Foreign Exchange - UK Weekly Update - Monday, February 25, 2008 11:02 - 0 Comments
Unexpectedly strong UK retail sales figures provided the major boost for Sterling last
week prompting thoughts that interest rate cuts in the UK will not be as vicious as
expected given inflationary fears. Other news included the Bank of England’s minutes
from February’s decision to cut details from the CBI on distributive trends.
UK retail sales jumped 0.8% against analysts’ expectations of a 0.2% increase allaying
fears of a severe and imminent slowdown and showing that the British High St. is
nowhere near the doldrums that some commentators and newspaper front pages
would have the average man in the street believe. The main boost was provided by
heavy discounting on electrical items and the seemingly endless expansion in internet
The market was only slightly wrong-footed by the Bank of England Minutes published
on Wednesday with only one member, David Blanchflower, voting for a different policy.
Blanchflower is possibly the most dovish of all the MPC’s members and true to his
loosening ways instead voted for a 0.5% curtailment. Sterling stumbled in response
briefly but markets regained confidence within a few hours.
Bullish readings continued as the CBI’s distributive trends survey showed that the
industrial sector in the UK was upbeat over future conditions. 3% of firms polled told of
increasing order books compared with 2% on the previous reading; extending the 12
year run of increasing demand. Exports showed a fall off of 8% but confidence
readings for the next 3 months are all positive.
We will see whether the good sentiment in the manufacturing and retail sectors can
translate into the hearts and minds of Joe Public with the Gfk Consumer Confidence
figure due for release Friday morning. Given that the survey takes data from the past
year as well as for the future, predictions are still negative as the shock and turmoil of
recent market unease (Northern Rock et al) are still factored in.
The week ahead
This week’s data is predominantly US centric. Highlights include Existing and New
Home sales figures, Initial Jobless claims and the Chicago Purchasing Managers
index. All these however may pale into insignificance as Fed Chairman Ben Bernanke
once again testifies before the US Senate on Wednesday afternoon.
The EU moves back into focus this week after a fairly nondescript data cycle
previously. Releases of note will be Germany’s GDP and IFO data (both Tuesday) and
Consumer Confidence (Wednesday). The IFO release rose last month, moving away
from a 2 year low, predictions are of a fall and consequent euro weakness however.
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Currency Rates Low High Current
GBPEUR 1.3189 1.3369 1.3264
The Euro enjoyed a strong week against all the majors but fell back against high
yielders on carry trade strength. The ECB downgraded its forecast on Eurozone growth
again on Thursday to 1.8% from 2.2% and raised its inflation forecast to 2.6% from
2.1%. Justification of this increase was shown in German inflation figures which jumped
0.8% alongside further allusions to a problem by voting members of the ECB. One
release which veered wildly from expectations was the current account figure which fell
by close to €10.5bln. This is widely credited to a lack of competitiveness because of
recent single currency strength and lack of investment due to credit crisis concerns.
GBPUSD “Cable” 1.9362 1.9709 1.9681
Last week was tough for USD as recession fears continued to weigh and as such we
lost ground against GBP and EUR with EURUSD breaching 1.48 for the 3rd time this
year. Heavy losses will probably not happen as USD will be backed up by global
recession fears because of the ‘flight to safety’ provided by US treasury notes. On the
data front recession was the buzzword as leading indicators fell along with the
Philadelphia Fed Index which dropped further below last month’s 7 year record low.
This was compounded by publication of the Fed’s minutes which warned of slowing
growth and rising inflation. The market continues to price in further cuts however the
Fed warns that once growth has stabilised we could see an equally strong tightening of
interest rates mirroring last month’s intra-meeting moves.
Low High Current
GBPAUD 2.1104 2.1426 2.1287
Minutes from the RBA’s last meeting helped AUD continue to strengthen against GBP
as thoughts of a 0.5% rise were widely discussed before settling on a 0.25% hike. This
is in keeping with the recent ‘tough talk’ on inflation that voting members seem to be
trotting out at speeches and on news programmes. Further support was also found due
to increasing gold and copper prices.
GBPNZD 2.4254 2.4787 2.4245
As seems the way recently NZD has been ably supported and to a certain extent is
being dragged around by its Australian counterpart. Increases in the carry trade due to
global stock market positivity also helped to underpin high returners; this will continue
on yield grounds. Towards the end of the week NZD rose above 0.8 USD a level which
has previously seen intervention from the New Zealand central bank; none is
forthcoming at the moment due to the movement being primarily down to US weakness
as supposed to Kiwi strength.
Low High Current
GBPCAD 1.9544 2.002 1.9636
.Canadian dollar is the only commodity currency that did not enjoy a significant fillip
from rising commodity prices. Although some underpinning was evident due to the
elevated oil and gold prices, economic fundamentals dominated the agenda.
December’s wholesale sales data declined to 2.9% in December but more importantly
core prices fell to 1.4%, the lowest level seen in 30 months. This seems to support
thoughts of further cuts in coming months.
GBPZAR 14.744 15.403 15.124
Wednesday saw the South African Budget announcement which to regular viewers
proved very interesting. The Treasury has taken the opportunity to announce a number
of headline-grabbing budget measures, including a cut in the corporate tax rate to 28%
(from 29%) along with opening up the restrictions on certain financial products listed on
the JSE. Finance Minister Manuel put Wednesday’s falls down to speculators attacks
with the rand able to recover half the losses over the coming days.
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accuracy and it may be incomplete or condensed. All opinions and estimates constitute the
authors own judgement as of the date of the briefing and are subject to change without notice.
Any rates given are interbank and therefore for amounts of £5million and so are not indicative of
rates offered by World First for smaller amounts.
Bull/Bullish: one who thinks a market, currency or asset will appreciate
Bear/Bearish: one who thinks a market, currency or asset will depreciate
Pip: the fifth significant figure of a currency price: 1.2345
Big figure: the third significant figure of a currency price: 1.2345
Basis point: a 0.01% unit
Tightening (Interest Rates): raising interest rates (loosening is opposite)
Hawkish: comments that suggest interest rate tightening i.e. moving higher
Dovish: comments that suggest interest rate loosening i.e. moving lower
MPC: Monetary Policy Committee, the body that sets UK interest rates
ECB: European Central Bank, the body that sets the Eurozone interest rate
RBA: Reserve Bank of Australia: the central bank of Australia.
Cross-Currency Pair Flow: Where a set of three interlinked rates, e.g. GBPEUR, EURUSD and
GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a
condition known as No Arbitrage. If there are movements in two markets, then the third must move
deterministically. Also knows as triangulation.
Carry Trade: Simply put, is the borrowing of money in a low interest economy (Japan) and investing it in a
higher yield economy (Australia). This yields a certain profit unless the interest rate differential narrows or
the exchange rate moves such that it costs more to buy the currency back.
Fair Value- Also called financial fair value: A measure of the theoretical exchange rate using certain
Macroeconomic models (such as eCIP).
Underlying Inflation: A somewhat academic measure of long-term inflation- removing all the’ interesting’
elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills and food.
[Quotes from BoE governor Mervyn King]
Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed
through the economy through some very complex and poorly understood channels. Once rate hikes are
having an effect on inflation and long term yields it is said that they are finding traction with the economy.
Unemployment rate: The percentage of people who are able and ‘willing’ to work (i.e. in the labour force)
who are not employed.
Participation rate: The percentage of the population of working age in the labour force.