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Poorna Mandal

September 2013 Newsletter

by FC Exchange , 04 September 2013 15:17

September Market Summary

From one of the darkest recessions of recent times we’re finally beginning to see emerging signs of a firmly-grounded recovery for the UK economy. Various institutions are revising up their projected growth forecasts for the UK and we have seen better than expected figures from services, manufacturing, factory orders, retail sales, house prices and mortgage approvals. Although this is quite a conclusive list of positive data for the UK, we are not out of the quagmire yet. After all, being complacent is partly what got us into that mess in the first place. There is some correlation between the pound and the UK’s performance as of late but perhaps not to the extent you may expect. Sterling has been performing well against its main trading partners but this could quickly reverse if we see the UK economy start to splutter. The green shoots of growth for the UK should be taken with a pinch of salt and the same can be said about the GBP’s current strength.

The picture for the eurozone is not quite as rosy as the UK at the moment. Elections in Germany and the very recent news that Greece will almost certainly need more aid at some point hang in the air. Although we saw the overall eurozone employment rate fall for the first time in two years last month, the peripheral countries are still seeing rising unemployment rates. Whilst on the surface the eurozone may appear stable, it is the fundamental data bubbling away beneath that is the worry.

In the US, focus has turned to whether tapering will happen in September or not, tapering being the scaling back on the amount of Quantitative Easing done each month ($85Bn) by the Federal Reserve. Some believe it will be on a large scale while others believe it will be a slow process. One thing is for sure: it will have an impact on the strength of the USD.

GBP – More positive data for the UK

We’ve seen yet more positivity emanate from the UK since our last monthly update. Mark Carney, the new Bank of England (BoE) Governor, had his first public press conference and was less dovish than the markets expected, allowing the pound to rally. This, combined with a plethora of positive data from the UK, meant we saw Sterling gain over 3% versus the euro throughout the month of August. UK unemployment came out in line with expectations, UK retail sales improved, house prices showed an increase, UK growth data (GDP) also proved better than expected. In additiona, consumer confidence looked on the up, and mortgage lending increased month-on-month.

For the first time in a long time we are experiencing a good run of data, and things in the UK look pretty good. The markets seem to have taken well to the new BoE governor and his plans to focus on the unemployment rate for UK monetary policy and interest rate setting.

Sterling has reversed its recent losses against a basket of currencies. Versus the euro we touched 1.18 (Interbank) again after hitting a four month low in July when we were trading in the 1.13’s (Interbank). The pound has climbed up from the low 1.48 (Interbank) versus the USD also seen in July to the current mid 1.5’s (Interbank). Throughout August, Sterling rallied over 4% against the AUD pushing the exchange rate up to the highest levels in three years, but even more impressive is the 10% gain the pound has made versus the South African rand over the last month, driving the rate to the highest levels since November 2008.

What lies ahead for GBP

With the BoE targeting 7% unemployment as a threshold for interest rate changes, it is understood that we will enjoy low interest rates (currently 0.5%) for the next 2-3 years. This is deemed good for the UK economy as it is seen as a method to stimulate growth through the means of borrowing, the housing market etc. If we continue to see better than expected economic data, then it’s difficult to see past the pound’s current upward trend. However, as the pound has rallied, we have reached some very significant technical resistance levels versus the euro and as quickly as the rate has risen, it could quite easily fall back again if it fails to push through this resistance. Versus the USD, it is not so clear cut and may be dependent upon the situation in Syria and the outcome of the US FED tapering.

EUR - On a slippery slope?

After a relatively positive start to last month, the euro seems to be on the wane and this being at a time when data suggests its performance should be to the contrary. Eurozone manufacturing has actively picked up across the region again. China, one of the eurozone’s key trading partners, has lifted hopes that its economic slowdown is over and the US is still uncertain on when any “tapering” of its monetary policy will take place. This should all be playing into the euro's hands leading the currency to strengthen, but, in fact, the opposite has happened.

It is difficult to pinpoint exactly why the euro has lost ground against its major counter-parts. Some of it can be attributed to the fact that these countries have recently posted their own positive data, but perhaps more likely it can be attributed to the markets belief that the European Central Bank (ECB) will stick by its recent forward guidance and keep interest rates low for what President Mario Draghi called “an extended period of time.” This could mean that no matter how well the eurozone economic data proves to be in future, the ECB will stick to its guns resisting any temptation to alter policy.

What lies ahead for EUR

Despite this period of improved economic data, the euro outlook remains extremely volatile. The ECB has recently reduced its overall growth forecasts for 2013, suggesting that the recent improvements are far from sustainable. It may also be the case that the ECB is erring on the side of caution as there is increased uncertainty surrounding the effect that the German elections, taking place later this month, will have on the market. As the political debates heat up, it looks ever clearer that providing further financial support to indebted European countries is seen as politically toxic, with the German public clearly shifting to a policy of protecting self-interests. German Chancellor, Angela Merkel, is currently experiencing growing opposition to a perceived weak-line approach with regards to the indebted European nations. As discussed in last month’s report, the euro’s decline may further be exacerbated by Germany challenging the legality of the ECB’s ‘Outright Monetary Transactions' programme through the German Supreme court later on this year.

German Minister, Wolfgang Schauble, also recently hinted that Greece will require a further bailout before the end of 2014, in addition to the two bailout packages totalling €240Bn already received. If accurate, such forecasts would have a further negative impact on the euro. If you add this to the fact that unemployment rates remain extremely high, pinning back any potential economic recovery, the picture at present is quite gloomy for the eurozone. We have been here before though; weak data resulting in the euro bizarrely strengthening and it is quite ironic that now we are starting to see the currency slide after finally providing some positive data. This shows just how fickle the markets are at present and makes it very difficult to predict which way rates will go in the short term.

USD – Cooling on monetary, heating on politics

In August, we saw the Greenback weaken further from its July losses and, in particular, versus the pound, falling by over 3%. The pundit tug-o-war continues with some still believing that the slowing of asset purchases (QE) by the Federal Reserve will begin this month after the Federal Open Market Committee’s (FOMC) two-day meeting on the 17-18th.

The mix of data out of the US has called to question whether a September taper is as likely as previously thought. Markets are anticipating further data releases at the beginning of this month to give a much clearer view as to a possible delay past September. Positively revised GDP data has given more impetus to those calling for action sooner rather than later whilst the cautious few would like to see further positive data and a retracement of bond yields on top of the looming debt ceiling in Mid-October before actionable words can be uttered by the Fed. On top of tapering, the US is working towards inserting itself more prominently into an escalating Syrian conflict which, were the situation to descend in the trouble country, would have dire consequences for markets.

What lies ahead for USD

Even with the current US dollar weakening in the past two months, projections are still relatively upbeat given that data is aligning more so with a healthier economy bringing the tapering game more into play. If positive data does unveil itself we could see GBP/USD head back down strengthening nearer to the 1.50 level over a trending two-week movement period. It is likely that although the data may come in positive, the FOMC will delay the September taper in favour of later date.

The current US unemployment rate at 7.4% is expected to remain unchanged for this month’s release, with jobless claims heading lower expectations are that non-farm payrolls will move up towards, and potentially past, 173K from the current 162K level seen in August.

If these employment predictions materialise, the Greenback may very well benefit across the board as its safe-haven appeal will be boosted, especially given the escalation of Syrian conflict and its impact on the international markets, i.e. risk off. Of course, though, any misses on the data side and, if congress does not find a solution for the upcoming debt ceiling, the dollar could be held at weaker levels going forward.

August 2013 Newsletter

by FC Exchange , 07 August 2013 14:16

August Market Summary

Summer has finally arrived and with it a new heir to the throne. The Queen can now breathe a sigh of relief. "It’s a boy", came the screams from St Mary’s Hospital London, so no need to be dragged into dull debates or to draw up new constitutional laws, for now. OK, slightly deviating from currency matters, although as with the Olympics last year, the UK should benefit from the inevitable tourism derived from Prince George of Cambridge. However, don’t be fooled and get caught up in the feel good factor; if you have budgets, stick to them. When the dust settled after the Olympics last year, reality gripped and the pound fell for six months consecutively.

One certainty is, however, that the global economy appears to be back on track; the eurozone appears to have turned a corner with manufacturing on the rise and unemployment falling. Good news at last. For now, the main watching brief will be over in the US where any hints of when (and by how much) the Federal Reserve will taper its economic stimulus should guide the markets on both sides of the Atlantic. If, as expected, they start the process in September, we can expect a strong dollar on the lead up and one would imagine for the remainder of the year.

GBP - Mark Carney finally finds his feet beneath his BoE desk

Since our last monthly update, we’ve seen more positive releases into the market with the recent Purchasing Managers Index (PMI) surprising all around. Manufacturing PMI made the biggest advance, hitting its highest levels since March 2011. Services PMI has consistently been on an upward grind since February this year and has seen the biggest jump on a month-by-month basis occur in this latest reading where it’s at its highest since December 2006 and currently setting the pace internationally on the indicator. Sterling appreciated only mildly against the US dollar on the month thanks to mixed data from the US of late, pushing back tapering.

A new age abounds for monetary policy at the Bank of England (BoE) with the new Governor, Mark Carney, unveiling the Bank's new framework for forward guidance. It is likely that he will push for a time-related forward guidance given his successful experience with it at the helm of the Bank of Canada. It may be used instead of a data-related guidance seen in the US, targeting a certain level on a data point, e.g. 6.5% unemployment for any potential rate changes.

Since taking up office, we have yet to see Mr Carney flex his muscles. With data surprising on the upside, it will be interesting to see his stance. His first official statement will accompany the August inflation report. On the housing front, we’ve seen continued improvement throughout July with the latest data from Nationwide showing a 3.9% year-on-year rise by comparison to the previous reading of 1.9% from June’s year-on-year numbers. If housing prices continue to move upward we should start hearing concerns of a potential housing bubble further down the road and housing’s obfuscating effects on the real economy. The NIESR GDP estimate came in at 0.7% on the previous 0.6% reading showing that the UK has produced more goods and services in the last three months than expected. This is only an estimate, of course, so expect a change in a month’s time when the official figure is published.

What lies ahead for GBP

We have had Governor Carney present the inflation report, shedding some light on the kind of forward guidance the BoE will incorporate into their policy kit. The Governor and his Monetary Policy Committee (MPC) have named 7% unemployment as a threshold for interest rate changes: “The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7% and then we will reconsider.” The MPC only expects unemployment to fall below the threshold in the third quarter of 2016 and reaching this level will not mean an automatic adjustment in interest rates.

Mr Carney, in his letter to George Osborne, mentioned that “if material risks to price or financial stability” do increase they will look to ‘knock out’ the 7% threshold and re-assess their policy. The Governor also mentioned to George Osborne that the MPC of the BoE will stand ready to push through further quantitative easing (QE) should the need arise. In his press statement he stressed that "what the MPC is doing is it's providing much greater clarity about how we would react to underlying economic conditions, how we'd set monetary policy."

Technically we have support at 1.149 against the euro but expect any major negativities from the August inflation report to weigh heavily pushing through the lower-bound 1.14s. Support against the USD will be nearing 1.526 on the dollar with continued levels between 1.53-1.54 and any breaks above this range moving it further upper bound to low 1.54’s.

There is a good probability that Sterling will continue to suffer in the markets for the time being, with a seemingly negative bias towards the pound at the moment. This bias will likely continue in the pricing, given the weak surrounding conditions, and go on until more positive data has been drummed into the markets, which we may see by the end of this holiday month. Expect big Sterling appreciation to be more externally news-related rather than continued positive domestic data. Any data improvements from the UK aligned with the BoE’s guidance (unemployment) will now have a greater effect on Sterling than previously.

EUR - The Euro remains buoyant as data begins to surprise on the upside

Throughout the first half of the year, the euro has managed to hold firm, showing resilience to the appalling economic data that has emanated from the eurozone. Negative data has included a growth downgrade from the European Central Bank (ECB) and eurozone unemployment reaching record levels, with youth unemployment in Greece and Spain reaching a shocking level of 55%. This prompted the International Monetary Fund (IMF) to urge further rate cuts from the ECB in order to stimulate economic growth. Despite this data, the euro lost very little ground so we're possibly starting to see signs that the eurozone could be heading out of recession. Will we go on to see the currency strengthen during the second half of the year, though? It is perhaps a little too early to say, but some of the key growth indicators have provided surprisingly strong readings. July’s Purchasing Managers Index switched to a growth reading for the first time in 18 months, coming in at 50.5 which, crucially, is above the 50 point level that separates shrinking activity and growth.

Manufacturing data surprised as well with a reading of 50.3. German data was again the largest contributor but the economies of France, Italy and Spain also registered a further easing of contraction and solid growth among their manufacturers. On top of this, unemployment levels dropped for the first time in two years, coming down 24,000 to 19.26 million. This data raises hopes that the region can finally start to claw its way out of recession and although we have seen false dawns before it does improve confidence in the area and provide some much needed optimism.

What lies ahead for EUR

Numerous factors will determine the direction of the euro rates in the short to medium-term. Whilst the eurozone as a whole starts to show signs of life there are still divisions within the region, exacerbated by Germany challenging the legality of the European Central Banks ‘Outright Monetary Transactions' programme through the German Supreme Court. Although a decision is not due until the autumn, such a division will surely prove detrimental to the single currency. Meanwhile, European Central Bank President, Mario Draghi, claimed that he “sees no challenge to the ECB from lower rates”, potentially hinting at further rate cuts or perhaps more likely a sustained period of extremely low interest rates which, given Germany's increasing inflation, indicates further conflict to come between the ECB and Germany. This could certainly rest heavily on the euro’s shoulders. With economic growth still far from guaranteed, investors will be looking for more explicit forward guidance from Mario Draghi, although it is likely that he will remain as vague as possible and avoid including any dates or economic targets. Most analysts at present therefore consider the euro to have a neutral outlook for the foreseeable future, with the likelihood being that we will see rates remain range-bound for quite some time to come.

USD - 'Will they or won’t they' saga continues and drags the dollar lower with it

Over the past month, the Greenback has weakened across the board and in particular versus the pound, having fallen nearly 4%. Will or won’t the Federal Reserve taper down on QE has been the general question on people's mind over recent weeks and this continuing uncertainty has been the dollar’s undoing.

To add to this, a recent spate of substandard economic figures has also helped to cloud the economic outlook and it has become increasingly difficult for Federal Reserve President, Ben Bernanke, to offer the markets any clear future forecast. Central banks around the globe are trying desperately to offer investors and the market some form of forward guidance; however, Bernanke himself has told us that interest rates will remain low for an extended period of time until employment levels come back to the desired levels. He has gone as far as saying that QE will be reduced, it's just not yet known to what extend and at what time.

What lies ahead for USD

Although the US dollar has weekend in the past month, the forward projections are relatively upbeat and if certain criteria are met, then sub 1.50 (Interbank) versus the pound could be seen in the short-term. The Federal Reserve has hinted at the possibility of higher interest rates only if unemployment levels fall to 6.5%, while maintaining a level of inflation below 2.5%.

With current unemployment levels at 7.4%, predictions are that we could see unemployment reach 6.5% by the summer of 2015, with any rise in GDP growth likely to bring this prediction forward a year.

If these unemployment predictions materialise then the Greenback could benefit across the board as its safe-haven appeal will be boosted, with investors flocking to a currency with a renewed positive economic outlook.

AUD - Aussie dollar continues to show signs of weakness

Over the last four weeks, Australia’s dollar has lost up to 7% versus the pound on the back of an ease in monetary policy from the Reserve Bank of Australia (RBA), weak growth out of China, and some softer economic data releases. The cut in the Australian cash rate from 2.75% down to 2.5% announced by the RBA last week was much anticipated but speculation of up to two more rate cuts over the next 12 months has also been priced into the exchange rate.

Since 12 March 2013 when we’ve seen GBP/AUD hit the lowest level ever at 1.4380 Interbank; the currency pair has rallied 20% to a three year high of 1.7268 Interbank.

So for those clients looking to buy Aussie dollars, now is a great time. The AUD depreciation means that to buy A$200k in today’s market, it will cost you almost £23K less that it would have just four months ago. Obviously, if you flip this around the other way, for clients looking to sell AUD and buy GBP then this is unwelcome news and maybe now is the time to bite the bullet and cut your losses. Speak to one of our brokers who will be well placed to explain exactly how we can help you regardless of your requirement.

July 2013 Newsletter

by FC Exchange , 11 July 2013 11:12

June market summary

Last month saw Sterling continue May’s depreciation against the euro and USD dollar. We saw a lot of volatility nearing Mark Carney’s arrival with a strong Sterling sell-off and devaluation following his fourth day in office as he took the stage after rate decisions.

We have seen market-affecting information come from statements of the heads of the central banking institutions of the US, UK and the eurozone, with the Bank of England (BoE) having entered new territory of guidance following their more ‘forward’ cousins across the Atlantic.
Mervyn King declared that a recovery was under way in the UK during his final days, albeit a fragile one, that could use a little push through further quantitative easing (QE) from the current £375Bn programme in place. He did not have enough support from the rest of the Monetary Policy Committee (MPC) to go through with further stimulus with a maintained out-voting of 6-3 for no QE.

By contrast, the US Federal Reserve (Fed) followed suit in maintaining its current purchases without ‘taking the punchbowl away’ from the markets. The US has been gaining ground on the euro and Sterling thanks to the calm following stormy speculation of tapering after the Fed's Chairman laid out the Federal Open Market Committee's expectations. Unemployment remained at 7.6% from the prior increase, but it is surrounded by more positive jobs data in the form of hourly earnings and nonfarm payrolls which should bode well for tapering.

The European Central Bank (ECB) of late has maintained it dovish stance. The ECB chief, Mario Draghi, this month insisted that there will be "a gradual recovery by the end of the year". The data however contradicts his views as continually negatively-skewed data released by the members, has even dragged Germany down with it.

GBP - Mark My Words

Our newsletter reports for Sterling of late have been mostly glowing reviews of a currency and an economy firmly on the up. The recent Government spending review from UK Chancellor, George Osborne, seemed to support this view, describing the UK economy as being in the process of making a transition from “rescue to recovery”. Fundamental economic data indicators have also been very supportive of this proposition, ostensibly adding to an already robust start to Q2. But all is not as rosy as it appears in the UK. Major threats to the value of Sterling are apparent in the appointment of Mark Carney who many spectators are adamant will adopt a proactive monetary policy stance, along with an approach to actively devalue the pound.

PMI figures released in June were broadly positive, with July’s print following suit by highlighting the UK services sector gauge which surged to a two year high. So why has Sterling performed so poorly recently? Although these positive figures have augmented confidence in the economy and belief that long-term Sterling strength will come to fruition, the pound, for the time being, is strongly on the back foot. Analysts are also almost unanimous in their forecasts that Sterling will continue to lose ground against most of its major currency pairs for the foreseeable future. It is also clear that the BoE will take far more convincing with regards to the UK’s return to sustainable growth, meaning that QE may be back on the table. This is the major domestic factor weighing on the strength of the pound at the moment.

The NIESR GDP estimate this month also seemed to cement the view that an economic recovery is underway, with growth coming in at 0.6%. The Royal Institution of Chartered Surveyors (RICS) also released its Housing Price Balance indicating that house prices increased 21% in comparison to the 5% increase reading in May. In fact, one of the only negative fundamental figures we have seen is for manufacturing production, which accounts for 10% of the UK economy, when it surprised to the downside with less than expected year-on-year growth coming in at -2.3% in comparison to the -1.4% seen previously.

What lies ahead for GBP

Despite the aforementioned positivity, Sterling is currently posting the lowest level witnessed against the US dollar since June 2010. Once this strong support level has been breached, we are somewhat back in unknown territory, with the potential to fall to 1.44 and 1.35 against the Greenback. Sterling is not faring much better against the euro, which is prompting market participants to question what the UK actually has to do to stimulate a stronger currency. All in all, the UK seems to be fighting a losing battle; expect the slightest mention of QE to see Sterling fall to fresh lows across the board.

The outcome of the first BoE monthly policy meeting with Mark Carney at the helm did not end well for the pound. Although it was the decision of the committee to leave interest rates and its asset purchase target unchanged, it was in fact the BoE’s unexpected public statement issued directly afterwards that really shook the pound hard - falling nearly 1.5% in a matter of moments. The statement highlighted observations from the central bank, which noted that over the past few months, data from the UK had been consistent with its outlook for output growth and inflation revealed in its May report.

The section of the statement that really hurt the pound stated that even though there has been an uptick in sentiment, upward movement in market interest rates would weigh on the bank’s outlook and it was implied that any expected future rate rises would not be warranted by the recent developments in the UK domestic economy, i.e. interest rates will not increase in the foreseeable future. Even though we have seen an upturn in services, manufacturing and construction growth in the past month, the markets reacted ruthlessly to the fact that the central bank will not look to raise interest rates in the near future.

EUR - Zoned Out

As the first half of 2013 drew to a close, the single currency seemed to lose ground as data in the eurozone continued to disappoint. With jobless figures rising to all-time highs, the direction of the euro seemed all too clear. To make matters worse, and in stark contrast to the eurozone, UK and US data was consistently coming in above expectations, increasing speculation that the end of the central bank’s QE programmes in these countries were imminent. The rate decisions in the UK and eurozone on the 4th of July therefore had increased significance and, in particular, the monetary policy statements that followed. With new BoE governor, Mark Carney, issuing an unexpected statement indicating that QE was far from off the table, the euro strengthened significantly against the pound, gaining almost 2 cents in a matter of minutes. So, with the pound faltering, the euro would surely strengthen significantly against it? Well, not quite. The rate decision and following statement from the European Central Bank (ECB) also meant it was a difficult day for the single currency. ECB president, Mario Draghi, well known for his post rate decision comments, had plenty to say regarding the direction of the euro going forward. He commented that rates would stay on hold for “an extended period” and when questioned how long this would be he went on to say that “an extended period of time is an extended period of time, it is not six months, or 12 months, our exit is very distant.” He added that they would “remain accommodative” for as long it takes to stimulate growth which was viewed by traders and analysts as vague, giving very little insight into the ECB’s future policies, although it does suggest that interest rates in the eurozone will remain low for the next few years. This eroded much of the gains that were seen versus the pound and resulted in the euro dropping under the significant 1.30 level versus the US dollar.

What lies ahead for EUR

As the markets continue to digest this news, it does appear that the euro has fared quite well considering all this and has managed to move on despite the weaker-than-expected economic data from Germany that followed shortly after. The fact that Greece looks likely to be granted its next and largest tranche of bailout funding thus far seems to be prevalent and is currently supporting the euro. Looking forward, data releases from Germany (and for the eurozone as a whole) scheduled for today and tomorrow will give a clearer indication on rates for the short-term. Longer-term, Mario Draghi now also seems to be following the pattern of Ben Bernanke and Mark Carney in giving the markets forward guidance on when interest rates may change. This is a significant departure from anything we have seen before from Draghi as he has rarely discussed anything beyond the short-term. Many analysts believe that part of the euro’s recent strength can be attributed to Draghi and the ECB’s tight-lipped stance but the fact that he is now considering a much looser monetary policy could weigh on the single currency down the line.

USD - Tinker, Taper, Soldier, Spy

The US dollar has been the standout performer across all markets over the last month. Despite some volatile swings, the most recent move higher since the middle of June has seen the US dollar rally over 5% versus most of the major currency pairs. The rise in the dollar has been even more aggressive against growth currencies such as the AUD/NZD, with USD now gaining over 15% versus the AUD since April and showing very few signs of slowing down.

In terms of recent data, the US has seen very mixed results which is probably why we have observed vast swings in momentum over the past few months as analysts continue to argue over whether we will see the end of QE in the coming months. Recently, we’ve seen a disappointing ISM Non-Manufacturing survey, and the recent US GDP data showed an expansion at an annual rate of 1.8% - down from a previous estimate of 2.4% growth. However, last week the widely anticipated nonfarm payroll data did not disappoint the market. The US labour market figures made for positive reading for investors holding US dollar denominated assets. The news that the world’s largest economy added a greater than expected 195,000 new jobs to its combined payroll last month has sent the markets into a tailspin, with the Greenback being the major beneficiary. The data has performed very much in line with the Fed’s prediction that they will create 200,000 jobs per month; the current average is 202,000 jobs per month.

There is no doubt that the main driving force behind the recent dollar strength has been the prediction that the Fed's Chairman, Ben Bernanke, will announce the end of the US stimulus programme in the near future. In the past, we have seen any positive US data strengthen the dollar as it heightens the chance of the end of QE. By contrast, any negative US data would see the dollar weaken as it strengthened the argument that the US recovery is still a long way from being sustainable and more stimulus would be needed to aid the recovery. Recently, we have seen these rules change and the dollar has continued to rally regardless of the US data being positive or negative.

What lies ahead for USD

The recent dollar strength is hard to overlook and with negative US data having little effect in slowing the currency's progress, fundamentally the current trend looks positive for the dollar’s future. However, we still need to breach some important technical levels for the current momentum to continue in the long-term. Most analysts have highlighted that the next major support level versus the pound will be the yearly low of 1.4829 (Interbank). If the level does not hold the focus will switch to the 2010 low of 1.4227 (Interbank).

The main focus of the dollar strength over the last few months has been the ‘will they/won’t they’ argument to put an end to QE. Many analysts think that last week’s better than expected employment report has put an end to the speculation and the Fed will power down its massive stimulus programme as early as September. Whilst the stimulus program has no doubt been the main focus for many, we cannot overlook the part that has been played by the safe-haven appeal of the USD. Historically, when the stock market lands in financial difficulty we see investors run for cover and invest in safe-haven assets such as the USD, JPY, CHF and commodities like gold. Lately, we have seen a major slowdown of growth in Europe and in the world’s fastest growing economy China. It is easy to argue that there is a lot of market risk and underlying global issues that could see investors shift away from riskier assets into safe havens. Usually we would see investor funds being spread between various safe-havens, but over the past year the USD has been the preferred choice for investors given that the other safe-haven currencies have underperformed. The JPY and CHF have endured vast amounts of stimulus intervention from their respective central banks which look set to continue in an attempt to weaken their currencies and improve growth. Commodities such as gold have also faltered with softening global commodity prices so USD may be the only safe-haven currency left for investors if we see another financial crisis.

Yesterday we did see a small setback for the dollar when the minutes from the FED’s June Federal Open Market Committee showed around half of central bank officials think the Fed should exit its $85Bn per month bond buying programme by the end of this year. Investors were disappointed that the minutes offered little indication whether the central bank will start to wind down stimulus efforts later this year. The Fed chairman went on to say that the bank was in 'no hurry' to increase rates even when the jobless rate falls to its 6.5% target. Whilst the future looks bright for the dollar, be aware that opinion can change very quickly. If we see a run of negative US news and data we could see a very sharp reversal of the recent strength.

June 2013 Newsletter

by FC Exchange , 12 June 2013 10:55

May market summary

After positive gains throughout April, Sterling failed to make any further headway against the euro as speculation grows that incoming Bank of England Governor, Mark Carney, will actively pursue a weak Sterling policy.

Although we have recently seen incoming bank Governors actively weaken their country's currency (most noticeably in Japan) to boost exports, it should be noted that as the UK economy shows signs of sustainable economic growth it may prove impossible for Governor Carney to get the necessary backing required from the panel of nine Monetary Policy Committee (MPC) members to support policies such as further quantitative easing (QE) which would almost certainly weaken the Great British Pound.

Eurozone economic data continues to disappoint with unemployment reaching record levels, whilst youth unemployment in Greece and Spain reached a shocking level of 55%, keeping EUR firmly under pressure. With questions regarding the legality of the eurozone bailout policies reaching the German Supreme Court, EUR volatility looks set to continue as a ruling against the European Central Bank would prove detrimental to the single currency.

Meanwhile speculation that the European Central Bank (ECB) is still considering the prospect of negative interest rates on deposits, keeps the ECB firmly on a collision course with Germany who would surely vehemently oppose such a policy.

With the US economic recovery remaining fragile, recent gains for the US dollar were sharply reversed as an increase in the rate of unemployment announced at the start of June from 7.5% to 7.6% contradicted speculation that the Federal Reserve stood ready to wind down its QE policy.

Whilst the US economic recovery certainly remains stronger than both the UK’s (which is showing signs of growth) and the eurozone which recently announced its sixth consecutive quarter of contraction, a prolonged period of QE by the Federal Reserve would undoubtedly prove unfavourable for the dollar.

UK QE: Can he or Carney?

In a month where the Great British Pound has seen more ups and downs than a snakes and ladders tournament held on a roller coaster, the question currently on everybody’s lips is whether the incoming Bank of England (BoE) Governor will take a proactive monetary approach. This approach is expected as history has shown that incoming Governors attempt to prove their worth from the outset, often to the detriment of the value of the nation’s currency.
This month it must be noted that Sterling’s gains versus the euro are currently stalling; despite this, it continues to push the boundaries with other currencies, particularly the commodity currencies. The most recent growth figures published from the UK may be the protagonist to these gains, even building on the initial positive start to Q2 figures witnessed in April, with further PMI improvement in May. Despite the turbulent ride Sterling has witnessed recently, figures from the manufacturing, construction and services sectors have all signalled positive growth momentum. In fact, the PMI figures from May as a whole were the strongest witnessed since March 2012, which is very positive indeed, and is lending some much needed confidence to the market.

The National Institute for Economic and Social Research (NIESR) GDP estimate for May continued the string of positive fundamental economic data releases, posting GDP growth of 0.6% and indicating the UK economy may be firmly back on track. Despite this, opponents argue that the GDP estimate for April was 1%, meaning GDP may once again be falling.

With the market uncertain as to how to react to the incoming BoE Governor, Mark Carney, Sterling is being held back from making big gains off the back of these positive data releases. The truth is that even though Carney will be massively influential and possibly even instrumental in any decision to increase QE, he still only controls one vote of nine in the MPC. It will be an uphill task for him to persuade another two members to vote in favour of additional stimulus while the UK growth remains on its current uptrend.

What lies ahead for GBP

Yesterday’s GDP estimate from NIESR (The National Institute for Economic and Social Research) continues the stream of already positive data seen recently from the UK, and adds hope to growth in the UK economy, and Sterling’s value alike. The data came in at an estimated 0.6% for the month of May, indicating that while the second quarter is showing consecutive monthly growth, there may be a slow down since April’s 1% expansion.
While the figure from the NIESR is not an official one, the body’s estimates are well respected, and have been known to directly influence future monetary policy. In one month, however, we will see the official release from the Office for National Statistics, and how it will impact the credibility of the NIESR going forward.
The path of the BoE, and in part, the value of the arguably Great British Pound, will soon be under the governance of Marc Carney, following the completion of Mervyn King’s 10 year reign.
While Mr King has certainly helped encourage the UK to show some signs of growth thanks to an introduction of monetary stimulus early on in the global financial crisis, he is leaving the central bank in worse state than he found it in 2003. Realistically, however, this does not mean the same will happen to Mr Carney, who is widely renowned for turning around the financial situation of his native Canada.
Mark Carney is in this for the long game however, and more monetary stimulus, most likely again in the form of QE is expected to be the cards he will show at his first MPC casino meeting in July. This translates into weakness for Sterling as soon as more hints are made to that effect, and could continue for some time after the comments he made shortly after his captaincy was announced earlier this year. This resulted in the pound dropping off a proverbial Niagara Falls. Many outright optimists out there believe that these comments were Carney’s means of weakening the pound in an effort to encourage investment from overseas and in turn growth, and that his policy going forward will merely play out his vision, with the damage already being priced in. Only time will tell.

Europe, then you’re down

Another month passes and we have witnessed yet another dismal set of jobless figures from the eurozone. Unemployment increased by 95,000 in April and if the trend continues, an unenviable milestone could be reached by the end of the year, with 20-million on the dole in the seventeen nations that use the single currency, increasing a jobless rate which already stands all-time high of 12.2%. The phrase "lost generation" is entirely appropriate when you consider that one in four of all under 25’s across the region is out of work, with Greece and Spain’s youth unemployment at a staggering 55%.
The problem that the European Central Bank faces in dealing with unemployment is that they have to cope with so many different economies and conflicting opinions on how to solve the crisis. In the US for example, unemployment has been kept under control by the fact that the Federal Reserve are prepared to embrace QE on a grand scale. This is in stark contrast to the European Central Bank, where the failure to loosen monetary policy has been coupled with tax rises and spending cuts, even when it was clear that most of the economies were struggling. The crisis is therefore exacerbated by this unwillingness or inability to change the macroeconomic policy and the mistakes we are currently seeing mirror those of the Great Depression in the 1930’s.
French President, Francois Hollande, is certainly optimistic though, declaring that the eurozone crisis is over. "I believe that the crisis, far from weakening the eurozone, will strengthen it." He continued: "now, we have all the instruments of stability and solidarity. There was an improvement in the economic governance of the eurozone, we set up a banking union, we have rules on budgetary matters that allow us to be better co-ordinated and have a form of convergence."

What lies ahead for EUR

European Central Bank (ECB) President, Mario Draghi, believes that the European economy will return to growth by year-end, offering policymakers a reason to hold back on fresh stimulus. "Euro-area economic activity should stabilise and recover in the course of the year albeit at a subdued pace", stated Draghi, adding that "we will monitor very closely all incoming developments and we stand ready to act." Mr Draghi was speaking after the ECB's latest rate decision where it left its main refinancing rate at 0.5% after reducing it by 0.25% last month. The ECB also held the deposit rate at zero and the previous talk of negative deposit rates was mentioned as just one of many options that the ECB has. Among the other options, he mentioned lending more money to banks, easing collateral rules, reviving the market for asset-backed securities and providing investors with greater guidance on how long borrowing costs will stay low. The euro has confounded expectations and performed reasonably well in recent weeks. Ordinarily, talk of negative interest rates for an economy would result in investors looking elsewhere, but the single currency has held its ground in the aftermath of the comments. Recent German data has been strong and is perhaps keeping the euro artificially high, masking the problems within the eurozone.
On the horizon in the short-term we have a German Supreme Court hearing on the eurozone’s bailout policies. The main bone of contention is the ECB’s decision to prop up the Italian and Spanish bond markets, which helped save the eurozone last July as it stopped the debt crisis from spiralling out of control. It did, however, result in German taxpayers being liable for hundreds of billions of foreign debt and judges are to consider claims that the ECB is overstepping its mandate. A ruling against the ECB would reignite problems within the eurozone and we could see a weakening of the euro as a result.

Greenback to black

In May, attention was focused on the continued talk of tapering of the US Federal Reserve’s $85Bn monthly bond and asset purchases, aptly named Quantitative Easing Unlimited. The temperature has steadily risen on the debate as to whether to start sooner, rather than later.
The Federal Open Market Committee has indicated unemployment data amongst the largest factors on their decision. The data has been mixed, but tilted to the positive, with the most closely watched indicator, Non-Farm Payrolls, surprising on the upside and increasing to 175,000 in comparison to the previous 145,000. Unemployment rate data from last week came in at 7.6%, weaker than the previous (and forecasted) 7.5%. The USD has seen strengthening against the GBP through May, starting at 1.55978 at the interbank level, moving to 1.50193 nearing the end of the month. Recently, however, it has seen some weakening back up to 1.56837 on the reduced expectations of the Fed tapering this month.
The recent data out of the US has seen fragility, with quarter-on-quarter GDP maintaining 1.2%, an improved housing market and sentiment from Purchasing Managers Indices and consumer surveys. This all indicates a temperate recovery is under way in the US.

What lies ahead for the USD?

Given the mixed data, it is problematic to make any concrete forecasts, but with most data out of the US being positive one would have to expect the USD to take a long strengthening position. This is especially prevalent with the increased tapering rhetoric indicating the factors affecting action are aligning towards removing QE. This would be a positive for the USD with a slowing of monetary flow strengthening the currency.
In the short-term, it will continue to be dominated by continued and improved data expectations coming out throughout this month with backlashes on any negative data. We would expect volatility up until the Federal Open Market Committee meeting where more light will be shed on the Fed’s plans looking ahead. Ben Bernanke’s utterances of tapering will be heard with utmost interest, strengthening the dollar if he speaks of any preparations or removal of the punch bowl for the next meeting.

The obvious important data out this month comes in the form of decisions and speeches as the markets gear up for the FOMC meeting on the 18th and 19th and the ensuing direction of the market being made clearer.

May 2013 Exchange Rate Survey

by FC Exchange , 21 May 2013 14:01

FC Exchange has used an independent company, GSA Business Development Ltd, to gather and collate information on exchange rates from various institutions to help make exchange rate comparisons.


May 2013 Euro Rate Survey


FX ProviderGBP/EUR Exchange Rate     GBP cost for EUR 250,000Saving GBP cost for EUR 1,000,000
FC Exchange   1.1820 £211,505.92 £846,023.69
Lloyds 1.1530 £216,825.67 £5,320 £867,302.69
RBS 1.1534 £216,750.48


NatWest 1.1534 £216,750.48 £5,245 £867,001.91
First Direct 1.1534 £216,750.48 £5,245 £867,001.91


1.1615 £215,238.92 £3,733 £860,955.66


1.1700 £213,675.21 £2,169 £854,700.85


Survey results based upon moving £85,000 into EUR, conducted 16 May 2013 and information was gathered between 09.45am -10.45am. Values in the table are the equivalents using rates given.


May 2013 Australian Dollar Rate Survey


FX Provider   GBP/AUD Exchange Rate     GBP cost for AUD 250,000SavingGBP cost for AUD 1,000,000
FC Exchange   1.5525 £161,030.60 £644,122.38
First Direct 1.4410 £173,490.63 £12,460.04  £693,962.53
HSBC 1.4413 £173,454.52 £12,423.92 £693,818.08
NatWest 1.4589 £171,361.99 £10,331.39 £685,447.94
Santander 1.5000 £166,666.67 £5,636.07 £666,666.67
RBS 1.5003 £166,633.34 £5,602.74 £666,533.36
Lloyds 1.5150 £165,016.50 £3,985.91 £660,066.01
Halifax 1.5161 £164,896.77 £3,866.18 £659,587.10


Survey results based upon moving £55.000 into AUD, conducted 16 May 2013 and information was gathered between 09.45am -10.45am. Values in the table are the equivalents using rates given.


May 2013 USD Rate Survey


FX ProviderGBP/USD Exchange RateGBP cost for $250,000SavingGBP cost for $1,000,000
FC Exchange 1.5210 £164,365.55 £657,462.20
HSBC 1.4292 £174,923.03 £10,557.48 £699,692.14
RBS 1.4830 £168,577.21 £4,211.66 £674,308.83
First Direct 1.4830 £168,577.21 £4,211.66 £674,308.83
NatWest 1.4886 £167,943.03 £3,577.48 £671,772.13
Lloyds 1.4895 £167,841.56 £3,476.01 £671,366.23
Santander 1.4900 £167,785.23 £3,419.69 £671,140.94
Halifax 1.4930 £167,448.09 £3,082.54 £669,792.36


Survey results based upon moving £95,000 into USD, conducted 16 May 2013 and information was gathered between 09.45am - 10.45am. Values in the table are the equivalents using rates given.

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