Friday, March 25, 2011
F/X weekly comment
Interesting. Very interesting. But stupid. I'm sure I can picture that sketch from Rowan and Martin's laugh-In in the 70s, or was it the late 60s? It is such an apt comment for this week's machinations in the foreign exchange market.
Euro highs
The euro has had a very good week, at one point reaching a 4 month high (that's a low exchange rate to you and me). This is all despite the Portuguese government falling apart over an austerity vote; a general election likely and ratings downgrades by Fitch and S&P. Add to this Moody's decision to cut the ratings of 30 Spanish banks and the news that Irish GDP fell by 1.3% in Q4 you have to wonder what the hell is going on in Euroland. What are they on? And can I have a couple of litres of it please? The simple answer is continued bullishness over possible interest rate increases in the Eurozone. Trichet and his crew seem determined to increase interest rates even while the PIGS are teetering on the brink.
Sterling lows
Sterling was also the architect to its downfall with a poor retail sales figure for February. It looks like high st UK brought forward high ticket spending beat the 2.5 percentage point increase in VAT while still being fearful of unemployment and the government’s austerity measures. The backlash is that there was no money le4ft to spend in February. Even Sainsbury’s posted poor results and if they are feeling the pinch then the smaller family stores and independent retailers are bound to be in a worse position.
If inflation stays high, as predicted in the budget, we are going to see these companies increase prices, further pressurising sales in rest of the year. This sends a powerful message to Mervyn's gang that while inflation is high, the state of growth in consumer spending, business lending, and the housing market is too perilous for an interest rate rise anytime soon. This is not good news for sterling, as we have seen this week.
A brighter outlook?
What? Am I mad? Quite possibly, but my point is that the only thing that moves any market is supply and demand. Yes, that can be swayed, or even panicked by sentiment, but logic rarely plays much of a part. The stronger a logical case you can make for sterling going down the pan, the less likely it is to do so.
Sterling is just too low. I'm not saying it won't go a bit lower, but it must come back (don't quote me).
Back to the 1,1500s for me, by the end of next week.
Saturday, March 19, 2011
F/X weekly comment
Even mildly observant readers of this column may have noticed a pattern starting to emerge recently. I forecast that sterling will go up; it goes down. I forecast it will remain level; it goes down. I forecast it will go down; it goes down. Last week I forecast that sterling would tread water in the 1.1600 range, and where is it now? 1.1450, that's where.
It's not even as though much happened this week. Chernobyl MK11 is unfolding before our very eyes; another oil war, this time in Libya (why can't we pick a fight somewhere where our equipment won't clog up with sand?). And of course a currency crisis in Japan, where the very last thing they need at the moment is a strong currency.
Confidence
Unsurprisingly, the British public seems somewhat lacking in this useful commodity recently. The Nationwide Building Society's consumer confidence index fell to 38 last month, its lowest since the survey began in May 2004, following on from another sharp drop to 48 in January. The record fall was driven by a steep decline in the index that measures consumers' expectations for the British economy in six months. That fell to 50 in February, from 64 in January. The spending component, the section which gauges people's appetite for buying household goods and other major purchases, tumbled even further, down 18 points to 52 from 70.
The gloomy survey highlights the dilemma facing Mervin King and his team as they debate when to raise rates from a record low of 0.5 pc to try to curb inflation now running at 4.2 pc, more than double its target. They have to balance the need for an interest rate hike to fight inflation with the need to protect and encourage growth. Add to this the uncertainty about the global economic outlook in the wake of last week's earthquake and tsunami in Japan, and the result is that expectations of a UK interest rate rise in May are looking less and less likely to come to fruition. A more likely date is now deemed to be August.
Timing
The problem with a UK interest rate rise in August is that it is likely to be preceded by a Euro rate hike , possibly in May. If this happens sterling will fall further against the Euro, as yet another reason to buy the pound disappears.
Onwards and downwards
Moving forwards I think it likely that sterling will remain weak due to the uncertainty in the world at present. Problems in Libya will now escalate, and this is likely to have an impact on oil prices and also investors will continue to move away from riskier currencies such as the pound.
Highlighting concerns about the economy, the OECD cut its 2011 growth forecast for the UK this week, saying that we face significant risks from falling house prices, weak domestic consumption and uncertain global demand. Also yesterday figures showed that UK unemployment is at its highest since 1994. The combined bad economic news for the UK weakened the pound and pushed exchange rates lower against all major currencies.
So where to this week?
Let's go with the flow. Flow only goes one way. Down. I can't see any good news around at the moment. I think we will test 1.1400 early in the week, and if it doesn't hold, we could be looking at the 1.12s before very long.
It's not even as though much happened this week. Chernobyl MK11 is unfolding before our very eyes; another oil war, this time in Libya (why can't we pick a fight somewhere where our equipment won't clog up with sand?). And of course a currency crisis in Japan, where the very last thing they need at the moment is a strong currency.
Confidence
Unsurprisingly, the British public seems somewhat lacking in this useful commodity recently. The Nationwide Building Society's consumer confidence index fell to 38 last month, its lowest since the survey began in May 2004, following on from another sharp drop to 48 in January. The record fall was driven by a steep decline in the index that measures consumers' expectations for the British economy in six months. That fell to 50 in February, from 64 in January. The spending component, the section which gauges people's appetite for buying household goods and other major purchases, tumbled even further, down 18 points to 52 from 70.
The gloomy survey highlights the dilemma facing Mervin King and his team as they debate when to raise rates from a record low of 0.5 pc to try to curb inflation now running at 4.2 pc, more than double its target. They have to balance the need for an interest rate hike to fight inflation with the need to protect and encourage growth. Add to this the uncertainty about the global economic outlook in the wake of last week's earthquake and tsunami in Japan, and the result is that expectations of a UK interest rate rise in May are looking less and less likely to come to fruition. A more likely date is now deemed to be August.
Timing
The problem with a UK interest rate rise in August is that it is likely to be preceded by a Euro rate hike , possibly in May. If this happens sterling will fall further against the Euro, as yet another reason to buy the pound disappears.
Onwards and downwards
Moving forwards I think it likely that sterling will remain weak due to the uncertainty in the world at present. Problems in Libya will now escalate, and this is likely to have an impact on oil prices and also investors will continue to move away from riskier currencies such as the pound.
Highlighting concerns about the economy, the OECD cut its 2011 growth forecast for the UK this week, saying that we face significant risks from falling house prices, weak domestic consumption and uncertain global demand. Also yesterday figures showed that UK unemployment is at its highest since 1994. The combined bad economic news for the UK weakened the pound and pushed exchange rates lower against all major currencies.
So where to this week?
Let's go with the flow. Flow only goes one way. Down. I can't see any good news around at the moment. I think we will test 1.1400 early in the week, and if it doesn't hold, we could be looking at the 1.12s before very long.
Saturday, March 12, 2011
F/X weekly comment
Timing is a vital ingredient in F/X forecasting. Had this week ended on Thursday, my forecast would have been spot-on at 1.17. As it is, we have drifted back and the pound is now back under the 1.1600 level. It has been an interesting few days however, and could get more interesting in the coming weeks. Here is what happened this week:
Interest rates
The Bank of England left interest rates at 0.5% on Thursday. We have now been at that level for a full two years. No rational onlooker would have expected anything else, but it appears as though some market players were holding out for an early rate hike, and the pound was sold when this didn't happen. I don't actually expect anything to happen next month either, and it's touch and go whether they do anything in May. There is a school of thought that favours August on the basis that government cuts will hurt the UK economy more than the coalition expects, and therefore growth could slow in May. Recent signals that the ECB is nearly ready to hike Euro rates will not help sterling.
Inflation
Friday was a busy day for figures, with inflation reports for the major European economies released showing that prices accelerated in February as debt woes continued to occupy traders' minds. German CPI data showed that prices surged at the fastest pace in more than two years last month, driven by the rise in commodity prices. Inflation in Germany rose to 2.2 percent, in line with market expectations. The German economy has of course been driving the Eurozone recovery. New jobs are being created, bringing unemployment to the lowest level in almost 20 years, but inflation is on the way up as oil prices surge. Heating oil rose 32% year on year, while fuel prices have risen 12% since January.
UK Producer Prices provided no great cheer here either. Input prices increased by 1.1 percent last month, with an annual price gain of 14.6%, the fastest rate in thirty months. This puts more pressure on the BoE to contain inflation, and that means rate rises. Consumer Prices rose in February by an annualised 4%, double the desired rate set by BoE at 2% and the upper limit set 3%.
Debt
Spanish. Lots of it. So much that Spain’s credit rating was cut yesterday to Aa2 by Moody’s, which said lenders may need as much as 50 billion Euros to meet new capital adequacy rules. The Bank of Spain said its estimate of 15.2 billion Euros may end up lower as some savings banks opt for stock listings that will reduce the amount of capital they need under Spain’s new rules imposed last month. Some chance!
Spain is desperately trying to stem contagion as investors fear that Portugal may need a bailout and Greece and Ireland will lobby to renegotiate rescue deals. Prime Minister Zapatero’s government is seeking to show that his banks can survive a fourth consecutive year of economic slump and a jobless rate of 20 percent, as bond yields on the PIGS surge.
So what now?
We woke on Friday to see images of the tsunami bursting over Japan's shores. This is a real biggie, and could have a great effect on both equity and currency markets. Things could get a bit 'choppy' in more ways than one. It might even have the effect of diverting attention from more mundane matters, in which case I suspect that we will not see much change in the exchange rate this week. Sterling in the 1.16s for me.
A bientot, Rob
Interest rates
The Bank of England left interest rates at 0.5% on Thursday. We have now been at that level for a full two years. No rational onlooker would have expected anything else, but it appears as though some market players were holding out for an early rate hike, and the pound was sold when this didn't happen. I don't actually expect anything to happen next month either, and it's touch and go whether they do anything in May. There is a school of thought that favours August on the basis that government cuts will hurt the UK economy more than the coalition expects, and therefore growth could slow in May. Recent signals that the ECB is nearly ready to hike Euro rates will not help sterling.
Inflation
Friday was a busy day for figures, with inflation reports for the major European economies released showing that prices accelerated in February as debt woes continued to occupy traders' minds. German CPI data showed that prices surged at the fastest pace in more than two years last month, driven by the rise in commodity prices. Inflation in Germany rose to 2.2 percent, in line with market expectations. The German economy has of course been driving the Eurozone recovery. New jobs are being created, bringing unemployment to the lowest level in almost 20 years, but inflation is on the way up as oil prices surge. Heating oil rose 32% year on year, while fuel prices have risen 12% since January.
UK Producer Prices provided no great cheer here either. Input prices increased by 1.1 percent last month, with an annual price gain of 14.6%, the fastest rate in thirty months. This puts more pressure on the BoE to contain inflation, and that means rate rises. Consumer Prices rose in February by an annualised 4%, double the desired rate set by BoE at 2% and the upper limit set 3%.
Debt
Spanish. Lots of it. So much that Spain’s credit rating was cut yesterday to Aa2 by Moody’s, which said lenders may need as much as 50 billion Euros to meet new capital adequacy rules. The Bank of Spain said its estimate of 15.2 billion Euros may end up lower as some savings banks opt for stock listings that will reduce the amount of capital they need under Spain’s new rules imposed last month. Some chance!
Spain is desperately trying to stem contagion as investors fear that Portugal may need a bailout and Greece and Ireland will lobby to renegotiate rescue deals. Prime Minister Zapatero’s government is seeking to show that his banks can survive a fourth consecutive year of economic slump and a jobless rate of 20 percent, as bond yields on the PIGS surge.
So what now?
We woke on Friday to see images of the tsunami bursting over Japan's shores. This is a real biggie, and could have a great effect on both equity and currency markets. Things could get a bit 'choppy' in more ways than one. It might even have the effect of diverting attention from more mundane matters, in which case I suspect that we will not see much change in the exchange rate this week. Sterling in the 1.16s for me.
A bientot, Rob
Saturday, March 5, 2011
Weekly F/X comment
Well, we obviously didn't cross our fingers for long enough, did we? Whichever way you look at it, 1.1630 doesn't look much like 1.1875 so chalk this week down as another 'miss'. So let's roll out the things that we didn't anticipate this week...
ECB and Interest Rates
ECB President Jean-Claude Trichet said euro zone rates could rise sooner than expected in a press conference on Thursday. OK, he didn't actually say that, but an upgrade to European growth prospects twinned with a call for 'strong vigilance' towards price pressures said it for him. Trichet's speech is always closely monitored for coded references to interest rate changes, and the market seized on the 'strong vigilance' line as it has in the past been used as a precursor to a rate rise within two months. Just to make things blatantly obvious in this secretive world, the final statement omitted the line referring to current rates being appropriate.
UK Economy
UK house prices fell 0.9% in February, and worries about the economic recovery are likely to keep prices under pressure this year. This drop was twice as big as forecast by analysts, and most economists reckon house prices will dip this year by between 2% and 3%.
Just to add to Sterling's woes, it was hurt by a poor services PMI figure on Friday. While there have been increases for the construction and manufacturing sector in the past few months the services sector, which makes up 70% of the UK economy, fell back in February. This is a reflection of the lack of lack of consumer confidence that is causing the people in the street to not spend money. This is a blow to the government and will dampen hopes of a near term interest rate increase from the Bank of England.
A question of balance
Things are starting to get interesting (no pun intended) on the interest rate front. Sterling has been supported for a couple of months now by expectations of a rate hike, and now it looks as though the Euro may beat us to it. That in my view is unlikely though. I can see both central banks moving at the same time in May, but that won't give sterling any impetus against the Euro.
Where sterling may gain is after the rate hike. It will be interesting to see how the market reacts to a Euro rate hike when, quite frankly, that is the last thing the PIGS need. The Euro could then come under renewed pressure, and we could then see sterling mount another charge on the 1.2000 level.
Until that happens (or doesn't happen) it will be difficult for sterling to make much headway, so I don't have any high hopes for much change by next week. 1.1700 is my forecast.
ECB and Interest Rates
ECB President Jean-Claude Trichet said euro zone rates could rise sooner than expected in a press conference on Thursday. OK, he didn't actually say that, but an upgrade to European growth prospects twinned with a call for 'strong vigilance' towards price pressures said it for him. Trichet's speech is always closely monitored for coded references to interest rate changes, and the market seized on the 'strong vigilance' line as it has in the past been used as a precursor to a rate rise within two months. Just to make things blatantly obvious in this secretive world, the final statement omitted the line referring to current rates being appropriate.
UK Economy
UK house prices fell 0.9% in February, and worries about the economic recovery are likely to keep prices under pressure this year. This drop was twice as big as forecast by analysts, and most economists reckon house prices will dip this year by between 2% and 3%.
Just to add to Sterling's woes, it was hurt by a poor services PMI figure on Friday. While there have been increases for the construction and manufacturing sector in the past few months the services sector, which makes up 70% of the UK economy, fell back in February. This is a reflection of the lack of lack of consumer confidence that is causing the people in the street to not spend money. This is a blow to the government and will dampen hopes of a near term interest rate increase from the Bank of England.
A question of balance
Things are starting to get interesting (no pun intended) on the interest rate front. Sterling has been supported for a couple of months now by expectations of a rate hike, and now it looks as though the Euro may beat us to it. That in my view is unlikely though. I can see both central banks moving at the same time in May, but that won't give sterling any impetus against the Euro.
Where sterling may gain is after the rate hike. It will be interesting to see how the market reacts to a Euro rate hike when, quite frankly, that is the last thing the PIGS need. The Euro could then come under renewed pressure, and we could then see sterling mount another charge on the 1.2000 level.
Until that happens (or doesn't happen) it will be difficult for sterling to make much headway, so I don't have any high hopes for much change by next week. 1.1700 is my forecast.
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