Foreign Exchange - UK Weekly Update - Written by jeremy on Monday, July 28, 2008 14:28 - 0 Comments
World First’s Weekly Sterling Update - 28th July 2008
Shifts, Stagflation and the Spanish
Sentiment, like tectonic plates or God, moves in mysterious ways. 2 weeks ago there were few commentators who were within driving distance of being sterling bulls against the single currency. The relentless march of the Germans compared to the wheezing and spluttering of the UK’s manufacturing sector had us all fairly glum, however things have shifted and Herman and his economy are now on unstable ground.
For the best part of the last year Germany has been the star European economic member. A large portion of its exports are to countries whose bellies are swollen from recently high oil prices (Russia, Saudi Arabia and the like) and although the pace of the exports continues relatively unabated the confidence of the people actually manufacturing and selling the goods has slipped.
Both key sentiment indices, IFO and ZEW, have seen steadily larger falls over the past couple of months; once is an event, twice however is a trend. The comments that accompany these releases now sound no different from the comments that we’ve been hearing from Japan, the UK, US and other EU member states; things are getting tougher, inflationary wage price spirals are tightening purse strings and higher commodity prices are hitting business hard at the factory gate. Herr and Frau Deutsch have now joined us all on the SS Credit Crunch.
This is not just a case of laughing at the Europeans, as much fun as that is the UK has been the beneficiary of some good news of late; this is surprising given it used to be as rare as an invitation to a ‘You’re doing great, Gordon!’ party are at the moment.
Private equity and M&A over the past 3/4 years was the grease to the city’s engine. As credit conditions tightened deals collapsed and the overall pace slowed. Those same credit conditions have improved slightly and M&A news started to pick up as a result. Earlier this month Banco Santander made an offer to buy Alliance and Leicester; Banco having already bought Abbey in 2006. Competition Commission deliberations aside, the deal should go ahead. BBVA, another Spanish bank, is apparently looking to buy HBOS, and why not? Shares in HBOS have fallen by 69% since this time last year. News out of the global financial sector has been better than expected of recent; earnings figures beating analyst’s expectations; a positive fillip for sterling. This week will again prove to be important with yet more institutions reporting how Q2 was for them.
The week ahead
Following a fairly light data week previously we are gearing up for an absolute belter. Starting with the US it is dominated by Friday’s Non-Farm Payroll announcement and associated employment figures which we expect to reinforce that the jobs market stateside is currently very weak.
Europe is also under the microscope with inflation figures from individual German regions alongside that of the EU as a whole. Watch for Wednesday’s consumer confidence figure to further underline the paucity of good feeling across the channel.
Currency Rates Low High Current
GBPEUR 1.2536 1.2753 1.2632
As explained above the euro was subjected to a poor week of data although it managed to hold its own on the markets.
IFO fell to the lowest level since 2005 as economic unease spreads throughout Germany while the manufacturing and services PMIs both fell into contractionary territory; the latter hitting a 5 year low.
Inflation still remains a hot button topic in Frankfurt with Trichet persistently warning anybody who’ll listen of the dangers of a wage price spiral. It seems that the message has got through however and subsequently although another rate increase is possible a series is not expected at all.
GBPUSD “Cable” 1.9814 2.0075 1.9860
It was another rollercoaster week for the dollar as it whipsawed violently against its major trading partners and the trade weighted index also took one in the gut.
The main mover over the week was the release of the minutes from the latest Fed meeting. The voting record went 9-1 with Member Fisher the dissenting vote, cast for a rate increase. The accompanying statement highlighted the inflationary risks the US economy faces although belief is that this will decline of its own accord.
As is the norm in what seems like every economy at the moment consumer confidence is slipping stateside. The reading turned out to be the 5th lowest in the history of the survey.
Commodity currencies
Low High Current
GBPAUD 2.0394 2.0865 2.0777
The main feature of last week in Australia was the CPI release for 2nd Quarter 2008. The release showed that headline inflation was slightly higher than expected with the largest price increases coming in deposit and loan facilities (+9.5%). Other large increases were in fuel (+8.7%), rents (+2.2%) and medical services (+4.0%).
Despite Inflation being marginally higher than anticipated analysts within the banking sector have suggested that inflation will drop in the 3rd Quarter 2008 and should be back in line with the RBA’s target at some point during the coming year. This will then give the RBA room to manoeuvre and cut interest rates – the market is currently pricing in a 13% chance of a rate cut by March next year.
GBPNZD 2.6026 2.69656 2.6702
The RBNZ ended the suspense of the ‘when to cut rates?’ question last week by cutting the Official Cash Rate 25bp to 8%, and this was accompanied by a surprisingly dovish statement. This led to many analysts reviewing their Q2 and Q3 projections and very poor figures are predicted. Some now expect the Reserve Bank to continue cutting rates over the coming year all the way down to 6.50% or lower. If this proves to be the case then the next reduction in rates should occur at the 11th September meeting.
The net result in the currency markets was that the NZD unsurprisingly lost ground across the board. The coming week is not likely to see too much improvement for the NZD – Tuesdays Building Permits data will potentially be weak given the softness of the housing market and the NBNZ Business Confidence data on Friday will give us the first insight into how Quarter three 2008 is shaping up in New Zealand.
Ultimately on the currency side of things it is not now a question of whether the NZD will weaken but more a question of by how much? How quickly it depreciates in value will depend on the global environment and commodity prices. The depreciation of the currency will also have a reasonable bearing on the RBNZ’s desire to cut the OCR rate – if the value of the NZD falls too much too quickly they will have to reassess the move to cut rates.
GBPCAD 1.9975 2.0323 2.0224
CAD continues to garner support from metal and energy prices however it is still being push/pulled by shocks to global risk sentiment as stock markets were pressurised to the downside.
With a lack of data expected short term views will be managed by expectations of a hold by the Bank of Canada at their next meeting.
GBPZAR 14.8499 15.2755 14.9641
Confidence in the South African economy fell in Q2 by the largest margin since measurements were first taken as high food and fuel prices alongside stifling interest rates persisted. The MSI index fell by 18 points in Q2 to 109 from 127, the biggest fall since 2002.
Last week was very quiet on the data front however we more than make up for it over the next 5 days. CPI (Wednesday), PPI (Thursday) and Trade Balance (Thursday) will all have a significant sway over rand in the coming days.
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