Currency Forecasts

Interest Rates, Quantitative Easing & Exchange Rates

Good Morning. It was a year ago this week, that the financial crisis really took hold, with bank bailouts and emergency world interest rate cuts. This started a big decline in Sterling exchange rates, as it became clear the global economic situation, and the UK’s in particuler, was much worse than thought.

Crisis Timeline 2008
7 SEPT: Fannie Mae nationalised
15 SEPT: Lehman bankruptcy
18 SEPT: Lloyds takes over HBOS
19 SEPT: $700bn US bail-out plan
29 SEPT: Bradford and Bingley nationalised
5 OCT: Bail-out plan agreed by Congress
12 OCT: UK bails out RBS and Lloyds-HBOS

It was during these months that we saw huge swings on exchange rates, demonstrating how quickly and unpredictably the currency markets can move. The UK faces years of damage to their public spending plans as the rescue and the economic collapse has led to huge government deficits. Each UK household is on average £40,000 worse off – it is for these reasons that the pound is so weak in comparison to other world currencies, and is likely to remain so for some time.

We had some good UK financial news last week however, which has caused rates to climb after more than a week of steady declines. At the time of writing, rates are as follows:

  • GBP/EUR 1.1443
  • GBP/USD 1.6419
  • GBP/AUD 1.9201
  • GBP/NZD 2.3690
  • GBP/ZAR 12.497
  • GBP/JPY 152.98
  • GBP/CAD 1.7732

UK Interest Rates & Quantitative Easing
This week we see an interest rate annoucnement by the Bank of England, and markets will be focusing on whether the Bank of England will stick to its loose monetary policy.

The BoE is widely seen keeping interest rates unchanged at a record low 0.5% leaving investor focus on whether it will stick to its ultra loose monetary policy going forward.

We still feel that the quantitative easing process from the Bank of England is at the start of a winding down process, and the monthly amount of QE the BoE is doing is beginning to diminish and we think it will continue to do so that negative sterling is at least starting to disappear.

However, remember last month when analysts thought the same, but in fact the Bank annoucned a further £25bn in ‘new money’ and when the minutes to the meeting were released, it showed that 3 members, including the Governor Mervyn King actually wanted double that, so markets will watch nervously for any further announcements this week.

This Weeks Data
Lots of data this week, that will no doubt cause big swings in what has been a very volatile currency market of late. Interest Rate decisions will feature heavily, as we see announcements by the Bank of England, Reserve Bank of New Zealand, and also Canada. For the UK, we expect rates to be left on hold at a record low of 0.5%, which has helped keep the pound low in recent months. However, in recent months the bank has surprised the markets in announcing further Quantitative Easing measures which have weakened the pound. Watch the decion and comments closely as GBP rates will likely be affected.

Also for the UK, we’ll see Industrial & Manufacturing production data, which are both short term indicators of the strength of UK activity that dominates a large part of total GDP. We have a GDP estimate for the UK on Wednesday, that comes out a month before the official announcement. The report is highly reliable and would influence the UK monetary policy.

For the EU Investor Confidence, and an ECB monthly report that contains a detailed analysis of the prevailing economic situation and the risks to price stability. It also provides articles on a wide range of topics related to the tasks of the ECB. A high reading anticipates a hawkish attitude which will be positive, or bullish, for the EUR, while a low reading is seen as negative, or bearish.

As always, should you have any questions about how any of the below releases could affect exchange rates for your requirments, get in touch today for a free consultation.

Monday
Ger – Factory Orders
UK – RICS House Price Balance
Jap – Trade Balance

Tuesday
Aus – NAB Business Confidence
Swi – Unemployment
Ger – Trade Balance
UK – Halifax House Prices
UK – Industrial Production
UK – Manufacturing Production
UK – Nationwide Consumer Confidence
Ger – Industrial Production
US – Consumer Credit

Wednesday
Aus – Home Loans
US – Investment Lending
Ger – Consumer Price Index
UK – Trade Balance
UK – BRC Shop Price Index
UK – Mortgage Applications
NZ – RBNZ Interest Rate Decision
UK – GDP Estimate

Thursday
Aus – Inflation
US – Jobless Claims
US – Trade Balance
Can – Interest Rate Decision
NZ – Food Price Index
UK – Interest Rate Decicion

Friday
Jap – Consumer Confidence
EU – ECB Monthly Report
UK – Producer Price Index
US – Import Prices
US – Consumer Sentiment
Can – House Price Index

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Sterling gains, but not likely to last

Sterling Gains
Sterling hit a 1 week high against the dollar and the euro yesterday on news the UK services sector grew at its fastest pace in almost two years, easing concerns about the UK economy. The PMI index for the services sector rose to 54.1 for August from 53.2 the previous month and this was the strongest reading for close to two years. This caused the pound to rise and pull exchange rates up slightly. Rates stand as follows at 08:30am:

  • GBP/EUR 1.1450
  • GBP/USD 1.6353
  • GBP/AUD 1.9423
  • GBP/NZD 2.3921
  • GBP/CAD 1.7973
  • GBP/ZAR 12.488
  • GBP/JPY 151.61

Sterling got an added boost from waning risk aversion as global equity markets regained some ground led by banking shares and after the European Central Bank held its key interest rate unchanged at a record low 1 percent.

Still, the backdrop for sterling remains very negative on the growing view the Bank of England will keep interest rates low for some time, as reflected by falling UK bond yields, which have been keeping the currency under selling pressure, market participants said.Sterling secured a firmer tone on Thursday with relief from domestic and international factors.

Following recent weakness, the data revived some degree of optimism over underlying economic conditions, although confidence is still likely to be extremely fragile given the extremely important issue of rising government debt. Fears over the overall policy requirements during the next few months will remain a negative Sterling factor.

So, yes the pound has risen, and many clients may wish to hold in the hope rates will continue to rise. However, if you are holding out for a higher rate, then consider the fact that the UK government debt means analysts think the pound is going to remain weak for quite a while.

UK Economy, and Sterling exchange rates unlikely to recover
This BBC Article outlines how the EU economy is now set to rise, and another article from the BBC also shows how the downturn in the US is coming to an end.

World Recovery – UK will lag behind
Britain will be the last major economy to exit recession, according to alarming forecasts. The UK will fail to record a single quarter of positive growth in 2009, the highly respected Organisation for Economic Co-operation and Development predicted yesterday.

While trading partners such as Germany, France and Japan have already exited recession, Britain’s economy will not return to growth until 2010. The OECD says it expects the economy to contract 4.7 per cent this year – much more than the 3.5 per cent predicted by Alistair Darling in April.

In the fourth quarter output will be flat, the report says, meaning Britain is likely to return to growth nine months later than Germany, Japan and France. Even beleaguered Italy is expected to muster a 0.4 per cent expansion in the final three months of 2009.

So, if you are holding hoping for a continued rise in rates, in my opinion you will be dissapointed. We are seeing the occaisional spike, but as the UK lags behind other major economies, Sterling exchange rates are likely to remain poor.

Summary
Forward contracts are available to lock in todays rates, even if you dont need the currency for some time.

If you’re holding out for a higher rate, you need to ask yourself why you think that rates will rise, given all the negative information about the UK economy. If you cant answer that question, then you are simply ‘wishing’ the market will move in your direction.

Now, wishing is not a sound economic tool when dealing with large amounts of money! Look at the facts, then contact us to tell us your requirements, and let us help you achieve the best possible rate within your timeframe.

Dont leave it to chance, and dont let the markets control you. Take control of your situation by opening an account with us today and discussing the options available to you.

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Sterling rises against other currencies.

At last! Sterling rose yesterday clawing back from recent dismal losses and hitting a 1 week high against the euro as investors covered short positions in the UK currency following its broad slide in past weeks. At the time of writing, rates are as follows:

  • GBP/EUR 1.1413
  • GBP/USD 1.6310
  • GBP/AUD 1.9477
  • GBP/NZD 2.4078
  • GBP/CAD 1.7965
  • GBP/ZAR 12.679
  • GBP/JPY 150.49

Sterling rise
Weakness in the euro helped to push the pound up against the Euro, in addition to better than expected UK data helping to end the decline of the pound. Traders added UK banks and hedge funds were buying the pound against the dollar, adding an extra boost to the UK currency.

Still, sterling gains were capped and it remained in sight of a 7 week low against USD as weak global shares kept a lid on demand for currencies considered to be higher risk, which include the pound.

“There’s still concern about the UK, especially its budget situation … but the dollar outlook is also gloomy,” said Robert Miniken, senior currency strategist at Standard Chartered in London.

Other data showed net UK lending in July fell at its sharpest pace since records began in 1993 which suggests credit conditions remain tight. Meanwhile, the number of mortgages approved rose to its highest since April 2008.

Also yesterday, we saw UK construction PMI rise to 47.7 in August from 47.0 the previous month, falling at its slowest pace in 18 months. The data has reinforced views the Bank of England will keep interest rates for some time, as reflected by falling UK bond yields, which have been keeping sterling under selling pressure.

G20 and Government Debt
G20 nations must continue spending to ensure the global economy returns to sustainable growth next year, UK Chancellor Alistair Darling has said. Germany and France want G20 nations to discuss “exit strategies” from the measures used to stimulate economies at a G20 finance meeting this weekend.

But Mr Darling told the Independent: “The biggest single risk to recovery is that people think the job is done.” Removing government stimulus packages is expected to be on the agenda when G20 finance ministers meet in London from Friday, ahead of the G20 leaders’ summit in Pittsburgh later this month.

This is key. The UK are trying to spend their way out of the recession, pumping billions of pounds of newly created money into the economy through Quantitative Easing. The EU are not doing this. It’s forecast that the level of UK debt will exceed 100% of GDP, and our children will be repaying this in taxes for the next 60 years. Darling is alone in his views of rescuing the economy, in full knowledge it’s highly unlikely the Labour goverment will be there to sort out the mess. It’s this massive debt that analysts think will keep the pound weak against other currencies for the foreseeable future.

For this reason, a Forward contract is worth considering if you need to purchase currency in the next 6 months. Remember, using FCG to secure your currency can get you better rates than banks and other institutions – it’s why we;re in business, why I’m writing this blog, and hopefully also the reason you are reading it! To benefit from our rates, register for an account. It’s free and does not obligate you.

Todays Data
Australia – We have already had Trade Balance data for Australia – this is the difference in the value of its imports and exports of Australian goods. Export data can give an important reflection of Australian growth, while imports provide an indication of domestic demand. Trade Balance gives an early indication of the net export performance. If a steady demand in exchange for Australian exports is seen, that would turn into a positive growth in the trade balance, and that should be positive for the AUD. The figure was expected to be -840m however it actually came in at -1156m – the worse than expected figures have pushed GBP/AUD to 1.9480 at time of writing.

Europe – We have Purchasing Managers Index, Retail Sales, and of course the interest rate decision by the European Central Bank. We expect rates to be left on hold at 1%. Retail sales will be more important, as it measure of changes in sales of the German retail sector. It shows the performance of the retail sector in the short term. Percent changes reflect the rate of changes of such sales. The changes are widely followed as an indicator of consumer spending and can have a big impact on GBP/EUR rates.

United States – We have Jobless claims which is the main news to look for. The G20 meeting will also have an impact.

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Sterling continues to fall, outlook is poor.

Sterling fell on Tuesday, wiping out early gains and approaching a near three-month low versus the euro after a surprisingly weak reading of UK manufacturing cast doubt on the UK economy’s recovery prospects. Rates at 08:30am stand at:

  • GBP/EUR 1.1350
  • GBP/USD 1.6138
  • GBP/AUD 1.9420
  • GBP/NZD 2.3894
  • GBP/CHF 1.7232
  • GBP/ZAR 12.716
  • GBP/JPY 149.86

The poor PMI figures were the main reason the pound fell. An index of British manufacturing activity fell to 49.7 in August from a downwardly revised 50.2 in July. It fell short of expectations for a rise to 51.5, and came in below the 50 level (anything above 50 signals growth, anything below 50 signals contraction.

It’s far too early for people to think that sterling’s troubles are behind it. There are other better currencies around whose central banks are more likely to raise interest rates, as outlined in yesterdays report.

Traders said market participants had been caught long on the pound, which had climbed in early London trade after a recovery in Asian share prices had stoked appetite for riskier assets. The pound extended losses after taking a beating last week, when dismal UK business investment figures and data confirming that the economy contracted in the second quarter further convinced the market that UK interest rates would remain at a record low 0.5 percent as quantitative easing continues. We look today to house price data for the UK, and Gross Domestic Product data for the EU. We expect the GDP to show a decline of -0.1% monthly and -0.7% year on year. If figures are better, then the Euro will strengthen and rates will fall further.

US Dollar
The US Dollar climbed against Sterling for a fourth consecutive week, largely owing to Sterling weakness rather than US Dollar strength. Increased investor optimism of global recovery prospects generally lowered demand for the Dollar purely on account of its perceived safe-haven status.

Looking forward to this coming week the US Economy looks set to strengthen further after the US Government reported improvements in manufacturing activity, consumer confidence, house prices, new home sales, and durable goods orders all boosted US recovery expectations, having an adverse effect on the Dollar.

Existing home sales are currently at their highest in almost two years and additionally last week, both the New York and Philadelphia Federal Reserves’ reported sharp increases in manufacturing within their regions.

This was reinforced last Tuesday when the ISM Manufacturing Index reported record figures since January 2008. Hopes were further fuelled by a lower than expected 1% annualised contraction in GDP over the second quarter, compared to -6.4% in the first quarter.

Contrary to this the US Governments “Cash for Clunkers” car scrap page scheme, similar to those seen in Europe, ended on 24th August. As a result the Automotive Industry is set to see a considerable drop in output.

Important US economic data to be released this week include the US Federal Reserve policy meeting minutes on Wednesday and non-manufacturing activity data on Thursday. Friday’s non-farm payrolls report is expected to show job losses narrowing to the lowest level for a year, and could inspire greater confidence in the economy if losses are less than expected.

It remains to be seen whether these positive figures from the US could lead to a trend in the selling of the US Dollar in favour of riskier assets. This rise in demand could see a weakening of the dollar, however skepticism in a global recovery could well spur a return to the safe haven of the Dollar and have a counter effect on the currency.

Australian Dollar
The Australian economy grew by more than expected in the second quarter of 2009, boosted by increases in household consumption and business investment. The economy expanded by 0.6% in the three months to June from the previous quarter, the government said.

Analysts had forecast growth of 0.2% after a sharp drop in export prices was announced earlier in the week. The better than expected figures have strengthened the AUD, and rates have dropped as a result. At the time of writing, GBP/AUD stands at 1.9420.

Todays Data:
Aus – Gross Domestic Product
UK – Halifax House Prices
EU – Gross Domestic Product
US – Mortgages Applications
US – Non Farm Productivity
US – Fed Speech
US – FOMC Minutes
US – Factory Orders

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Sterling Exchange Rate Outlook

The pound took a battering last week, falling around 1.5% against most major currencies. Rates this morning @ 08:30am are as follows:

  • GBP/EUR 1.1388
  • GBP/USD 1.6352
  • GBP/AUD 1.9442
  • GBP/NZD 2.3788
  • GBP/ZAR 12.669
  • GBP/JPY 152.42
  • GBP/CAD 1.7802

Sterling starts to gain
Sterling edged up this morning slightly, supported as recovering global shares stirred risk demand, while traders awaited a reading of the UK manufacturing sector for more clues into whether the economy is continuing to improve. This is released later this morning.

UK share prices made slight gains in early London trade, helping to pull the pound further away from a 2-1/2 month low hit against the single currency last week. The UK Purchasing Managers’ Index due at 09:30am is expected to rise to 51.5 in August from 50.8 in the previous month, keeping manufacturing activity in growth territory for the second straight month. Any difference in these figures, and expect Sterling volatility.

Traders and analysts said a strong PMI print and a broadly weak dollar would keep sterling supported on Tuesday, but some pointed out that additional, significant gains may be met by some selling.

The pound recovered on Tuesday after taking a beating last week, when dismal UK business investment figures helped to further convince the market that UK interest rates would remain at a record low 0.5 percent for some time to aid the economy.

Other figures showed the UK economy contracted less than expected in the second quarter, helping sterling to stem losses, but that data only added to the view the Bank of England would continue its quantitative easing policy.

Also due on Tuesday are figures on UK consumer and mortgage credit for July, which are expected to show a rise in mortgage approvals.

See a full breakdown of the weeks data releases below.

Eurozone Prices
The eurozone’s annual rate of inflation was negative in August for the third consecutive month.
Prices in the 16-nation bloc fell 0.2% in the past year, Eurostat said, following the record 0.7% fall in July. Inflation in the eurozone has been dragged down by lower energy and food prices and by falling demand from both companies and households.

The downward trend began in June with a 0.1% fall in prices, but a Japan-style deflationary spiral is not predicted. Deflation is considered damaging to an economy because consumers tend to delay making major purchases until prices fall further. Without consumer spending to stimulate growth, economic output falls. The European Central Bank’s target rate for inflation is just below 2%.

This is helping GBPEUR and without this bad news from the Eurozone, rates would be even lower than they are now.

UK Defence Industry
Investment in defence research and technology must be maintained to protect the industry, its trade body has warned in two reports. The Defence Industries Council has published two reports amid fears spending could face major cuts in the next Ministry of Defence review.

The DIC says investing in the industry will help protect the country and could provide a “path out of recession”. The sector currently employs 300,000 people in the UK.
It also generated an annual turnover of £35bn in 2008. The Ministry of Defence review will decide the future direction of defence after the next general election.

Defence is a big part of the UK economy, and spurs investement. So, if we do see significant cuts, expect further Sterling weakness.


This Weeks Data
Markets are extremely volatile at the moment, as the big movements in exchange rates last week demonstrated. This week we have various data releases from across the globe, that will no doubt cause further changes in exchange rates.

For Australia, we have an interest rate decision, Gross Domestic Product, and building permits. The interest rate will probably stay at 3%, but there has been talk recently of a rise in the coming months. When it is raised, expect AUD to strengthen and rates to fall.

For the UK, we have various releases that will be a good barometer of the UK economy. We have House Price Information, Mortgage Data, Construction Data. Watch for the Halifax House Prices Today

In the EU, as is always the case on the first Thursday of the month, we’ll see an announcement regarding interest rates. Again we expect rates to be left on hold at 1%. The UK announce their decision on interest rates on the first Thursday in the first full week of the month. Given the bank holiday, this means we wont get any news on this until next Thursday.

Contact us today to discuss how these data releases can affect your currency requirement.

Tuesday
Aus – Building Permits
Aus – RBA Interest Rate Decision
Swi – Gross Domestic Product
Ger – Retail Sales
Ger – Unemployment
EU – Purchasing Managers Index
UK – Money Supply
UK – Mortgage Approvals
UK – Purchasing Managers Index

Wednesday
Aus – Gross Domestic Product
UK – Halifax House Prices
EU – Gross Domestic Product
US – Mortgages Applications
US – Non Farm Productivity
US – Fed Speech
US – FOMC Minutes
US – Factory Orders

Thursday
Aus – Trade Balance
NZ – ANZ Commodity Prices
EU – Purchasing Managers Index
EU – Interest Rate Decision
US – Jobless Claims

Friday
Swi – Consumer Price Index
Can – Unemployment
US – Non Farm Payrolls
US – Unemployment


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