May 2013 Newsletter

Market summary for April

After a negative start to the year, Sterling sellers finally enjoyed a sharp reversal of fortunes as Gross Domestic Production (GDP) figures acted as a catalyst for a Sterling rally that breached 3 month highs against the euro. Despite credit rating agency, Fitch, deciding to follow Standard and Poors in cutting the UK’s revered Triple A credit rating in April, the UK’s economic outlook has improved significantly over the last month. However, concerns remain regarding the sustainability of Sterling’s rally, with incoming Bank of England governor, Mark Carney, admitting that the “UK (is) still a crisis economy”.

In the Eurozone, concerns surrounding the Cypriot banking crisis have been replaced by concerns that the European Central Bank (ECB) may be about to introduce negative deposit rates for the first time. An interest rate cut from 0.75% to 0.5% by the ECB at the start of May was well received by the markets with many seeing the interest rate cut as honouring their previous commitment to do “whatever it takes” to promote stability for the eurozone. With economic data remaining weak throughout, the ECB face an unenviable task of providing support for peripheral European countries without ignoring the needs of Germany, which would lead to a deeper eurozone recession.

Signs that the US economic recovery is stalling continue to weigh heavily on the US dollar. Significantly improved non-farm payroll figures, showing the US economy added 165,000 in this sector in May compared to a below par 88,000 the previous month provided some short term relief for the US dollar. However deteriorating economic data maintain fears of further quantitative easing (QE) which would have a short term negative impact on the US dollar. Despite an undeniable slump in economic data from the US resulting in a Gross Domestic Production (GDP) annualised figures of 2.5% missing forecasts of annualised growth in the first 3 months of 2013 (Q1) of between 2.80% and 3.2%, the US economic recovery continues to significantly outpace its counterparts in the Eurozone and UK, with GDP growth in the UK forecast to fall below 1% for the whole of 2013.

The Great British Pound – Finally some sunlight through the clouds

Following a plethora of poor data releases, pessimistic forecasting and a general air of negativity surrounding the Great British Pound (GBP) this year, we have finally seen some positivity return to the market, albeit mostly centred on this month’s GDP figure. Recently, there has been a tendency towards adverse sentiment regarding Britain’s economic performance, but, when the facts are analysed, an upward trend is clearly visible. For example, the quarterly change in output has risen from a contraction of 0.1% in the fourth quarter of 2011 to a 0% flat reading in Q1 2012, followed by a return to growth of 0.1% (Q2 2012), 0.2% (Q3 2012), 0.2% (Q4 2012) and most recently 0.3% (Q1 2013). Although progress has been slow, we’ve seen some progress, most importantly.

Although the growth statistics in themselves are positive for Sterling as a currency and economic recovery in general, Sterling has also benefitted (and continues to do so) from the decreased likelihood of further QE being adopted by the Bank of England. The Funding for Lending Scheme has been extended to early 2015 and politicians are still emphasising the importance of increasing lending to small to medium enterprises (SME) to prolong the recovery. This type of monetary activism coupled with the positive GDP figure has meant QE is firmly on the back burner for the time being.

Elsewhere, we also witnessed a report showing UK manufacturing grew more than expected for the month of April, which has brought about a feeling of renewed confidence in the UK. Alongside this the UK construction PMI beat a forecast level of 48.0 coming in at 49.4 and a significantly better reading than 47.2 in March, also contributed to the belief that the UK economy is on the cusp of sustainable economic growth.

Despite this recent positivity, we are still being reminded by cautious economists that the UK continues to face a long and arduous task ahead, although optimistic tones are reverberating around the market.

What lies ahead for GBP

QE, in a simplified sense, is the method whereby central banks resort to printing more money to boost a country’s struggling economy. In the case of the UK and Bank of England, the Monetary Policy Committee (MPC) has chosen to allocate this money to bond purchases, keeping down the cost by which UK PLC can borrow internationally and reducing the currency’s buying power.

With the better than expected GDP figure announced on the 25th of April, the threat of adding more of this commonly used monetary stimulus has alleviated somewhat, as it appears the already printed pounds have induced the desired effect. GDP for Q1 2013 was expected to print at 0.1% growth; however, Sterling was boosted when the result was 0.3% for the quarter, and gained even further when previously dire GDP figures were revised slightly upwards.

Inflation is the other problem the UK faces, but with this coming slightly more under control of late, price growth poses more conundrums for the policy makers in the Bank of England and Government alike. Traditionally, the best way to lower inflation is to raise interest rates to encourage people to spend less and create slightly less demand, in line with creatng more of an incentive to keep money with the bank, while getting a higher return.

Currently, there is less chance of adding more QE, as the effects could be unnecessarily detrimental to the buying power of Sterling. However, as inflation staggers towards the Government’s 2% target, there isn’t any real possibility of an interest rate hike anywhere on the horizon. We will need to wait and see if the already implemented procedures continue to drive the UK back to the power it once was. A warning though: doing too much could be hugely detrimental. Realistically there are not many other options for the MPC to help tackle the economy other than what has already been used, so QE will not be far from the decision makers’ minds while we retain our sovereignty.

EUR and Europe’s hope for a revival

Over the course of the last month, we have seen the euro continue to suffer as attention turned from the banking crisis in Cyprus to the bigger picture of how the ECB is going to deal with reviving growth in the region. As a string of poor data flowed in from the eurozone, including euro powerhouse Germany, the markets geared themselves up for some action from the ECB. They duly obliged at the rate-setting meeting by cutting the benchmark rate to 0.5% - much as expected. What did surprise though were the comments from ECB president, Mario Draghi, who left the door open to negative deposit rates if the data deteriorates further. In his press conference, President Draghi said the bank is technically ready for negative deposit rates and noted downside risks to the economy. The ECB has kept a zero rate on deposits in an attempt to discourage banks to just keep money at the ECB and activate the lending market. A negative deposit rate would be a far more drastic measure and mean banks will actually have to pay the ECB for holding euro deposits, stopping them from hoarding funds, much to the “frustration” of Mr Draghi.

The rate cut itself is not anticipated to make much of a difference to the eurozone economy, which is still expected to languish in recession when first-quarter figures are published later in May. It is seen more as a gesture that the ECB will do “whatever it takes” but realistically the impact will be marginal. There is little evidence that the rate cut will result in lower borrowing rates in troubled peripheral countries where they have remained stubbornly high compared to rates in principal countries such as Germany, where lending is seen as a far safer bet by banks. The issue of juggling the vastly different needs of these countries is an art that the ECB will need to master going forward.

What lies ahead for EUR

The ECB has attempted to give the euro a boost with its move to lower interest rates in a bid to get credit flowing in the monetary union. The accommodative stance shows a much needed recognition of the deepening economic issues that face the European Union’s weakest members, further to accepting recent harsh austerity measures. The problem is that if you go back over five years to the start of the recession you will see that unemployment rates are still rising throughout the area. During this time government debt as a share of economic output has continued to grow, thanks in no small part to the shrinking economies in the region.

Whatever optimism investors can muster rests chiefly on the ECB’s pledge to do “whatever it takes” to hold the euro together. This effectively means buying government bonds in countries that are still taking steps to return to fiscal health. The EU’s definition of fiscal health is a government debt level of less than 60% of GDP, which looks an unattainable goal for a large portion of the euro region. If these peripheral nations fail to manage their finances accordingly, they will eventually have to default on their obligations. The subsequent losses could be disastrous and far outweigh what we have seen already in countries such as Greece and once again could again question the survival of the euro. Whatever measures are taken will require an element of risk and a loss of sovereignty that Europe’s leaders, particularly Germany’s, have so far spurned. If they don’t come around then there is a chance that the ECB’s assurances won’t be enough to keep the euro intact.

The US Dollar – Has the sell-off subsided?

In April, all eyes were firmly focused on the important US employment data that was released last week, although this time the figure was good.

For the majority of April, the dollar was seen as a SELL currency by traders pushing GBP/USD Interbank rates up from the low 1.50 mark to 1.56 and EUR/USD interbank rates from 1.2750 to 1.32 in the space of just four weeks. The main reason for dollar weakness in the past few weeks was the threat of further QE and that resulted in the biggest bearish dollar correction this year (since April 24th). Poor Q1 growth figures from the US were seen a few weeks ago, putting the dollar firmly on the back foot. The reading printed 2.5% annualised with the market consensus being 3.2% so quite a lot weaker than the expected. However, the dollar sell-off did finally come to an end (for now) after better than expected non-farm payroll figures were released last week. The report indicated that the US economy added 165,000 jobs in the month of April, with the market consensus being for an increase of 145,000, and we also had upward revisions to the figures released for February and March.

This bodes well for the US economy and coupled with the current issues in the eurozone, the dollar could recoup some of its recent losses as investors look for a safer bet.

What lies ahead for the USD?

Without sitting on the fence too much, it is extremely difficult to correctly predict which way the dollar will move from this point. On the one hand we’ve seen positive jobs data reversing the negativity from previous months. US growth, albeit down on expectations, was still showing a decent number by comparison to other major economies and the issues in the eurozone could cause a flight to safety. These are all strong arguments that could result in further dollar strengthening moving forward.

On the other hand, one set of good labour figures does not mean that the US economy is out of the woods just yet. Recent economic data before the non-farm payrolls has been on the poor side and the need for further QE continues to linger. So it wouldn’t come as a surprise if traders continued to sell USD.

In our opinion (not to be taken as advice), the dollar’s safe-haven capacity will come into play a bit more, adding strength to the currency. If we see EUR/USD break back through the 1.30 interbank level on the downside, then that too, may act as a catalyst for further dollar strength. Obviously, we could be completely wrong but one thing is certain - volatility will remain high.

A few things to look out for over the next few days - Federal Reserve Chairman, Ben Bernanke, speaking at the Federal Reserve Bank’s 49th Annual Conference on Bank Structure and Competition and the release of US unemployment claims, which will be closely monitored to see if they back up last week’s non-farm-payroll figure.

April 2013 Newsletter

Sterling edges higher but gains could prove short lived

It is fair to say that Sterling sellers have not had much to celebrate in recent months. Dire economic fundamental data coupled with negative forecasts have seen the UK and its currency firmly backed into a corner and running out of options. Now we have seen Sterling stand up and fight back. Just as UK residents were digesting the news that their dream property abroad may be slipping out of reach, some sunshine has been seen through the clouds (albeit in the currency markets, the weather remains dire.) In fact, the UK is in a much brighter place than this time last month, but do not be fooled by the temporary rally; the situation is predicted to reverse and exacerbate.

In the eurozone we have witnessed a communal sigh of relief that the seemingly inevitable Cypriot euro exit did not materialise. More significantly, the eurozone managed to avoid the post-fallout shockwaves that would have reverberated around the whole region. In fact, Mario Draghi has already put a positive spin on the situation in Cyprus by suggesting that the bailout reaffirms the commitment made by the ECB to do whatever is necessary to save the eurozone. Nevertheless, the unprecedented events in Cyprus have justifiably left their mark and will continue to do so for some time to come, and the eurozone faces serious threats going forward.

If the core theme of this newsletter has so far focused on negativity, unfortunately the data released Stateside has been just as ominous. With the on-going eurozone economic concerns, we have been fairly reliant on the US for positive economic data. Unfortunately, the latest jobs figures firmly ended the recent positive run. Recent data indicated that in March the least jobs were added to the US economy for the first time in nine months. In fact, the world’s largest economy added just 88,000 jobs last month; analysts were expecting 200,000.

Sterling's gains – how long will they last?

We have witnessed encouraging signs from the UK of late, which have seen Sterling firmly on the offensive. Following the dire start to 2013 whereby the Great British Pound (GBP) tumbled from January highs just below $1.64 to $1.48 versus the US dollar and €1.24 to €1.13 against the euro. The rebound has been largely driven by non-UK specific factors rather than the UK’s own economic performance. Despite this, we observed encouraging data in the form of the UK’s services sector (which accounts for 77% of GDP output), which posted growth at the fastest pace seen for seven months in March. Last week, the ratings agency S&P also decided against downgrading the UK, as Moody’s and Fitch have seen fit to do, although they have kept the UK on negative watch. The fundamental question now is whether the recent Sterling rally is a sign of a reversal of the UK’s fortunes or whether we are simply observing a temporary reprieve.

Not all data we have seen released has been as positive, however. Last week we saw manufacturing and construction purchasing managers’ index statistics which indicated that the sectors remain in contraction. This will be of particular concern to the Bank of England Governor, Mervyn King, as he has categorically stated that manufacturing exports may be vital to ensure the UK’s economy is rebalanced and the trade deficit is combatted effectively.

The UK emerged relatively unscathed following the annual budget announcement by Chancellor George Osborne. This was despite a revised growth forecast, with 2013 GDP expectations lowered from 1.2% to 0.6%. Osborne has also tasked the Bank of England (BoE) directly with stimulating UK growth, which is no mean feat. King himself has suggested that a weak Sterling would directly aid the economy by way of increasing export demand, but this in reality has been of little assistance to the ailing economy. In addition, the eurozone crisis is obviously also affecting the GBP. Almost half of the UK’s exports are to Europe and account for approximately 15% of the UK GDP. In this case, the eurozone is a sinking ship that will take the UK down with it. Unless the region springs back from recession, a UK recovery would not come from exports and a weak currency.

What lies ahead for GBP?

There is significant downward pressure on the GBP and it will face many obstacles in the coming months that are likely to see the currency firmly on the back foot. The current Governor of the BoE, Mervyn King, is due to step down and this change of leadership itself is likely to put pressure on Sterling as markets anticipate a potential proactive monetary policy stance. If new Governor, Mark Carney, chooses to adopt similar methods to the Federal Reserve in the US or the Bank of Japan then we can expect an aggressive stance which could include increasing quantitative easing which is ultimately Sterling negative.

The gains Sterling has experienced over the last few weeks have also coincided with the return of eurozone fears which have reignited contagion concerns. Many eurozone inhabitants are also questioning the safety of bank deposits in the EU periphery following the Cyprus crisis. EUR weakness versus the GBP has also come about following comments from Mario Draghi that confirmed speculation the European Central Bank (ECB) had held discussions regarding easing monetary policy through an interest rate cut. Many analysts are predicting Sterling weakness moving forward as the GBP appears particularly unattractive in comparison to its peers in the G10. In fact, the consensus is a rebound to the recent low against euro of 1.1343 (£0.88) or possibly even the 1.1111 (£0.90) area is possible.

Although many policy makers are confident the UK will avoid the widely publicised triple-dip recession, this is by no means a done deal. Even the aforementioned positive service sector data suggests that at best GDP did no better than flat line in Q1. NIESR has also estimated the UK GDP expanded 0.1% in March. These risks mean the triple-dip could materialise and in fact remains a real threat moving forward.

The Euro – watch your deposits

In the last month, Cyprus has well and truly stolen the limelight. And, for all the wrong reasons. The unprecedented situation regarding the dreaded potential exit from the eurozone and messy bankruptcy have been avoided, but the repercussions are far reaching and have left the eurozone with a lasting impression. The inhabitants of peripheral countries in the eurozone, both individuals and companies, are now finding themselves at risk of a term that has been coined ‘bail-ins’ whereby bank deposits are raided to pay off national debts. This new credit risk will have a massive psychological effect on euro investors and may lead to a euro exodus into perceived safer havens such as the GBP and the USD.

This month, as expected, the ECB governing council voted to keep the main interest rate at 0.75% and desisted from implementing any new measures to boost the economy. During the subsequent public engagement, Draghi highlighted the challenges still facing the eurozone which were vast and included unemployment, sluggish growth and continuing debt issues. The markets are struggling to ascertain whether Mario Draghi’s riddles are euro positive or negative. The euro has gained a little due to risk appetite and the ECB once again pledging its commitment to the euro.

Other than the debt crisis, eurozone data has remained disappointing at best. We have seen growth rates diminish across the eurozone as a whole, which is contradictory to Mario Draghi’s promise of economic stabilisation and growth.

What lies ahead for EUR?

Investors and eurozone inhabitants are decidedly nervous – which country will the focus shift to next? Italy is looking like the next potential crisis hotspot. Along with political instability, the country is also facing continued economic contraction and alarmingly, and the health of the Italian banking system is rapidly deteriorating. It has been suggested that if Italy carries on at this rate then we could easily find the country in a very similar position to Cyprus, with its banks requiring recapitalisation.

The euro did manage to recover this month following some selective positive comments from ECB president, Mario Draghi. One such comment highlighted the Cypriot situation to prove the strong ECB commitment to the euro. The decisions by the ECB, along with the effort made by Cyprus to arrange an agreement, seem to be indicative of the pledge made by the ECB to always take action and promote stability for the eurozone – to do “whatever it takes”. It was cited as an example that member states are willing and able to ensure countries remain in the eurozone.

One concern moving forward is the performance of the eurozone's powerhouse, Germany. As the largest economy in the region, Germany is often seen to take the lead, contributing massively to the eurozone economy and consistently lending support to the ailing currency. However, even the economy in Germany is sluggish, and although we are expected to see a return to growth following the contraction witnessed in the final quarter of 2012, exports are falling and it now seems that Germany alone will not be able to avoid the quandaries currently being faced in the eurozone.

The US dollar – Grinding to a halt?

Up until recently, the US could do no wrong, its place was firmly cemented as the poster child of the currency markets, posting consistently positive fundamental data. Then we beheld the shocking release of the employment report. The statement of the all-important monthly jobs report indicated that the US economy added just 88,000 jobs in the month of March, the slowest pace in nine months. In fact, the best consensus had been 200,000 jobs. The release put the dollar firmly on the back foot and has the market paring back expectations of further quantitative easing (QE) in the summer. The appalling progress in the US labour market is more than likely to favour Bernanke and other pro-QE doves in the Fed.

Despite the negative jobs figures stateside, the fact remains that the US recovery is still far outpacing its counterparts in the UK and eurozone.

What lies ahead for USD?

Realistically the US needs more QE to further stimulate the economy, and this would ultimately encourage a weaker dollar.

Growth and confidence will only remain and increase if more jobs are created. With that in mind, we are likely to see the Federal Open Market Committee members react in an accommodative way in their rhetoric going forward. The next key pieces of influential data which will give the Fed officials some direction are the Advance Retail Sales out this Friday, as this is a monthly measure of sales of goods to the bottom line consumers, which in turn are paid for by job creation. Should that number print at 0% growth or even show a decline, it is then far more likely the Fed will react and extend their monetary easing program in the form of QE.

The next massively influential data release comes in the form of the Advance Gross Domestic Product number representing the first quarter of 2013. The Advance release is the first of three stages, followed by Preliminary, and then Final, so the Advance tends to have the most impact on market movement. Should the number come in showing any growth what-so-ever, it is likely that policy makers will feel vindicated, and thus continue on their current path.

There is something to be said for the Fed beginning to tighten monetary policy again and halt the printing of more money, if the desired effect continues to bear fruit. Before that can be speculated on, however, we would need to see more positive news out of the US than we have seen of late, and less of the dismal employment data released last week.

March 2013 Newsletter

Economic conditions intensify sending currency markets into turmoil

With the Great British Pound currently circling the drain and in real danger of being dragged down the proverbial plughole, these are the questions on everybody’s lips: how much worse can the predicament in the UK actually get? Will GBP/USD drop to 1.40? Is that dream overseas abroad suddenly out of my reach? Probably not, but the multi-year lows currently being witnessed have shrouded the market in uncertainty, especially as 2013 was supposed to be the first “post-crisis" year. Obviously, the UK didn't get the memo.

On the other hand, we have the United States leading the way with strong employment growth and a seemingly constant stream of positive fundamental data releases. With the distinct possibility of quantitative easing 3 (QE) now being wound down, we must analyse whether anything can stop this tour de force.

Finally, we have the euro, currently stuck in a trading range between USD strength and GBP weakness, and pushed and pulled in all directions and in danger of becoming unpredictable. We cannot disregard on-going Italian political instability, as much as Mario Draghi has attempted to play down the situation with his upbeat visions of grandeur and optimistic eurozone growth forecasts based on strong presupposed surges in global demand in 2013.

In reality, the currency markets truly are in turmoil, with fresh yearly highs and lows manifesting daily - now is the time to consult a specialist.

Sterling, where did it all go wrong?

In last month’s report we alluded to the fact that the pound’s start to 2013 couldn’t really have been much worse. Unfortunately, it could have been worse, as demonstrated by the performance of the UK in February and March.

Moody’s has seen fit to downgrade the UK’s prized AAA credit rating and it may only be a matter of time before other ratings agencies follow suit. This, coupled with the fact that fundamental domestic growth data from the UK has consistently disappointed, is painting a bleak picture for the UK economy. The situation has led to a substantial shift in rhetoric from the Bank of England (BoE) which has become more dovish than ever. Despite this, the BoE rate setting committee announced last week its decision to keep interest rates on hold at 0.5% and reject calls to implement more asset purchasing. This means the Monetary Policy Committee (MPC) has kept the interest rate at a historic low for four long years.

The MPC’s latest stance is likely to be a split decision amongst members, and many analysts still believe further quantitative easing (QE) is required to kick-start economic recovery. With little data from the UK to inspire confidence, moving forward we can expect Sterling to remain on the back foot. Nevertheless, many market participants state the fact that at least the UK has remained completely transparent, with all its poor results out in the open, unlike its counterparts in Europe.

The UK is still likely to witness a surge in demand during times of eurozone panic, as was observed during the Italian election fiasco. Although Mario Draghi played down the effect Italian election results would have on markets, the GBP still ultimately benefitted at the detriment of the single currency. This circumstance may prove vital for Sterling’s recovery because during times of increased appetite for risk, and when market sentiment is stable, Sterling seems to suffer. But if the value of the GBP is dictated by events elsewhere, how can we look to influence a recovery domestically? The notion that the value of Sterling could be out of our hands is a very worrying predicament indeed.

What lies ahead for GBP?

Sterling’s dire start to the year has continued into March with the UK beaten black and blue by negative economic data releases, a rating agency's downgrade, and a newly dovish stance from the MPC. This situation looks set to continue to put GBP on the back foot into the near future.

To start, fundamental economic data releases of late have left a lot to be desired. Weak January UK PMI figures were put down to the impact the snow had on the economy. On the other hand, February’s manufacturing and construction figures were inexcusable as they came in far below best consensus forecasts (and the lowest point since Autumn 2009). Positive news did arrive this month in the form of the Services PMI figures for February, which highlighted growth at the fastest pace for five months. With the service sector considered such a significant factor for UK GDP, hopes have been raised that the UK will dodge the dreaded triple-dip recession.

Following Moody’s decision to downgrade the UK’s prized credit rating, speculation is rife that the other ratings agency will follow suit, although if this is expected then it will be priced into the market, in which case we will not see a dramatic Sterling move following the announcements. Elsewhere. Chancellor George Osbourne is adamant he will not budge with respect to austerity measures - his Spring Budget on March 20th will reveal further details and is the next major event the market will be following closely.

The Euro - give me strength

The single currency; revered and resented in equal measure. A crucial confidant for UK farmers receiving their EU subsidies in 2013, a cruel courtesan for UK residents considering property purchases in Europe. The euro has actually traded relatively flat for the last month, stuck in a tight trading range whereby it remains strong and refuses to give back the gains it has made of late against Sterling, but also trying (and failing) on multiple occasions to break through the 52 week GBP/EUR low we plunged through last month.

Italy continues to weigh heavily on the currency and lead speculators to believe that perhaps the immediate sense of crisis in the Eurozone has not receded and its problems are as intense as they ever were. What has become apparent, once again, is that the previous disconnection between the Eurozone’s hard economic data and global investor’s perceptions seem to be realigning. The messy Italian election has prompted more questions than it has answers in terms of what will follow for the Italian Government. The Democratic Party, led by Bersani, failed to secure the parliamentary majority required to form a government, Berlusconi’s coalition made a late surge into second place, while the ex-comedian Grillo’s anti-austerity Five Star movement came in third place. Grillo has had the last laugh though as a third place vote truly shows the opinion of the Italian people with regards to Monti’s previous pro-austerity tenure.

Elsewhere, we saw the latest European Central Bank (ECB) policy meeting where the decision was announced to keep interest rates on hold. In the subsequent public engagement, Draghi admitted that the decision was not unanimous, however he was once again optimistic regarding eurozone economic recovery. The floating euro exchange rate came about once the EU had liberalised its capital markets, and once the ECB had opted for monetary autonomy. The resulting problem of the ECB maintaining historically low interest rates and restricting the money supply has been that the euro has become expensive relative to the currency of Europe's main trading partners.

Draghi also stated that a gradual recovery will be ubiquitous in the eurozone, commencing in the third quarter of 2013. The Central Bank head stressed that the implementation of structural reforms by sovereign governments would be a vital element in tackling the debt crisis and that strategies to combat youth unemployment should be a priority. Other positive comments included the point that banks have already repaid 40% of the net liquidity injected via the long term refinancing operations. Despite these positive projections, it has to be said that the eurozone is still currently experiencing recession and “necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.” The ECB's positive forecasts are heavily based on a presupposed strong boost in global demand in the latter part of the year, which may not materialise.

What lies ahead for EUR?

In terms of actual realised data, quantitative Eurozone growth indicators have failed to realise qualitative forecast confidence data. Sentiment gauges from the eurozone powerhouse, Germany, have come back very positive. However, actual data regarding manufacturing and services growth has been very disappointing, as they were in other peripheral countries. This situation of unequivocal disparity does not bode well for the eurozone economy moving forward.

The eurozone confidence survey from the beginning of March has highlighted the fact that concerns surrounding Italy are weighing on the market and will do for some time to come. Growth will also be a clear concern for the eurozone, despite Mario Draghi’s upbeat sentiment and confidence that the eurozone will in fact return to growth by the end of 2013. In fact, data has confirmed that the vast majority of eurozone nations contracted at a more aggressive rate than anticipated in the fourth quarter of 2012 (including Germany).

Although interest rates were kept steady by the ECB committee members, the risk of a rate cut increases with every month of contraction evident from the region. Let’s also not forget the other risks to the region (of which there are plenty), from the bailout of Cyprus, to Portugal’s request for a renegotiation of the terms of its own bailout. The recessionary pressures will continue to weigh on the eurozone, at least in the short-term or up until such point as Draghi proves that his forecasts can come to fruition.

US Dollar - the unstoppable force

It seems the US Dollar can do no wrong at the moment. It is the teacher’s pet setting the example for the unruly underachiever, the poster boy admired and respected by all. The undeniable and seemingly unstoppable strength of the Greenback is sending shivers down the spine of Sterling sellers whilst systematically allowing those with stockpiled dollars to rejoice.

As USD/GBP seems to be breaching a new high daily, only time will tell when/if the June 2010 Interbank rate of 1.4687 will be penetrated. In fact, the US dollar has been the principal gainer across the board, not just against Sterling. Positive fundamental economic data has been released in droves, firstly in the form of an upward revision to the Q4 initial GDP figure (which preliminarily had suggested contraction). This means that a return to growth has been reported from an otherwise stagnant 2012 (albeit marginally). Following the US fiscal cliff debacle, US data in February has, by and large, remained on the upside. In fact, positive data has been realised in consumer sentiment, housing data and manufacturing growth statistics, which have all added to investor confidence and expectations for a strong rebound in the first quarter of the year.

The USD has also enjoyed a rise as a result of overwhelmingly good employment figures across the pond. Those joining the labour force in the US have done so in large quantities, leading to a four year hike in employment rates. Confidence in the States is at an all-time high, unemployment is significantly down, and the increased taxation and slash in Government spending seems to be firmly on the backburner for the time being.

What lies ahead for USD?

The market is intrinsically and perpetually concerned with the implications that strong fundamental data will have on future monetary policy from the Fed, more specifically, the QE3 asset-purchasing programme. Now comes the interesting part: Ben Bernanke has recently given his testimony to the House of Representatives in which subtle clues were given that suggest a move to taper-off QE3 is not imminent. Despite this, major support still exists within the Fed to unwind the current QE3 policy as the US economic recovery gathers pace and uncertainty regarding the fiscal cliff diminishes. If the recovery continues and QE3 is wound down this year, the US dollar will spectacularly appreciate further.

Confidence will continue to grow in the US as analysts and market participants lean toward a strong growth forecast for the remainder of the year. The market is alive with enthusiasm that a secure currency has once again been established as the USA and US dollar look ever-more attractive to investors. This is a status quo that once established tends to remain in place as a self-fulfilling prophecy situation arises that sees overseas investment drive growth forward.

February 2013 Exchange Rate Survey

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.

February 2013 EUR Rate Survey

Survey results based upon moving £65,000 into EUR, conducted 1 February 2013 and information was gathered between 10h00hrs -11h00. Values in the table are the equivalents using rates given.

February 2013 AUD Rate Survey

Survey results based upon moving £60.000 into AUD, conducted 1 February 2013 and information was gathered between 10h00 -11h00. Values in the table are the equivalents using rates given.

February 2013 USD Rate Survey

Survey results based upon moving £68,000 into USD, conducted 1 February 2013 and information was gathered between 10h00 -11h00. Values in the table are the equivalents using rates given.

February 2013 Newsletter

Economic conditions improving…just not in the UK

2013 has brought with it a surge of optimism around the world with equity markets buoyant, the debt crisis calmer, and America avoiding falling off the so-called Fiscal Cliff at the eleventh hour. This has prompted some to suggest that 2013 could legitimately be branded as being the first “post-crisis year.” Unfortunately, the UK didn’t get the New Year’s Resolution.

So, with the spotlight firmly on the UK economy, it is perhaps no fluke that this has materialised in-line with improvements elsewhere. We do often see this in the currency markets and it is frequently referred to as the rotation of risk, with the eurozone, US and UK each taking the mantle to bear the brunt of pent-up markets.

With this in mind, it is perhaps no coincidence that fears in the eurozone died down towards the end of the summer last year, just as the US fiscal situation took precedent. The same can also be said for the UK’s recent woes coinciding nicely with not only a surge in optimism in Europe but also America surviving its debt dilemma.

In reality, not too much has changed – the ruthless currency markets have simply decided to highlight what we already knew- that the UK economy is very poorly indeed.

Spotlight on the UK economy, and it is not pretty

Make no mistake about it - the pound’s start to 2013 couldn’t really have been much worse.

January has seen it stoop to its lowest level against the euro in 14 months, and 5 months against the US dollar. To put this in perspective, the pound’s performance over January is its worst since the height of the crisis in December 2008 and its poorest ever against the euro since its inclusion in 1999 - all very depressing.

Sterling’s fall from grace has been rapid - you only have to go back a few months to find glorious talk of the UK’s safe-haven appeal, but the currency markets certainly have short, fickle memories. The reason for this is that the spotlight is firmly back on the UK economy and its incredibly weak fundamentals. A bizarre surge of optimism in Europe, coupled with America avoiding yet another debt debacle, has forced markets to once again sniff out the weak and unfortunately the UK currently seems to be winning the ugly sister competition. The euphoria of 2012 is now very much a distant memory.

News that the UK economy shrank 0.3% in the final quarter of 2012 acted as the main protagonist for GBP weakness and raised the questions over whether we actually ever exited recession - with the economy pretty much in the same place now as it was four years ago. The political debate is now raging over whether the government should consider easing fiscal policy to try and boost growth, given that a triple-dip recession is now a scarily real possibility. To add to this, given that the deficit is actually increasing rather than shrinking - it ballooned 7.3% on the financial year, there is now a compelling case that the UK should be stripped of its prized triple-A credit rating.

The UK high street is in crisis, with Blockbuster the latest casualty to join Comet, Jessops and HMV in administration since December. Consumers are choosing to save rather than spend, and David Cameron has concocted some great political instability by promising a referendum on the EU. Add to this, the incoming Bank of England Governor, Mark Carney, implied willingness to implement more quantitative easting (QE) when he takes control in July, and unfortunately the future looks decidedly bleak.

The euro, so strong…what’s going on?

So, the single currency is trading at a 14-month high against the pound and the dollar, and it has suddenly become fashionable to declare the debt crisis as over. Yes, the immediate sense of crisis has receded and the intensity of the problems diminished, but what has become apparent is that there is suddenly a huge disconnect between the eurozone’s hard economic data and global investor’s improved perceptions.

Whilst there have been a series of positives, for the most part it does seem that the euro’s recent run can largely be attributed to policymakers actively talking up the single currency. Head of the European Central Bank, Mario Draghi, in scenes reminiscent of his now infamous “whatever it takes” comments last summer, reiterated that he expects the eurozone to recover towards the second half of this year and that the “darkest clouds” have now passed. A Greek Finance Minister bold claims that he is “100% certain that 2013 will be the last year of recession for Greece” perhaps best illustrates how important a role confidence plays in the current climate.

So, with markets lapping this up, there is a growing sense that all of this euro strength could be more than a little artificial and that the economic establishment has suddenly become appallingly complacent and sympathetic. Perhaps markets are simply sick and tired of the debt crisis, but in the same way that sentiment may have become way too negative at the height of the crisis, it does seem that to some extent markets have concocted a largely imaginary recovery.

In reality, there is no reason that sentiment should have shifted as we have not seen any fundamental reforms. Economic data is still very grim, and the entire monetary union is almost certainly still in recession. Youth unemployment in Spain stands at a staggering 55.13% so it is no wonder that their economy contracted by 0.7% in the fourth quarter of last year. A French Labour Minister, who must have missed the “talk up the euro” memo, let on to the fact that “France is totally bankrupt”. Even the German economy, which, whilst still showing some signs of life, was battered into recession again, contracting 0.5% in the fourth quarter.

Are we finally about to see a shift in the USD?

The dollar has certainly had a mixed start to 2013, in part down, to distortions from the “Fiscal Cliff” but also because there are suggestions that the way the dollar reacts to certain US data could be about to change. As such, it is currently trading at a 14-month low against the euro, but a 5-month high versus Sterling, and for once its pricing is largely influenced by the value of its counter-parts.

By managing to successfully resolve half of the Fiscal Cliff at the eleventh hour (and kick the other half just about far enough down the road), it appears that the whole “risk-on/risk-off” regime which has dominated market thinking (and the dollar’s value) since the credit crisis appears to be unwinding. Over the past few years, strong US data has generally hurt the dollar - the premise being that the Federal Reserve will keep interest rates on hold forever, at rates close to zero thereby squeezing yield hungry investors out of US markets and into foreign currencies.

The reason we are seeing this shift is because the Federal Reserve, in response to an improving US economy, is slowly coming round to the idea of unwinding its extensive QE3 policy. This is by no means a guarantee, but the very fact that it is at least being openly discussed is significant, prompting some to speculate that we could see a move perhaps even as early as this year. With this rational in mind, we could potentially see the risk associated mantra come to an end, which, in theory, will mean stronger US data once again being dollar supportive.

The US economy, now with its warring politicians out of the limelight, is actually performing relatively well. Wall Street is roaring once again as companies defy gloomy markets, consumers are spending, and unemployment is slowly being tackled, prompting the Fed to expect moderate growth this year.

We did have a bit of a shock when GDP data came in disappointingly below expectations, revealing a 0.1% contraction, especially as the world’s largest economy shrink for the first time since the end of the recession. A closer look at the data however does suggest it needn’t be panic stations; it was a case of growth stalling at the end of 2012 rather than the beginning of another recession. The question really is, can it continue?

What lies ahead for GBP?

The threats to Sterling over the next few months are fairly self-evident.
The most immediate concern will revolve around growth. With the horrific GDP figure from the last quarter of 2012 now behind us, we can at least take solitude in the fact that it is at least out in the open. We will now, however, face on-going speculation that the UK economy will enter a triple-dip recession and the rebound that was anticipated in the first quarter of 2013 (continuing the economies zigzag pattern) could very well have been squashed by the snow.

With the Chancellors plans in tatters, it genuinely could be a matter of weeks before the UK is stripped of its triple-A credit rating. The plan that we had been promised, and that markets have believed in, has simply fallen apart, and it is understandable that faith has been lost. If this were to transpire, this really could be the final nail in the coffin, as if one major rating agency downgrades the rest will soon follow.

Add to this concern that a UK referendum will act as a barrier on any capital inflows (whilst not to mention cause great political instability) and that the Bank of England could once again become keen on more QE and it is no wonder that the pound faces such an uphill battle.

With this in mind, it is perhaps prudent not to panic and look at the markets from a slightly longer-term view. Yes, the UK is in a bit of a tough spot, but it is perfectly rational to suggest that the hammering the pound has taken recently is a little overdone, and it perhaps won’t be too long before we are all once again discussing the horrific situation the eurozone, because despite the recent cheer, fundamentally not much has changed.
One thing is for sure though and that is if we don’t see a significant uptick in UK macro-economic data to convince markets that there is still life in our economy, it is hard to see anything but further Sterling woes.

What lies ahead for EUR?

Moving forward, it is certainly hard to imagine how the euro’s recent run of form will be sustained, as there is surely only so long that policymakers can actively single-handedly support its value. However, whilst this may not make any sense, we do still have to be conscious of the irrational nature of the currency markets, and we would still not be surprised if this continued to flummox clients.

The market has certainly not accidentally missed the endlessly horrific economic data - it has merely chosen to disregard it for now. For the moment, data has certainly become irrelevant, and in the same way that poor data is not damaging the EUR, economic announcements that exceed market expectations (however rare they may be) are by-in-large not supportive either.

Unemployment figures in early February are expected to be truly dismal, showing that the jobless rate has hit 11.9%, which would put it at its highest level since records were first gathered in 1995. However as already mentioned, this will arguably continue to play second fiddle to how the overall market place regards the monetary union.

Until we see a marked shift in the way the Eurozone’s obvious problems are conceptualised, it is hard to see an immediate change in attitude. However, at some point we do expect the debt crisis to flare up again, and whilst it is difficult to predict what the catalyst will be, it is even harder to fathom how this complacency can continue.

What lies ahead for USD?

The next few months will likely prove pivotal in determining whether or not the dollar is now taking a more traditional approach to US economic data. As mentioned before, there is increasing talk that we could see a shift in the way it is priced, which will see it take a more conventional approach to certain announcements. For example, if strong US data continually prompted the dollar to appreciate (which is certainly sensible) it will make pre-empting its value a lot more rational; rather than simply being a shot in the dark.

If this does pan out, there is certainly scope for the dollar to gain ground given that its economy is slowly grinding forward which, when compared to the UK and much of Europe, is a significant achievement in the current climate. That said, this sudden change we have been discussing is certainly not going to happen overnight, and if US economic conditions continue to deteriorate, thereby prompting the Fed to consider extending rather than unwinding its QE3 program (which is certainly possible), we could well see old habits return.

Add to this the fact that asides from this, the dollar will always be greatly convoluted by its staggering safe-haven demand in risk averse markets, and its future still remains very uncertain. Therefore, moving forward the dollar will still always be sensitive to overall market sentiment both in the US and around the globe. We also can’t help but get the feeling that it won’t be too long again before we are all once again assessing America’s fiscal stance, with some suggesting that we have only averted the calamity for the time being.