Carney clarifies BoE interest rate outlook

In Mark Carney’s first policy speech, he put to bed worries about the MPC’s willingness to ensure the interest rate remains at 0.5%. The outlook on the UK economy has been looking increasingly positive, resulting in speculation that the unemployment rate will fall to 7% faster than the central bank is predicting and consequently push interest rates higher. In his speech to business leaders today, Carney said if interest rates tighten due to rising expectations “and the recovery seems to be falling short of the strong recovery we growth we need, we will consider carefully whether, and how best, to stimulate the recovery further.” He also reiterated that “Our forward guidance was clear that, although we would not reduce the stimulus until the recovery is secure, we would if necessary provide more”.

BoE Governor Carney’s objective has been achieved. Confidence that the central bank will aim to keep the interest rates low has been restored. Misinterpretation of earlier forward guidance comments gave the perception that the future of interest rates was solely dependent upon the unemployment rate. In his speech today, the Governor also cleared up that confusion and said “We are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.” He noted that “Guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they will stay low depends on the progress of the economy.” This highlighted that the bank has a potential strategy in place in case rate pressure continues. Using extra stimulus to support growth shows the central bank is not willing to compromise the strength of the recovery, and achieving healthy growth is a huge priority for the central bank as well as price stability.

As for convincing the markets that the committee has a plan in place, the Governor’s speech looks to have done the job. If price pressure unexpectedly gets out of hand however, the MPC may have to rethink their back up move of increasing stimulus.

Sasha Nugent,
Currency Analyst
Caxton FX

GBP/USD remains vulnerable ahead of QE3 tapering

Recently the UK has been experiencing an on-going stream of positive data reflecting progress on the outlook for the economy. However in recent weeks the GBP has failed to capitalise on the increased optimism provided by positive data.

The release of UK Services PMI data shocked the market by exceeding expectations at 60.2 from 56.9 previously. Furthermore, industrial and manufacturing data were also positive with 1.1%m/m and 1.9%m/m growth respectively. Despite all of this good news, GBP has struggled to strengthen against its major counterparts.

The market had been anticipating the BoE inflation Report outlining forward guidance on the direction of interest rates. The release of the report as well as BoE Governor Mark Carney’s comments was broadly in line with expectations, with the MPC accepting that the UK recovery is underway but confirming market concerns that the recovery is still weak by historical standards. Most importantly, Carney expressed that the MPC intends to “maintain the current highly stimulative stance of monetary policy” until employment data improves, similar to forward guidance provided by the Fed. So low rates are here to stay for a long time to come, but we knew this.

On the release of the report and the accompanying statement last week, the pound initially weakened, but soon rebounded sharply against the USD closing at 1.5489 from opening at 1.5349 on Wednesday. It seems like this was exactly what the market was waiting for to provide the GBP with that extra strength it deserved after recent positive economic signals. The release of some strong UK trade data presented the opportunity for the pound to post its biggest weekly gain in a month as the trade deficit narrowed.

The dollar started August on the back foot thanks to a disappointing non-farm payroll figure but figures since then have been rather more encouraging. ISM manufacturing data exceeded expectations at 56.0 and the trade balance figures were positive with the trade deficit narrowing to $34.2bn, supporting US GDP growth. This set of releases definitely provides evidence that the US economy is in recovery mode; however the lack of detail on the timing of possible QE3 tapering is putting pressure on the USD.

The market continues to wait for an indication of when QE3 tapering will take place and comments from Fed officials point to the need for better employment figures. Last week, the release of unemployment claims was positive, with the average number of jobless claims declining to 335,500(the lowest figure since 2007), thus providing another boost to the view of the US recovery. This has gone some way to reduce concerns after the July non-farm figure.

Bearing in mind both the UK and US have been releasing positive data, the outlook for GBP/USD is as uncertain as ever. We now know that the BoE has linked its interest rate outlook to employment, and this corresponds to Fed statements claiming that QE3 tapering is dependent upon labour market improvements.

There is an argument that the gains for the pound after Carney’s comments were premature, and should have been dependent next week’s employment data. The market didn’t seem to cut the US any slack when it came to the disappointing non-farm payroll figure. In fact, the doubt in the US labour market was reduced when the jobless claims figure was released yet it still hasn’t resulted in the USD gaining much ground. This makes us think the USD dollar has some catching up to do with respect to recent figures. While the likelihood of QE3 tapering is increasing in the US, the UK is rather highlighting its “highly stimulative stance”. If the market is looking for some indication of future QE prospects then the higher possibility of further stimulus in the UK should be something to worry about. This slight divergence in UK and US monetary policy should favour the USD in the months ahead.

Sasha Nugent,
Currency Analyst
Caxton FX

July 2013 Monthly Report: Mark Carney makes an instant impression

In his recent Government Spending Review, Chancellor George Osborne described the UK economy as making the transition from “rescue to recovery.” UK economic data over the past month has certainly been very supportive of this proposition, building on signs of a robust start to Q2. The June PMI figures were very robust indeed and July’s followed suit, with the UK services sector gauge surging to a two-year high. This has bolstered our confidence that we will see GBP/EUR higher later this year but it is quite clear from the recent Monetary Policy Committee statement that the BoE’s will take a little more convincing as to the strength of the recovery. This is the major factor weighing on sterling’s upside potential at present.

As far as the eurozone is concerned, there have been some bright spots economically. Survey data in recent weeks has pointed to the start of a recovery. The eurozone economy is still contracting and there is still not much to cheer about at this stage but the pace of contraction is slowing and hopes of a recovery in the second half of 2013 are now very realistic. However, economic improvements have been offset by the re-emergence of debt crisis fault lines. Greece is back in the headlines for all the wrong reasons, while the political situation in Portugal in particular has pushed up bond yields and highlighted the euro’s ongoing vulnerability to political instability.

The dollar has endured a rocky time of it in recent weeks but the clarification that Ben Bernanke gave at the last US Federal Reserve meeting looks to have been a key moment. For a long time now the market has been second-guessing the Fed’s position on tapering its QE3 programme and on June 19, Bernanke communicated in no uncertain terms that they are on course to begin tapering later this year. Underpinning all of this, US data was broadly encouraging through June and things have started well this month with an excellent monthly employment update. Accordingly, we remain comfortable with our bullish USD position.

GBP/EUR
Downside risks prominent in light of BoE concerns

UK growth data remains on an uptrend but we, like many others, have been continuously frustrated to see the pound underperform its economic fundamentals on the exchange rates. This is particularly the case with respect to the euro.

Taking a look at UK conditions then, we have seen improvements in almost all areas of the economy. Judging by the monthly PMI surveys, the UK manufacturing and construction sectors have recovered by spending the past two months in expansion territory, while the dominant UK services sector continues to kick on impressively. UK services sector growth actually hit more than a two-year high in June.

Confidence in the private sector really is picking up and there are other areas to be cheery about too. Data revealed that UK retail sales for May surged by 2.1%, while we saw yet more improvement within the UK labour market. Meanwhile, the latest Bank of England credit report pointed to improvements in lending in Q2 to both individuals and corporate entities.

What has been slightly more disappointing on the growth front has been the news that on an annual basis, GDP has been downgraded from 0.6% to 0.3%. Nonetheless, Q1’s 0.3% GDP figure was confirmed and looking at the present and future (which is far more relevant than what went on last year), activity is looking up. Glancing ahead to the July 25 preliminary Q2 UK GDP figure, we are expecting at least a 0.5% showing, with a considerable chance of an overshoot. Given the sort of GDP figures coming out of the eurozone, we feel justified with our calls for a higher GBP/EUR rate, though we will seemingly have to be very patient.

So what is the Bank of England’s take on UK conditions? Carney didn’t take long to cause a stir, getting started by releasing a statement which managed market expectations surrounding monetary policy. Carney has told us that interest rates will remain lower for longer (probably unchanged at record lows into 2016) and the market has interpreted an increased chance of further quantitative easing down the line. The MPC statement was also distinctly cautious despite the upturn in recent UK growth data, reminding us that growth “remains weak by historical standards.” An MPC statement in itself is actually very unusual; the last one was released in March 2009, so the market is clearly concerned that Carney is planning an aggressive shake-up on the monetary policy front. Based on a steadily improving economic performance and brightened outlook, we feel that the Bank of England will not elect to top up its asset purchase facility (quantitative easing) next month but we cannot rule it out later this year given Mark Carney’s aggressive entrance. Concerns in this regard will weigh on GBP.

Euro typically robust despite political concerns
While the UK recovery makes strides, the eurozone recession also appears to be stabilising. Looking at the eurozone PMI figures as a whole, a 15-month high was hit. This is encouraging stuff, though the PMI gauges do still remain in contraction territory. With this in mind, we do not expect the European Central Bank to cut interest rates again soon, particularly in light of the recent upturn in eurozone price pressures. Draghi did however remind us in his recent press conference that another rate cut is still very much on the table. In terms of other monetary policy measures, talk of negative deposit rates is probably aimed at easing the pressures being felt in the peripheral bond markets. Again, we would be surprised to see them implemented soon.

Events in Greece are definitely ramping up debt crisis nerves – the last thing the market wants to see is a return to the brink for that troubled country. Greece is currently grappling with officials over the release of the next €8.1bn bailout tranche, regarding which eurozone finance ministers will be meeting on Monday July 8.

Greece needs to show that it has made sufficient progress on reforming it public sector and it looks as though a deal will be struck with IMF to avoid the body withdrawing its support for the bailout plan. There is real sense that Greece is not doing enough and developments could well weigh on the euro in the short-term.

Portugal is the other dominant concern as far as the euro is concerned at present; the political situation there has been in turmoil after the recent resignation of the finance minister, followed by the leader of the junior coalition partner/foreign minister. Despite recent news that a deal has been struck to keep the governing coalition intact, there remains a risk that the government could fall apart and early elections be called, which would raise uncertainties surrounding Portugal’s commitments to its bailout plans. The political climate is likely to remain highly fragile in the weeks and months ahead. So long as unemployment soars, political risks are likely to be the centrepiece of the debt crisis moving forward, throughout the eurozone.

After this week’s major GBP/EUR downswing, which saw fresh 3 ½ month lows posted below €1.16, we can no longer ignore the downside risks that this pair is likely to face over the coming weeks. We certainly don’t believe the fundamentals justify this sort of GBP/EUR weakness but momentum counts for quite a lot in FX. We do see this pair recovering later on in the year but for now, levels below €1.16 look set to dominate.

GBP/USD

Confirmation of QE3 tapering frees up dollar rally

GBP/USD’s rise in June up to four-month highs in the $1.5750 area was, at least in part, a fair reflection of this improved UK growth performance and brighter outlook (though it would more accurately be attributed to doubts over QE3 tapering). However, the rate has fallen every bit as far and fast as it climbed and we don’t expect to see those levels again given the intentions stated by the Fed last month.

There is no shortage of dovish dissent from within the US Federal Reserve but Chairman Ben Bernanke has clearly been sufficiently encouraged by US growth data to communicate to the market that an exit plan for QE3 is loosely in place and that they are on schedule to taper it off in H2 of this year. This did not come as a surprise to us but the verbalisation of these intentions from the man himself appears to have been a seminal moment. Stocks, commodities and other riskier assets suffered and funds came flooding back in the greenback.

We retain a broadly positive outlook for the US economy across the second half of the year. The eurozone recession does appear to be stabilising now and is likely continue to do so but improvements will be very slow indeed and the bloc is streets behind its US counterpart, which supports are calls for a lower EUR/USD pair. EUR/USD is still a fair way off its year-to-date lows of $1.2745 and we fully expect this to be targeted in the weeks ahead. GBP/USD will be hard-pushed to post anything but further losses below $1.50 if this scenario plays out.

A stronger US economy, as shown by the recent strong US non-farm payroll figure, should result in the Fed tapering QE3 and in doing so support the dollar in the coming months. We do feel the lingering concerns over further BoE QE are slightly overstated but this is unlikely to be sufficient for sterling to avoid another decline vis-a-vis the dollar.

On top of monetary policy and growth drivers, we are seeing a considerable slowdown in Chinese growth, which as well as weighing on commodity prices and confidence in the global recovery, is seeing cash flood out of the emerging markets. This again is a safe-haven, dollar-positive theme.

Exchanging currency

With some crucial support levels having been taken out, GBP/USD looks set to head even lower. Targets towards $1.40 by the end of the year remain very realistic.

GBP/EUR: €1.1550
GBP/USD: $1.47
EUR/USD: $1.2725

Richard Driver
Foreign Exchange Analyst
Caxton FX

• This post has been prepared by Caxton FX Ltd for information purposes only
• If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.

 

June Currency Report

June Currency Report

JUNE 2013 Currency Report:
UK outlook improves but sterling still can’t fully capitalise     
Whilst sterling has enjoyed itself against commodity currencies like the AUD, NZD and ZAR, it has come under periods of real pressure against majors like the euro and the US dollar. Sterling’s poor performance has not been fully justified in fundamental economic terms, though we can understand why the market’s faith has been dented a little. The market may have been overexcited by the UK economy’s performance in the first quarter (+0.3% GDP) and we have been dealt a few reality checks of late in terms of economic figures. Amid a sharp decline in UK inflation and a lack of change in the MPC voting pattern on QE, sterling has been slapped with fresh waves of speculation that the Bank of England will do further quantitative easing in the months ahead. With Sir Mervyn King heading towards the exit door in the next few weeks, a change to the man at the head of the Bank of England also complicates matters for sterling significantly.

As far as the US dollar is concerned, shifts in speculation as to the US Federal Reserve’s QE3 programme continue to dominate price movement. There really is no other issue that reverberates throughout the financial markets like the QE3 issue and the FX markets are certainly no exception. US economic developments and comments from Fed speakers have ratcheted up the speculation, though there was more than a hint of over-hype about market fears in May of an imminent exit of QE3. The dollar-weakness we have seen in the past few sessions may be a reflection of a market coming to its senses.

Eurozone data showed some brighter spots in May. Q1 GDP figures may have come in significantly softer than expected but Germany is seemingly shaking off some early-year weakness and looks to be stepping up output at the start of Q2. Spain is also stabilising. Tensions with respect to the debt crisis remain remarkably subdued and economic data has taken on the main significance. The euro was unperturbed by the ECB’s decision to cut interest rates and we have even seen a welcome shift in focus from the European Commission towards growth promotion and easing-up on austerity demands. We remain bearish on the euro on a medium and long-term view, but June could be a strong month for the single currency.

GBP/EUR        
UK growth kicks on
Sterling has been underperforming for a fortnight now, erasing gains made at the start of the month as a result of some positive Q1 and early-Q2 UK growth figures. April’s manufacturing, construction and services PMI figures all came in above expectation, with the latter showing some particularly encouraging growth. The same has been true of May PMI figures, with the UK services sector coming in at a 14-month high. Provided momentum is carried into June, a Q2 GDP figure of 0.5% is very much on the cards.

Along with some more solid UK unemployment data, the UK outlook really has improved. This hasn’t been lost on Mervyn King and the BoE, the May Quarterly Inflation Report was noticeably upbeat about the UK recovery and Q2 growth in particular. Regardless, sterling’s post-GDP honeymoon was short-lived. But why?

It has by no means been all good news from the UK economy. The latest public borrowing update disappointed, as did the trade balance. The most concerning area has doubtless been the high street. Retail sales data confirmed that April was another shocking month for spending on the high street, with households continuously constrained by alarmingly weak wage growth.

The Carney Factor remains a concern
Another key point of weakness for sterling has been in the area of QE speculation. UK inflation dipped to a seven-month low of 2.4% in May and whilst this remains above the official target, this certainly gives the BoE much greater scope to ease monetary policy via QE. There were plenty of raised eyebrows (us included) with respect to the fact that the minutes for the MPC’s May meeting revealed that despite the brighter UK outlook, three members continued to vote in favour of more QE. We thought the increasingly bullish sounding Mervyn King would at least have changed his vote.
Some softer UK growth figures and the sharp dip in UK inflation would have left sterling vulnerable to more QE regardless but the fact that the market is staring down the barrel of a new BoE Governor has only intensified QE speculation. Mark Carney takes over from Sir Mervyn King in July and some commentators are expecting a monetary policy shake-up, which may or may not involve more QE. There is plenty of scope for more QE if he chooses to make an early impression and this uncertainty has been a major driver of sterling’s underperformance lately and will continue to weigh over the next few weeks.

Green shoots of recovery in the eurozone?
Similar to the UK economy, there has been room for a little optimism with respect to the eurozone. The key development has been the recent upturn in German manufacturing and industrial production data. However, there have been other good news areas; the PMI updates out of Spain and Italy have beaten expectations and there have been some significant improvements in the Spanish labour market over the past couple of months. There is an extremely long way to go and this could well prove premature but some indications have emerged that the eurozone recession is beginning to stabilise. 
The ECB cut interest rates last month to a fresh record low of 0.50% and in the subsequent press conference, ECB President Draghi assured the market that he “stands ready to act” if conditions warrant it, be that in the form of another interest rate cut or a move towards negative deposit rates. The growth figures that have emerged since that comment suggest the need to act has receded. One of the key motivations for the rate cut in May was concerns that economic weakness in the eurozone periphery was spreading to the core (Germany), a theme which looks to have abated for the time being.  Accordingly, we expect Draghi to focus on boosting SME loans at the monthly meeting this Thursday (June 6), rather than cutting rates.  

There is room for further euro optimism this month. On June 11-12, there appears to be a strong chance (according to analysis among the legal profession) that the German Constitutional Court will refer the case of German participation in bailout schemes to the European Court of Justice. Draghi’s bond-buying plan is part of this and it has been crucial in underpinning confidence in the survival of the euro. Referral of the case to the ECJ would appear to be a far safer option in terms of having objections to the bond-buying plan thrown out. This should help to continue keeping the lid on peripheral bond yields for the foreseeable.

We see the euro as pretty overvalued at present. Even when eurozone data outperforms expectations, UK data is still streaks ahead in general. As the UK recovery takes shape, this should be reflected in higher GBP/EUR levels in the second half of the year. However, the softer tone of the USD, the cautious optimism surround the eurozone recovery, and the concerns over BoE monetary policy could be enough to keep GBP/EUR pinned down in the weeks ahead.  A dip back down to €1.1630 is perfectly plausible but losses beyond this level should be contained. Broadly speaking, we are looking for more sideways trading in this pair in June, in and around the €1.17-1.18 area.

GBP/USD        
Market on red alert vis-a-vis QE3
The USD was rampant for much of May, helped by improvements in US data which have fanned the debate surrounding tapering off QE3. While the US Federal Reserve said in May that it was willing to increase QE3 if needs be, we still think its next move will be to taper things off. So too do most other market players, not least due to an upturn in some key US figures in recent weeks. The latest monthly jobs report was encouraging and improvements in consumer sentiment were particularly impressive. We are expecting another monthly jobs report this Friday (June7). The result has been some increasingly hawkish language from members of the US Federal Reserve.  

Still, there remains plenty of reason for caution from Fed doves like Bernanke. This week’s US manufacturing PMI update was the weakest in almost four years and such figures give the Fed ample justification for continuing with QE3 for at least the next few months. US inflation remains very subdued as well, which isn’t conducive to QE3 tapering in the near-term. Expectations of imminent QE3 tapering have been pared back over the past week or so and it’s certainly true that the Fed will be in no hurry. We do think that the move will come about around September/October time.

This should ensure a strong conclusion to 2013 for the USD. US data, while patchy, continues to outperform indicators from the eurozone and the UK on the whole. We see significantly greater risks of another monetary easing move from the ECB and the BoE than we do from the Fed.

A little more room overhead before another downturn
Sterling has benefited from decent support at the $1.50 level and there is some scope for further upward momentum. The recent UK services PMI figure (June 5) has brightened the UK outlook further and a strong EUR/USD pair above $1.30 is also lending plenty of support.  A rise to the $1.55 area is feasible in the near-term. However, nerves over QE from incoming BoE Governor Carney will likely dampen any bounce back up close towards the $1.60 level. We remain content with the analysis that this latest bout of USD-weakness is a short-term correction rather than the start of a GBP/USD recovery.  The trends in respective economic data and central bank rhetoric from the US and the UK support a GBP/USD move lower in the longer-term. In the meantime, a move to $1.55 is feasible before fresh selling pressure mounts.

Richard Driver
Foreign Exchange Analyst
Caxton FX

• This post has been prepared by Caxton FX Ltd for information purposes only
• If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.

May EUR/SEK Report: Euro to pay the price for weak eurozone fundamentals

Neither of these two currencies is particularly high up the market’s wish list at present. The eurozone is languishing in recession and the ECB is easing monetary policy, while Sweden is dealing with an economic soft-patch and staring down the barrel of an interest rate cut of its own. The euro has held up remarkably well amid robust reserve manager interest but we do see this giving way to a fresh bout of euro weakness in the second half of this year.

A decline in the Swedish unemployment rate has been confirmed this week. This was in line with expectations and whilst we don’t expect major improvements in this area, we are confident that the labour market is stabilising after the weakness that has been such a feature of the past six months or so. In addition, data has evidenced a strong upward trend in consumer confidence, which is at its highest level since August 2012. This has translated into better domestic consumption, as shown by an impressive 1.6% rise in retail sales in Q1.

However on the industrial side, conditions remain highly uncertain. Confidence in the Swedish manufacturing sector is not quite so buoyant and figures have been mixed. We have seen an excellent 0.8% industrial production figure for March, backed up by an extremely impressive new orders figure of 10.5%. However, April’s manufacturing PMI, which pointed to contraction, remains a source of concern. The underlying trend in manufacturing is tilted slightly upwards but with eurozone growth failing, clearly conditions are highly vulnerable. In addition, a seemingly soft start to Q2 contributed to a disappointing budget deficit of 0.8bn in April.

In terms of Swedish monetary policy, the inflation outlook will be the key driver and the SEK will be highly sensitive to developments in this area. The news has been SEK-negative on this front; Sweden’s CPI figure for April saw a much larger decline than expected, with the annual rate falling from 0.9% to 0.5%. This figure undershot not only market expectations but the Riksbank’s own projections, which could well convince the bank to cut interest rates to 0.75% at its next meeting in July. There will be major focus on May’s inflation data next month, but in light of the strong SEK, soft-ish Swedish growth and high unemployment, the case for a rate cut is compelling and the Riksbank will probably bow to pressure in July. This poses a significant risk to the SEK’s performance this summer.

On the issue of the strength of the SEK, comments from Swedish officials have weighed somewhat on the currency as well. Riskbank Deputy Wickman-Parak confirmed that the central bank is monitoring developments closely but importantly, she did note that alarm bells are not ringing at current exchange rate levels. Finance Minister Borg also chimed in, “We are not in a situation today where the SEK is a serious problem, but potentially it’s a problem.” Market concerns in this regard will likely limit SEK upside.

As far as the euro is concerned, it’s been relatively quiet on the debt crisis front. The way in which the Cyprus crisis was contained has strengthened market confidence in the future of the euro and represents another indicator that the worst of the crisis could be behind us. A look at Spanish and Italian 10-years bond yields, which at 4.0% are at their lowest levels since the end of 2010, tells you how calm market nerves are with respect the debt crisis. While Italy may have established a much-needed government, political instability certainly represents a key concern. Public discontent with eurozone austerity is building constantly and this looks set to be the central threat to the euro moving forward.

Growth data from the eurozone has remained reliably poor in recent months. The Q1 GDP figures revealed a double-dip French recession, extremely weak German growth (0.1%) and yet another quarter of negative growth for the eurozone as a whole (-0.2%). The gravity of this depression hasn’t been lost on the ECB, which at last cut interest rates to 0.50% at its last meeting. More worryingly for those long of the euro is the declared openness of the ECB to the policy of negative deposit rates. If this option is utilised, the euro really will suffer.

This week’s May PMI figures from the eurozone are expected to show a degree of stabilisation but we wouldn’t be at all surprised to see them disappoint once again. On the bright side, Germany stands a decent chance of gaining some momentum in Q2, based on some impressive industrial order and output figures in March. However, broadly speaking we remain very bearish on eurozone growth and expect further ECB monetary easing, or speculation in that regard, to weigh on the euro in the months ahead.

Middle and Far Eastern reserve managers continue to rotate out of dollars and into euros but this theme is waning somewhat. We hold a very firm outlook for the USD in 2013 and if we are correct, as we have been so far this year, there is a high probability that this will result in a weaker euro in H2 2013. The 8.50-8.65 range has held for the past month but we prefer the lower end of this range, with potential upside considered quite limited. Range-trading around the 8.50 level looks a decent bet for the next 2-3 months before paying another visit to the 8.30-8.35 trough that was established at the end of Q1. Neither currencies look attractive in the current environment but we believe the euro’s downside risks are greater.

Richard Driver
Foreign Exchange Analyst

Caxton FX

• This post has been prepared by Caxton FX Ltd for information purposes only
• If you would like more information or would like to make a money transfer, get in touch info@caxtonfx.com.

Weekly Round-Up: USD on the front foot

Less dovish MPC minutes should follow upbeat Inflation Report

Last week’s Quarterly Inflation Report was decidedly positive, pointing to an earlier than previously expected return to the 2.0% inflation target on a two year horizon. The outlook for growth was also brighter, with near-term Q2 projections of 0.5%. With UK unemployment data impressing once again last week, there is plenty of positives for the BoE to focus on and this has been reflected within the latest speeches from MPC policymakers.

We expect this Wednesday’s MPC minutes to reveal a less dovish shift in the voting pattern away from QE, with perhaps Governor King the most likely candidate to swing his vote. With King stepping down from his position in just over a month’s time, an abandoned QE vote from him is unlikely to be a major source of strength for the pound. However, we do expect growing optimism over UK growth to be evidenced in the minutes and this should bolster market confidence that any plans for QE have been shelved for the foreseeable future.

UK data this week should confirm a drop in domestic inflation, which can be negative for a currency but is unlikely to be for sterling this week. There may be more room for manouvre on the inflation front (in terms of more QE) but the uptrend in growth should trump this. Not much is expected from Wednesday’s retail sales figure and on Thursday we should see the UK’s Q1 GDP figure confirmed at 0.3%. This should make the BoE’s recent 2013 GDP forecast of 1.0% uncharacteristically feasible.

All eyes on Bernanke and Fed minutes
Ben Bernanke testifies on Wednesday and his comments will be put under the microscope as the market continues its constant evaluation of the future of US monetary policy. Most of the talk out of the Fed last week was of the hawkish, anti-QE3 persuasion and this got the market thinking the Fed is edging towards tapering off QE3. However, Bernanke has time and again put the dampeners on such speculation and we suspect the same could be true again on Wednesday. There remains plenty of reason for caution, as US growth figures still lack consistency. Bernanke could well take some of the sting out of the dollar’s recent rally with more “wait and see” talk, but there is a good chance that talk of QE3 tapering within the Fed minutes could have the final say by spooking investors and giving the dollar another lift.

Eurozone growth disappoints as PMIs come into view
Last week’s eurozone GDP figures for the first quarter were reliably concerning, with France confirming an double-dip recession and German growth significantly undershooting. April’s monthly PMI growth figures will be released on Thursday morning and while a minor lift is expected, these updates invariably highlight the weak state of eurozone growth and more often than not disappoint. The euro decline that has characterised the past few weeks (albeit losses against the pound have been limited) looks set to be resumed before too long.

End of week forecast
GBP / EUR   1.1875
GBP / USD  1.5175
EUR / USD 1.2780
GBP / AUD 1.55

Sterling/euro has started the week very slowly with much of the eurozone on bank holiday. We remain comfortable with higher targets than the current price of €1.1835 but we are resigned to having to be patient for sterling gains. GBP/USD remains vulnerable against the dollar, which has been a top performer in recent sessions. Any sterling rallies will likely be sold against the dollar. As for EUR/USD, the year-to-date low around $1.2750 still looks set to be breached on the downside, perhaps by the end of this month.

Richard Driver
Caxton FX

Caxton FX Weekly Report: GBP in demand after GDP surprise

GBP on the up after firmer UK GDP figure

Last week brought the relieving news that the UK economy avoided another quarterly negative growth figure and therefore a dip back into technical recession. Not only this, the 0.3% showing was much better than 0.1% consensus forecasts. The dominant and usually reliable UK services sector drove this Q1 growth, while the manufacturing and construction sectors remained under pressure.

Growth in itself is positive for sterling, given the uncertainty surrounding the UK economy. However, sterling is also benefiting as the market prices out the expectation of more QE being announced at next Thursday’s MPC meeting. The Funding for Lending Scheme has been extended to January 2015 and greater emphasis has been placed on increasing lending to small businesses. This sort of monetary activism, combined with the GDP figure, will probably maintain a majority in favour of standing still on QE this month.

MPC member McCafferty reminded us yesterday that the UK faces a slow and difficult recovery but his cautiously optimistic tone is likely to be fairly typical among the committee.  The week ahead brings the PMI figures for the month of April and we are expecting modest improvements within all three of the UK manufacturing, construction and services sectors, which should bolster the pound’s growing demand in the coming sessions.

ECB to cut interest rates this week

ECB interest rate policy is the key topic in the FX markets at present. Last week’s German data looks likely to be the straw that broke the camel’s back as far as an ECB rate cut is concerned. Germany insists it doesn’t need or want a rate cut but the ECB must be seen to take action in the face of the eurozone’s deepening recession. We believe the rate will be reduced from 0.75% to 0.50%.

Some market players seem to have used the ECB rate cut story as an excuse to buy the euro this week, on the positive implications it might have for eurozone growth. There is a chance this could be the response on Thursday but we are still siding with the probability that a rate cut will be negative for the single currency in the short and long term.

Any near-term dollar rebound relies on a firmer US jobs report

This Friday’s US non-farm employment change will be a key driver for the US dollar over the next few weeks. It will shed some light over whether the March jobs report was a temporary blip or the start of an extended period of labour market weakness. We are expecting Friday’s figure to bounce back, which could well lend the greenback some support.

We remain confident that the soft finish to Q1, as evidenced by last week’s lower than expected US GDP figure (2.5% q/q), will prove temporary and that the dollar will return to strength in Q2. On balance, we don’t actually expect any major changes on monetary policy front from the Fed tomorrow.

End of week forecast

GBP / EUR	1.1950
GBP / USD	1.55
EUR / USD	1.2970
GBP / AUD	1.50

Having recently posted three-month highs of €1.19, GBP/EUR is trading half a cent lower this afternoon. The outlook remains positive in light of the improved UK economic picture and we expect a climb back above €1.20 in the weeks ahead. Sterling’s rally against the greenback may have a little further to go from the current $1.55 level, though we do expect it to top out soon. Looking at the big picture, the current price represents a decent level at which to buy USD. 

Weekly Analysis: UK to avoid Triple-Dip

UK triple-dip to be avoided but MPC doves could get their wish

The long-awaited UK GDP figure for Q1 will be released at 09:30 on Thursday morning and we are in line with consensus in predicting a meager 0.1% showing. Expansion in the UK services sector is likely to have bailed the wider economy out once again. A 0.1% showing would clearly be enough to avoid a triple-dip recession and should spare sterling a knee-jerk sell-off. A negative figure cannot, however, be discounted and we can expect a major sterling slide if this were revealed.

However, a 0.1% figure is unlikely to be enough to trigger a sterling rally ahead of what could be a very interesting May MPC meeting. Comments from one or two MPC members in the past fortnight have highlighted the scope for a voting swing in favour of QE in May and the BoE does have a habit of making important announcements in Inflation Report months (May being such a month). We can’t discount the argument that the majority of MPC members will prefer to wait for the incoming BoE Governor Mark Carney before committing to more easing, but we do see a marginally greater chance that the doves will have their wishes granted next month.

Eurozone PMIs set to disappoint once again

On the eurozone front, the major news starts flowing in early tomorrow morning. There is likely to be heightened sensitivity towards tomorrow’s figures given the indications from the ECB this month that they are open to an interest rate cut. On the whole, we expect tomorrow’s PMI updates from France, Germany and the eurozone to point to a deepening recession, with events in Cyprus likely to have weighed on business confidence.

As ever, the Asian sovereign reserve managers continue to buy the euro on dips. We see this as a factor which will slow the euro’s downtrend rather than sustaining the sort of rallies that characterized January’s move above $1.35.

US GDP to rebound strongly  

There has been plenty of coverage of the soft patch that the US economy is currently enduring and there is no doubt that bets that the Fed will wind down QE3 imminently are receding. Only today has US housing data disappointed, whilst last week saw manufacturing data undershoot expectations. However, the news from Q1 as a whole should be distinctly positive, revealing an annualized pace of growth of around 3.0%, well above Q4 2012’s 0.4% pace of growth.

The big picture focus in the US remains squarely on the labour market and we will have to wait until next Friday for the next major announcement in that regard. With Chinese, eurozone and US growth figures disappointing of late, global investor sentiment has turned rather downbeat. European and US stock indices are posting losses, which has seen the dollar bounce back a little. The except here of course is sentiment in the Asian markets, which is still being propped up by the Bank of Japan’s recent expansion of its QE operations.  

End of week forecast

GBP / EUR	1.1650
GBP / USD	1.52
EUR / USD	1.3050
GBP / AUD	1.4925

Sterling has stabilized since last Friday’s AAA rating downgrade from Fitch’s. However, we still think nerves over Thursday’s GDP figure could kick in over the next couple of sessions. These nerves are most likely to leave its mark on the GBP/USD pair, with the euro vulnerable to tomorrow’s PMI figures. EUR/USD is keeping its head above $1.30 for the time being, but a move below this big figure is “when” not “if” as far as we are concerned. 

NZD: Top of the Class

The New Zealand dollar has made an excellent start to 2013 – it was the top performing G10 currency during the first quarter. Global risk appetite has been remarkably buoyant this year and surging dairy prices have also reflected well on the NZD. Along with resilient market sentiment, domestic economic performance has been a key driver of the NZD’s strength over recent months, in an otherwise low growth global environment. The GDP number for Q4 2012 came in at an impressive 1.5% q/q, which was the fastest quarterly pace of growth in three years, well above expectations of 0.9% and this put 2012 growth at an impressive 2.1%.

As the recovery from the Christchurch earthquake continues, NZ manufacturing maintained a robust pace of expansion throughout Q1, particularly by global standards. The droughts that have troubled the country’s rural areas in recent months look set to impact GDP negatively to some extent but we still envisage growth of up to 3.0% in 2013, which will certainly outpace most developed economies.

Importantly, New Zealand’s house price index reached a new record high in March, which is a major factor that could drive the Reserve Bank of New Zealand to raise its already attractive 2.50% interest rate later this year. RBNZ Governor Wheeler himself has told us that if house prices stay where they are, then his hand may be forced on a rate hike, despite below-target NZ inflation. As things stand, the RBNZ is right at the front of the queue with respect to G10 central bank first-movers and we are looking at a hike around the turn of the year. The RBNZ and the NZ government’s frustrations with the strength of the NZD should of course be monitored but it really does seem as though both institutions are resigned to a strong currency for the foreseeable future.

The stuttering global economic recovery doesn’t exactly point to huge demand for a riskier commodity currency like the NZD. However, a look at the monetary policies of the US Federal Reserve and the Bank of Japan provides some explanation as to why risk appetite has been so durable this year. The huge liquidity being pumped into the financial markets by the Fed and the BoJ’s quantitative easing programmes has provided ongoing encouragement to market players to search for the higher yield of currencies like the NZD. Recent US data suggests that the Fed will continue with QE3 well into the second half of this year, while the BoJ has barely got started. As a result of this and NZ’s robust economic fundamentals, there has been a notable surge in foreign demand for NZ bonds, which is indicative of the fact that NZ represents a rare bright spot in the global economy.

Whilst most signposts point to NZD-strength this year, we fully expect periodic bouts of risk aversion to dampen the NZD’s performance at various points this year. Uncertainties remain with respect to the US, European and Chinese growth outlooks, whilst we are very wary of further debt crisis sagas in the eurozone. Nonetheless, we fully expect sentiment towards the NZD to remain positive during 2013, with these risk-off periods likely to provide investors with attractive opportunities to buy NZD on dips.

As far as the UK economy and sterling is concerned, the picture looks distinctly gloomy when compared to conditions in NZ. We expect a triple-dip recession will be narrowly avoided with a 0.1% Q1 figure next week but we doubt that UK growth will do little more than flat line this year, perhaps posting growth of around 0.5%. Accordingly, we fully expect the Bank of England to provide further support to the recovery in the form of more quantitative easing (along with other more unconventional monetary easing measures), possibly as soon as May. Sterling’s share of safe-haven flows has diminished considerably amid the loss of its AAA credit-rating and the government’s failure to make inroads on the UK debt profile.

This pair is posting fresh all-time lows almost on a monthly basis and we do not see it bottoming out just yet - the NZ picture is bright and the UK economy is failing to turn a corner. It will not be a straight line south but shelf-life above 1.80 certainly looks limited. A period of consolidation at current levels may continue for the next few months and beyond this we note prominent risks of a push down to the 1.70-1.75 area.

Richard Driver
Analyst – Caxton FX

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Caxton FX Weekly Round-Up: Dollar-weakness persists

Fears of stalling US growth weigh on the dollar

The US dollar has been periodically knocked by weak US economic data in the past fortnight. Last month’s poor US jobs report has put the US economy in sharp focus and further indicators from the retail sales, consumer sentiment and manufacturing sectors have all disappointed of late. Unsurprisingly, bets have increased that the Fed will remain cautious and delay tapering off QE3 in the months ahead. This is largely behind the dollar’s poor performance of late. It should however be noted that last week’s Fed minutes were not as dovish as might have been expected. The message really was that one poor labour market report in itself has limited significance and we will have to wait to find out whether this is the start of a period of renewed labour market weakness.

Weak figures have kept the dollar hemmed in, which has allowed GBP/USD to test the $1.54 in the past week, while EUR/USD has seemingly put events in Cyprus behind it and consolidated around the $1.31 level. Higher levels for both pairs are possible in the sessions ahead.

Looking ahead to this week, it’s a fairly quiet data calendar as far as the US is concerned, which will be a relief to those long of dollars given the recent economic downtrend.

Sterling back in focus as the UK news comes thick and fast

Last week’s UK manufacturing and industrial production figure was encouraging and provided just a little more indication that we will avoid a triple dip recession when the Q1 GDP number is released on April 25. This week’s UK releases include the monthly inflation update, which we expect to remain steady at 2.8%, while we expect further evidence of slowing labour market progress on Wednesday.

There is a risk that Wednesday’s MPC minutes will reveal an extra voter in favour of QE, though on balance we expect any swing voters to wait until after next week’s UK GDP figure, particularly after last month’s encouraging UK services PMI figure. This may give sterling a bit of support in the short-term. Finally, Thursday’s UK retail sales is likely to show a bit of monthly contraction, though the market will probably take this in its stride given February’s barnstorming high street performance.

Euro to remain firm in the short-term

The single currency has enjoyed plenty of demand in April and this seems likely to continue this week. A leaked statement to be released by the G20 at the end of the week looks set to take a positive view of crisis-management in the eurozone. Tuesday’s German economic sentiment survey is also expected to remain firmly in positive territory. Other than that, Thursday’s Spanish bond auction should be noted, though pressures in this market are actually very subdued after a relatively quiet start to the month on the debt crisis front.

End of week forecast

GBP / EUR	1.1660
GBP / USD	1.5370
EUR / USD	1.3120
GBP / AUD	1.48

The recent theme of euro-strength looks set to persist for the time being. This is largely because the dollar is unlikely to turn the corner over the next few sessions, though we haven’t abandoned our positive long-term view of the US dollar by any means. Sterling is likely to trade somewhere in between these two currencies, probably testing the upside against the dollar, while remaining under pressure against the euro. For now, sterling trades at €1.17 and $1.53.

Richard Driver
Analyst – Caxton FX


For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.