Foreign Exchange - UK Weekly Update - Written by jeremy on Monday, June 23, 2008 17:18 - 0 Comments
World First’s Weekly Sterling Update - 23rd June 2008
Markets Continue To Pound On Sterling
Sterling was a volatile little beastie last week as criss-crossing data pulled it all over the place and the markets continued to worry about inflationary pressures.
After a relatively quiet Monday, we were knocked for 6 by Tuesday’s CPI release. CPI hit 3.3% triggering a letter to the Chancellor from Mervyn King and the run on sterling began. It was exacerbated somewhat by Mervyn King’s appraisal of the possible interest rate solutions to the stagflationary dilemma that the UK faces as ‘unclear’. The market rode this indecision as an example of an economy stuck between the devil and the deep blue sea; the higher interest rates that some think such an inflationary condition deserve would surely ruin any and all good work that has been carried out on the housing market in recent months.
The slump continued into the early part of Wednesday as the Bank of England MPC minutes for the June meeting were published. The vote went as planned with Blanchflower the only dissenter to the downside but, as we expected, certain members of the group considered voting for a hike to try and stop the inflationary rot.
Thursday was the day when sterling rose from the ashes and the catalyst was a retail sales report that surprised us all. A 3.5% monthly increase against a predicted 0.1% fall had everyone scratching their heads; possible reasons varied from price discounting to unseasonably hot weather but the market jumped on the hawkish band wagon brought out by the Bank of England Governor at his Mansion House speech earlier in the week. As a result sterling rose to 2 week highs against dollar and euro and also made gains against the commodity currencies and high yielding crosses which have been the bugbears of sterling holders in recent months.
After all the excitement it was hardly surprising that Friday was a fairly dull day. I for one was praying for the weekend.
The week ahead is a quiet one for sterling but key decisions elsewhere will leave the pound at the behest of credit, equity and commodity markets as we move towards next week’s MPC meeting.
The week ahead
The majority of US focus will be on Wednesday’s Fed decision with a hold forecast by the majority of analysts. Other key pieces of data which are expected to unearth frailties in the US economy include new and existing home sales figures and a consumer confidence index.
Eurozone data is also due to show that the economy is faltering but not to a level that would jeopardise a potential rate hike in July. Most data this week is from member states (German CPI) but Friday’s consumer confidence figure could weigh as inflationary pressures continue to build
Currency Rates Low High Current
GBPEUR 1.2569 1.2740 1.2643
Fallout from the Irish ‘No’ on the Lisbon treaty continued to affect the euro through the early part of the week as it continued to trade in ranges. The single currency was underpinned somewhat by the continually hawkish noises emanating from Frankfurt over inflation. Comments trended towards hikes however diverged as to the length of the cycle; certain members voiced their approval to a series of hikes whereas others intimated that a single hike would be sufficient to keep the inflation bear out of the honey.
Data for the Eurozone was fairly poor as many institutional investors start to shy away from investment. The influential ZEW economic sentiment index fell at a greater rate than expected as credit concerns were highlighted as the major anxiety of European businesses.
The Swiss central bank’s decision to hold rates will also weigh on policymakers minds.
GBPUSD “Cable” 1.9467 1.99791 1.9632
The US dollar’s performance last week could be described as sluggish. The greenback bumbled around its trading ranges against the major crosses neither making nor giving back much headway however the general overtone was that of weakness.
This was typified by the lack of positive growth orientated data; manufacturing indices from New York State and Philadelphia were both down to multi-month lows while housing starts dipped below the 1mio rate for the first time in 17 years.
Inflation perceptions were wildly volatile last week with huge hikes priced in at the front end of the week with a lot being eliminated by Friday. Although there were no public comments from Fed officials, some media reports that deflated the market’s view of significant near term rate hikes had FOMC voter fingerprints all over them. This Wednesday’s meeting is forecast as a hold with a balanced press release to follow; worries on the upside for inflation, for the downside for growth.
The dollar may also benefit over the coming months from investment inflows as negative perceptions of the European economy rise.
Commodity currencies
Low High Current
GBPAUD 2.0648 2.0933 2.0632
Minutes released on Wednesday from the RBA’s monthly meeting on June 3rd showed that current monetary policy settings were appropriate to deal with inflationary pressures. The board members left the bank’s cash target rate at 7.25% - in reaching their decision, the board members noted that the bulk of indicators becoming available over the preceding month continued to suggest moderation in domestic demand growth. The indicators included flat retail sales, declining household and commercial loan approvals, lower growth in housing and business credit, and subdued business and consumer confidence. But the minutes added that should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price-setting behavior, the outlook, and the stance of policy, would need to be reviewed.
Economists expect the RBA to leave its cash target rate unchanged at 7.25 percent after the board’s July 1 meeting, preferring to wait until release of second-quarter consumer price index data, due for release on July 23, before making any decision to change the rate if needed.
GBPNZD 2.5728 2.6162 2.5871
Last week in New Zealand Manufacturing volumes data were released and have increased 0.2%. Excluding meat and dairy product manufacturing, volumes decreased 1.4%. Total manufacturing sales increased 3.7%.
New Zealand also received External Migration data for May, which showed a reasonable surge (a net 1,010 seasonally adjusted) in permanent and long-term migrants for the month – the highest monthly inflow since November 2006. As a reasonably important driver of medium-term housing demand, increased monthly migration flows may provide some support to the housing market over the latter part of 2008 and into 2009.
Poor retail sales data highlights that the June quarter has got off to a poor start. With Q1 GDP now generally cemented as being negative(given the partial indicators received), the combination of core retailing (negative), housing market statistics (very weak), and business and consumer confidence, leaves us biased towards the same occurring for Q2. We continue to look for a September start to the easing cycle for interest rates in NZ. However, given the consistently weak domestic dataflow, we cannot rule out the possibility of a July move.
The hurdle is high, and it will require a very weak Q1 GDP print and a surprisingly soft non-tradable CPI print to get the RBNZ across the line. All up, currency markets are likely to lack any real conviction at present as they remain hostage to wider global credit/inflation gyrations for the time being.
GBPCAD 1.9845 2.0221 1.9964
Canadian dollar traded in a much tighter range against sterling and its US counterpart over the course of last week than it had previously. We put this predominantly down to a strong consumer price figure; prices rose by 1.0% on the back of energy costs and helped the market dampen the probability that the Bank of Canada would cut interest rates anytime soon.
Oil prices were volatile throughout the week and we expect that to continue allowing the CAD some support.
GBPZAR 15.5368 15.8411 15.7805
ZAR is heading for choppy waters. Every single piece of news-flow regarding South Africa and its currency is less than complimentary and foresees a serious downside. Both Fitch and Moody’s, 2 of the world’s largest credit rating agencies, have both made negative noises towards South Africa in the past week. Fitch has downgraded South Africa’s debt rating outlook from positive to stable, which could increase the cost of raising funds and Moody’s issued a warning on South Africa’s economic outlook. With problems ranging from electricity generation and inflation to xenophobic violence all weighing on Africa’s largest economy rand is expected to weaken beyond the 16.00 level over the coming months.
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Please feel free to contact me (jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.
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