Weekly Currency Report

3rd July 2009

06/07/2009 00:00:00

This week:

Economic data has led trade this week as the pound sought to break out of its recent ranges versus the dollar and the euro. As market confidence remains high and investors are still looking for higher returns on their investments any data to support the views of global economic recovery has favoured sterling.
The Hometrack Housing Survey started the week showing house prices remaining even for the second month in a row at 0.8% while the y/y indicated the pace of decline was slowing. GfK Consumer Confidence numbers improved to -25 from the prior months reading of -27 but it was the release of Nationwide’s House price data that allowed the pound to reach a new 8 month high against the dollar.
Nationwide House Price Index improved m/m to 0.9%, slightly lower than the prior months reading of 1.3% but represents the third consecutive month of increases. Analysts had expected house prices to fall to -0.4%
Oil prices recovered in the early part of the week to trade above $70 again to add to the pressure on the dollar.

However, just as data had supported the pound early the week it was also its undoing. UK GDP data showed growth falling by more than markets had expected. GDP came out at -4.9%, expectation was for -4.3%, only slightly lower than the 4.1% previously. The data highlighted just how fragile the ‘green shoots’ of the recent recovery are and triggered safe haven buying of the dollar. ADP employment and U.S. consumer Confidence data did nothing to stem the flow of dollar buying as both indicators came out lower than expected.

The main focus for the week was the European Central Banks rate decision and the release of the Non-Farm payroll data from the U.S. which came in the midst of the flight to safety dollar gains.
The ECB left interest rates on hold at 1.0% and made no real changes in policy stance came out of the press conference held by Trichet. The governing council saw risks of inflation remaining balanced and the EU economy was still on track for a recovery in mid-2010. Apart from some knee-jerk gains for the euro the overall result did not allow the currency to break its ranges.

Non-farm Payrolls came out significantly worse than forecast at -467K, markets had expected the number of jobs shed in the U.S. to only be -365K, the numbers further pushed the dollar higher and the caution and fear intensified. Safe haven flows continue and with most of the U.S. being closed for the Independence Day holidays thinning trading volumes exacerbated the move. Commodity prices and stock markets all traded lower on the data forcing the pound to struggle through.

Next Week:

After the volatile data releases last week and the poor growth figures in the United Kingdom emphasis this week will be on the U.K. GDP estimates for June as well as trade balance figures. The Bank of England will provide the main focus, interest rates are expected to remain on hold at 0.5% but they have recently and somewhat uncharacteristically made announcements after their rate decision. Traders will therefore wait to see if any comments are made by the central bank regarding any further fiscal stimulus initiatives or comments of growth and inflation.

Peter-John Theuninck
Senior Trader
Baydonhill plc

19th June 2009

22/06/2009 00:00:00

This week:

The pound suffered an early retracement of the gains made on Friday as concerns that the recent sharp rises in commodity prices might suffocate the recovery process weighed on the local currency. Additionally the CBI cautioned the markets against being over optimistic about the recent recovery and the any such recovery would be a slow and protracted process, their forecast for sustainable growth only happening near to the end of Q1 2010.
The pounds only saving grace was Oil prices which reached an 8 month high as investors are increasingly betting on a global economic recovery. Oil prices historically have an inverse relationship with the U.S. dollar and capped sterling losses.

CPI and PPI data was the main focus for this week as analysts have forecasted inflation to continue decreasing, raising fears of possible deflation. UK & EU CPI and US PPI data on Tuesday were all expected to show inflation falling further although at a slower pace. Prior to the release of inflation data, U.S. TICS capital flows data came out significantly worse than expected which indicated a weakening demand for U.S assets and saw the dollar appreciate on safe haven flows. However, a surprise increase in UK CPI inflation data to 2.2% y/y versus the expectation of 2.0% allowed the pound to regain its composure and recover overnight losses suffered by a drop in oil prices and flight to safety purchases.
EU CPI data came out in line with expectation which weighed on the euro across the board, markets interpreted the data as a sign that the euro zone was behind the U.K. and U.S. in term of where it was on the path to recovering from the recession.

Both gains and losses made by the pound this week never lasted very long as uncertainty caused a mixture of sentiment by traders. While U.K. CPI and employment data was supportive for the pound the Bank of England minutes from the June MPC meeting erased the positive impact.
The number of jobless claims decrease to 39.3K from the prior months 49.6K, analysts had expected the number to increase to 60K. The ILO Unemployment rate increased to 7.2% from 7.1% previously.
The BoE MPC minutes showed the members voted unanimously to keep the base rate at 0.5% and to not make any changes to the £125bln financed asset purchase scheme. Though details of the meeting revealed that while the central bank acknowledged there were positive signs emerging from the economy they were all short term indicators and the medium term outlook remained unchanged. Additionally risk to stability remained as credit markets and bank lending had not yet normalized.

A further cause of sterling weakness this week came from UK Retail Sales figures, retail sales posted a surprise fall coming out at -1.6% y/y, down from the prior release of 2.6% and more than the -0.4% forecast. Additional pressure came for Public Sector Net borrowing figures which showed government debt increase to £19.9bln. The figure casts doubt on Chancellor Darling’s debt estimates for government debt topping at £175bln for the fiscal year.

Sterling closed out the week on a high note as oil prices recovered from their late week slide and the lack of data on Friday had traders focus on stock markets and technical levels. Stocks market all performed well on the back of the higher commodity prices and profit taking as positions were squared away for the weekend.

Next Week:

Focus this week will certainly be on the Federal Reserve bank’s rate decision on Wednesday evening. The FOMC is unlikely to make any changes to the lending rate at 0.25% but analysts will be interested to see if the central bank makes any further adjustments to their medium term assessments of the U.S. economic recovery. Recent data has highlighted some cracks in the recovery that could escalate into a more aggressive reversal. U.S. GDP figures released the following day should give some insight into the overall health of their economy.

Peter-John Theuninck
Senior Trader
Baydonhill plc

12th June 2009

15/06/2009 00:00:00

This week:

The political turmoil of last week continues to impact currency markets, UK Prime Minister Gordon Brown managed to weather the storm with Friday’s cabinet reshuffle but his future still remains uncertain as the Labour party suffered significant losses in Thursday’s local elections. In addition to the political uncertainty the Non-Farm Payrolls figures were viewed with great skepticism, the figures came out at -345K versus a forecast of -520K. When weighed up against the unemployment data, which showed an increase to 9.4% from the prior months 8.9%, the figures seem to indicate an anomaly that is expected to be revised next month. The dollar gained across the board as safe haven buying returned to the market.

Data releases this week have provided a mixed bag and as a result a mixture of reactions, Trade balance data from Germany saw the trade surplus shrink more than expected while deficits in the UK and US increase only slightly more than expected. UK Industrial Production data gave further support for the pound and the view that the UK economy may well be heading for a recovery, Industrial Production data came out at 0.3% versus the prior release of -0.6%.
A further boost in confidence came from the National Institute of Economic and Social Research who believe the British economy grew in April and May. The pound rallied to near 8 month highs against the dollar and 7 month highs on the euro.

European data weighed on the single currency, German Industrial Production came out worse than expected and Exports by their steepest annual rate since records began, dropping to 28.7%. The releases highlighted the fragility of the present economic recovery and support the view the global economies may very well go through a W –shaped recovery, indicating more drops and subsequent recoveries are to come in economic data releases and therefore market trends.

Data releases aside the financial sector again came into view this week as it has been reported 10 U.S. banks have been granted permission to start paying back loans made from the government during the financial crisis. The move was seen as positive for the beleaguered sector as it supports a stabilization in the balance sheets of those banks and a decrease in the impact of so-called ‘toxic’ assets that have frozen credit markets.
U.S. Treasury Secretary Geithner and the Fed’s Beige Book, an assessment of the health of the U.S economy, both provided a positive market impact. Geithner, in his testimony, identified ‘encouraging signs’ within the U.S economy and that the international outlook had also improved, allowing for a reduced role for the key U.S. program created to stimulate markets for ‘toxic’ assets and loans. He did acknowledge that political risk associated with potential Congress interference in markets remained a deterrent to investors.
The Fed’s Beige book gave a positive review of the state of the U.S. economy and allowed investor confidence and risk appetite to increase.

Oil prices have been having an underlying positive impact for sterling the recent upward trend continues with prices reaching a high of $73.20 per barrel this week, push higher in part due to the expected increase in demand for the U.S. summer holidays and the fact the OPEC have not decided to increase production.

Next Week:

The Bank of England minutes as well as the inflation data will be of greatest interest to traders who are still trying to determine the sustainability of the present global recovery. Expectation on most inflation indicators is for the releases to drop further but at a reduced pace which may allow markets to maintain their optimism.

Peter-John Theuninck
Senior Trader
Baydonhill plc

5th June 2009

08/06/2009 00:00:00

This week:

The pounds recent rally continues to strengthen Monday despite the expected Chapter 11 Bankruptcy filing by General Motors. European and UK markets were largely unaffected as the last minute deal to spare Opel and Vauxhall from being involved in the filing came through with Magna agreeing to a purchase offering.
Further early support for the euro and the pound came as the U.S. Treasury Secretary Geithner toured China over the weekend, the recent fall in US treasury prices causing concern as China is the biggest foreign investor in U.S. government securities. In a statement he affirmed the U.S. governments commitment to shrinking its current account deficit.

Economic data continues to support higher confidence and a greater appetite for risk as investors continue to bet on the worst being over for the global economic recession and seeking out higher returns on their investments. German, U.K. and U.S. PMI manufacturing data all came out higher than market forecast while U.K. mortgage approvals and U.S. Pending Homes Sales followed suit and pushed the pound to new highs.
Oil prices have steadily pushed higher trading on average round the $68 per/barrel adding further pressure to the dollar.

As is customary in recent trade the week was not without its volatility and retracements. Fed Chairman Ben Bernanke testified before the House Budget Committee stated the current U.S. budget deficit threatened U.S. financial stability and said the government could not continue to borrow indefinitely at the current rate to finance the market shortfall.
Further caution in markets came from a failed bond auction in Latvia that sparked talk of a devaluation of the currency and caution over Eastern European & other emerging market investments.

Focus for the week was the rate decisions by the Bank of England and the European Central bank, the BoE and ECB both left interest rate unchanged at 0.5% and 1% respectively. The U.K central bank did not on this occasion announce any further quantitative easing measure. Trichet in his press conference continued to promote the central bank’s recent shift in focus from price stability to quantitative measures with purchases of covered bonds. Neither decision had any significant impact on markets although a well time rumour that Prime Minister Gordon Brown had resigns sent sterling spiraling down. While the rumour was completely unfounded the recent string of MP resignations has created a climate of fear over the stability of the U.K government. As the resignations continued talk of a cabinet reshuffle emerged that could possibly have cost current Chancellor of the Exchequer Darling his job, further MP’s stepping down however seem to have made that impractical and the Chancellor survived, what can only be described as a desperate move by the Government.

The result of the political turmoil was naturally a weaker pound, sterling lost nearly 2% of its value against the dollar and 1.5% versus the euro by the end of the week. A recovery was highly unlikely despite a short lived Friday rally ahead of the U.S. Non-farm Payrolls and unemployment data. Traders were looking for a glimmer of stability and hope buying back into the pound ahead of the data.

Non-Farm Payrolls significantly beat market forecasts coming out at -345K versus the expectation of -521K over the prior months -539K. Unemployment data came out at -9.4%, forecast -9.2%. The data was by and large positive and placed the dollar under pressure initially before analysts reassessed the data and deciding the figures were not a reliable reflection of the markets conditions. The dollar appreciated to trading at the highs of the week versus most currencies.

Next Week:

The political uncertainty that had ignited the retracement in sterling gains last week is likely to continue to place pressure on the pound, although data is still going to be the primary focus for traders looking for evidence of further recovery. U.S. jobs data last week was met with skepticism and will have analysts taking more care in interpreting the headline figures on future releases.
The Fed, BoE and ECB have all kept interest rates on hold and acknowledged that recent data does support and more encouraging economic forecast, all be it with some caution. Trade Balance figures and Current Account data is therefore going to be of great interest to market that are trying to establish the sustainability of the presently perceived recovery.

By Peter-John Theuninck
Senior Trader
Baydonhill plc

29th May 2009

01/06/2009 00:00:00

This week:

The May bank holiday in the UK had little impact on currency markets despite thinner trading volumes. Geo-political tensions resulting from North Korea’s nuclear and missile tests on the weekend had a negligible impact on trade . German confidence figures provided further justification for the current trend of optimism in markets. Business confidence came out better than expected while consumer confidence remained steady, the figures kept the euro supported against the dollar and kept sterling stuck in its recent ranges.

As volumes returned to the market on Tuesday risk appetite continued to support the pound, allowing it to reach a 7 month high versus to dollar and 3.5 month high against the euro. On the back of the German confidence data, U.S. consumer confidence followed suit significantly beat market forecast. Oil prices began to rally alongside global stock markets adding further pressure to the weak dollar. However, a lack of significant data mid week saw sterling succumb to profit-taking and market uncertainty. German HICP data showed inflation dropping further and although it was only a slight decrease the figures were enough to raised concerns over deflation in Europe’s largest economy and had traders scaling back their risk positions. German HICP came out at -0.1% y/y in May versus 0.8% in April. Although U.S. existing home sales beat market forecast risk appetite continued to ease, weighing on the pound.

Further retracement occurred as the fate of General Motors hangs in the balance, the U.S car-maker is expected to file for Chapter 11 Bankruptcy protection next week. Talks, arbitrated by the German government, regarding the sale of Opel ran into difficulty as GM reportedly upped their sale price by an additional €350 million and saw traders seeking out safe haven currencies.

Momentum to sterling’s rally quickly returned though as traders continue to bet on the fact that the worst of the global recession is over and a recovery in economies is underway. German unemployment data came out better than expected at 8.2%, analysts had expected the unemployment rate to worsen to 8.4% from the prior months reading of 8.3%. U.S data continued to support the resumption of pound gains with Durable Goods and New Homes Sales data both showing significant improvement on the previous months data.

OPEC met this week regarding the current production levels, oil prices reach $63 per/barrel leading up to the meeting which was largely expected to yield no change in output. Oil prices rallied further after the meeting, which provided no surprises to markets, to reach $65 per/barrel. The rally weighed on the U.S. dollar which has a historical inverse relationship with the commodity’s prices.

The pound rounded out the trading week posting new highs against to dollar, euro trade remains range bound despite the recent increase in risk appetite largely due to the single currency’s yield advantage over the pound.

Next Week:

With optimism and risk appetite likely to remain high, traders will certainly continue to be on the lookout for further data to support their current view on economic recovery. Inflation and housing figures will therefore be of great interest among the minor indicators. Highlights for the week will be the release of the Bank of England and European Central bank’s rate decisions, analysts will want to see if the central banks revise their growth estimates given the recent string of better performing data. U.S. employment data in the form of Non-Farm Payrolls data closes out the week.

By Peter-John Theuninck
Senior Trader
Baydonhill plc