a rate hike this year. However, the slowdown seen in the US at the end of 2012 has contributed to softer growth in its northern neighbour. Canadian growth has consistently surprised the BoC to the downside in the past year, particularly in the second half of 2012. Governor Carney (BoE-bound this summer) & Co yesterday indicated that the Canadian economy will not be up to full capacity until the second half of next year, which is a major delay compared to the previous ‘late 2013’ projection. Combined with subdued inflation and ongoing concerns over household imbalances, this has led the BoC to communicate that a rate hike is by no means imminent. It estimates a rate hike at the end of this year but our bet is that it will come a later than that.

The loonie has taken a hit as a result of the BoC’s change of position. GBP/CAD climbed by more than a cent and a half up to 1.5850, where it currently trades. Meanwhile CAD/USD dipped by a cent to a level just below parity, which represents a two-month low. This is a bit of a knock to the loonie but we do expect the currency to outperform GBP in the coming months, with another move down to 1.55 very much on the cards. 

Richard Driver

Currency Analyst

Caxton FX

Caxton FX Weekly Round-Up: UK GDP figure looms

Sterling continues to decline ahead of key UK GDP figure

We take no pleasure in reporting yet more bad news from the UK economy, which reported a 0.1% contraction in retail sales in December. There is unlikely to be much of a let-up for the pound, with Wednesday’s UK labour market not expected to provide much inspiration. Also released on Wednesday are the MPC minutes from the rate-setting committee’s meeting a fortnight ago. We are expecting David Miles to remain the lone dove in the MPC by voting for more QE. The other eight voters are likely to be convinced to keep their powder dry by persistently high inflation and further evidence of improved credit conditions due to the Funding for Lending Scheme. Weak growth figures may have convinced one or two to vote for QE however.

Sterling will struggle to benefit much from the minutes, with Friday’s UK GDP figure for Q4 2012 likely to be very disappointing indeed. The consensus market forecast rests at -0.2% but we are inclined to believe that a more significant contraction will be confirmed, with a -0.4% showing by no means beyond the realms of possibility. More bad news is in store for the pound in the short-term then. However, with sentiment so weak towards the UK economy now, we increasingly have to question just how much more damage bad data can do to the pound.

Indeed, broadly weak government borrowing and CBI industrial order expectations data have not left a mark on sterling today. As a result of the former figure, speculation has inevitably been boosted that the rating agencies are circling the UK’s triple-A credit rating. We must admit, a downgrade will surely be dealt in the coming weeks. What is not certain is how much this would affect the pound; the UK has never suffered a rating downgrade and as such we are in uncharted territory. We know from the example of the US downgrade last summer that the dollar emerged unscathed, but this may not necessarily be true of the pound.

News from Europe generally positive though concerns still linger

We have seen a very impressive German economic sentiment survey emerge today, which has given the euro further support. However, the accompanying press release points to only moderate economic growth from Germany in 2013 and we certainly don’t have high hopes for much more than 0.3% GDP growth as waning demand from eurozone partners continues to bite Germany’s exporters.

Thursday morning brings the monthly installment of eurozone PMI growth figures. Markit - the compilers of the PMI surveys - has claimed that the “worst is over” with respect to eurozone growth and expectations are for modest improvements across the board, though the indicators remain deep in recession territory.

End of week forecast

GBP / EUR	1.1800
GBP / USD	1.5770
EUR / USD	1.3400
GBP / AUD	1.4900

Sterling has regained the €1.19 level this morning but we doubt the market is done with the downside yet. The 85p EUR/GBP level remains very much in sight, which amounts to €1.1765.

Sterling is looking equally vulnerable against the US dollar, having fallen through some key levels. $1.5770 is the next big support level for GBP/USD. Arguably, the best sterling can hope for is that the market sees fit to take profit on betting against it of late, fearful of an upside surprise within Friday’s UK GDP figure.

Richard Driver

Currency Analyst

Caxton FX