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Sunday, April 13, 2008
British Pound Breaks Downtrend
The British pound saw a significant bullish turn last week against the US dollar and most of its more liquid crosses despite mixed fundamentals. For the benchmark GBPUSD, the pair opened the period by sustaining its steep downtrend. On Monday, like many other risk-related assets across the globe, the sterling was under pressure as traders looked to dump their more precarious investments, including the high-yielding currencies. This broad wave of risk aversion was triggered by the biggest drop in global stocks in over 5 years.
While this move was originally believed to be a mere change in sentiment, the market later learned that a massive unwinding of positions from Societe General, who uncovered a massive book of losing positions under one trader, may have triggered the panic selling. However, after this sharp move, the market slowly but surely started to buy back the sterling and other high yielders after the Fed delivered an emergency rate cut that calmed fears that the world’s largest economy was heading for a recession and would take the rest of the globe with it.
With these sentiment trends in mind, the economic calendar would also play its part in guiding the pound last week. Before the London trading session opened on Monday, the leading Rightmove housing price index confirmed the decade long boom was over. The average home price fell for the third consecutive month, while annual inflation marked its biggest drop since December of 2005. Officials at Rightmove foresaw further declines for the residential market unless the BoE cuts rates further.
While this move was originally believed to be a mere change in sentiment, the market later learned that a massive unwinding of positions from Societe General, who uncovered a massive book of losing positions under one trader, may have triggered the panic selling. However, after this sharp move, the market slowly but surely started to buy back the sterling and other high yielders after the Fed delivered an emergency rate cut that calmed fears that the world’s largest economy was heading for a recession and would take the rest of the globe with it.
With these sentiment trends in mind, the economic calendar would also play its part in guiding the pound last week. Before the London trading session opened on Monday, the leading Rightmove housing price index confirmed the decade long boom was over. The average home price fell for the third consecutive month, while annual inflation marked its biggest drop since December of 2005. Officials at Rightmove foresaw further declines for the residential market unless the BoE cuts rates further.
GBP Steep Downtrend
However, if the minutes from the last MPC meeting are any guide, a cut may not be close at hand. An 8-1 vote to keep rate unchanged at 5.50 percent was delivered as policy officials forecasted inflation possibly breeching 3.0 percent, even though GDP could slow “possibly quite sharply.” And, while the faltering in the domestic housing market and quickly cooling US economy threatened to stunt UK growth in the future, the advanced reading of fourth quarter growth suggested the economy wasn’t struggling just yet.
According to the government’s data, annualized expansion slowed to a 2.9 percent clip, the slowest in nearly a year. However, most of the major sectors were still reporting reasonable growth.
Ultimately, though, with economic and sentiment trends vying for control of the pound, the GPBUSD would finally break an eight-week falling trend channel in a move through 1.98. Whether or not this trend can be sustained though will fall once again to scheduled and unscheduled event risk this week.
The economic docket won’t have the same top tier market movers as last week, but a few indicators will certainly impact fundamental flows: the Nationwide housing inflation report will add insight to the Rightmove figure, the GfK consumer sentiment survey will offer a forecast for spending trends and a factory PMI number will take the temperature of the business sector. Looking beyond the calendar, risk trends will almost certainly be a factor for the high-yielding pound again as all eyes will be on the FOMC’s rate decision and US fourth quarter growth numbers to see if the US will usher in a global economic slowdown and rate easing policy
According to the government’s data, annualized expansion slowed to a 2.9 percent clip, the slowest in nearly a year. However, most of the major sectors were still reporting reasonable growth.
Ultimately, though, with economic and sentiment trends vying for control of the pound, the GPBUSD would finally break an eight-week falling trend channel in a move through 1.98. Whether or not this trend can be sustained though will fall once again to scheduled and unscheduled event risk this week.
The economic docket won’t have the same top tier market movers as last week, but a few indicators will certainly impact fundamental flows: the Nationwide housing inflation report will add insight to the Rightmove figure, the GfK consumer sentiment survey will offer a forecast for spending trends and a factory PMI number will take the temperature of the business sector. Looking beyond the calendar, risk trends will almost certainly be a factor for the high-yielding pound again as all eyes will be on the FOMC’s rate decision and US fourth quarter growth numbers to see if the US will usher in a global economic slowdown and rate easing policy
Swiss Franc Not Too Good on Economy Market
The Swiss Franc began the week significantly stronger against major currency counterparts, but a later reversal in the Dow Jones Industrial Average and other major equity indices forced a commensurate pullback in the risk-sensitive currency. Indeed, the tremendous tumbles in global stock markets sent the low-yielding CHF near record-highs against the US dollar and 13-month heights against the euro. Yet the Swissie turned on a dime when a surprise 75 basis point interest rate cut from the US Federal Reserve sent major risky asset classes significantly higher in its wake. Domestic economic developments took a backseat to the happenings in global financial markets, and we saw relatively little reaction to modestly disappointing inflation and retail sales figures.
According to the Swiss Federal Statistical Office, Producer and Import Prices unexpectedly fell through December on falling raw materials costs. Given forecasts of a 0.2 percent monthly gain, the result certainly proved disappointing to those that believe that higher import prices will drive the Swiss National Bank to raise rates through 2008. Yet one month does not make a trend, and markets will clearly wait until the release of later inflation numbers to shift forecasts on domestic yields. A subsequent Adjusted Retail Sales report likewise came below consensus forecasts, however, and consumption growth rates remained relatively low at 2.9 percent on a year-over-year basis. Though traders mostly ignored both retail sales and prices reports, it remains clear that continued disappointments in economic data could sink the recently high-flying European currency.
The coming week will help solidify Swiss interest rate forecasts, as closely followed KOF Leading Indicator and SVME PMI reports will provide a forward-looking peak at the robustness of the domestic economy. Current consensus forecasts show that analysts believe the KOF Leading Indicator will fall to 9-month lows through January hardly a bullish assessment on overall growth prospects. Subsequent SVME-PMI figures are forecast to show a similar deceleration in overall expansion; an in-line result would leave the figure at its lowest levels since September. It will be important to watch developments in both KOF and SVME reports, and any significant disappointments would only further temper bullishness for the domestic currency.
Yet Swissie price action will likewise depend on developments in broader financial markets. Given the low-yielders strongly negative correlation with major risky asset classes, any further Dow Jones Industrials rebound could sink the CHF against higher-yielding counterparts. Of course, the opposite is likewise true; a strongly negative week for the Dow and other stock markets could leave the Franc at significant heights against the euro and other risk-sensitive currencies.
According to the Swiss Federal Statistical Office, Producer and Import Prices unexpectedly fell through December on falling raw materials costs. Given forecasts of a 0.2 percent monthly gain, the result certainly proved disappointing to those that believe that higher import prices will drive the Swiss National Bank to raise rates through 2008. Yet one month does not make a trend, and markets will clearly wait until the release of later inflation numbers to shift forecasts on domestic yields. A subsequent Adjusted Retail Sales report likewise came below consensus forecasts, however, and consumption growth rates remained relatively low at 2.9 percent on a year-over-year basis. Though traders mostly ignored both retail sales and prices reports, it remains clear that continued disappointments in economic data could sink the recently high-flying European currency.
The coming week will help solidify Swiss interest rate forecasts, as closely followed KOF Leading Indicator and SVME PMI reports will provide a forward-looking peak at the robustness of the domestic economy. Current consensus forecasts show that analysts believe the KOF Leading Indicator will fall to 9-month lows through January hardly a bullish assessment on overall growth prospects. Subsequent SVME-PMI figures are forecast to show a similar deceleration in overall expansion; an in-line result would leave the figure at its lowest levels since September. It will be important to watch developments in both KOF and SVME reports, and any significant disappointments would only further temper bullishness for the domestic currency.
Yet Swissie price action will likewise depend on developments in broader financial markets. Given the low-yielders strongly negative correlation with major risky asset classes, any further Dow Jones Industrials rebound could sink the CHF against higher-yielding counterparts. Of course, the opposite is likewise true; a strongly negative week for the Dow and other stock markets could leave the Franc at significant heights against the euro and other risk-sensitive currencies.
Canadian Dollar Rate Cut
The Canadian dollar strengthened against the US Dollar over the course of the week, despite a rate cut by the Bank of Canada, as interest rate differentials continue to benefit the Loonie. Indeed, the possible implications of a 25bp rate reduction to 4.00 percent - lowest level since April of 2006 - by the Canadian central bank was offset by an unexpected emergency 75bp rate cut by the Federal Reserve.
Nevertheless, there is potential for Canadian dollar weakness in the future judging by the policy statement that accompanied the BOC rate announcement. While the outlook for growth was still relatively upbeat, as the bank said it expected domestic demand to “remain strong,” the group lowered its outlook for growth in 2008, saying it was “significantly weaker” than its October projection given the negative impact of the rapid appreciation of the Canadian currency on export sector activity.
On the inflation front, the BOC forecasted core CPI to fall below 1.5 percent by mid-year - which appears entirely possible after the bank’s inflation measure surprisingly dipped to 1.5 percent in December – and with the BOC’s inflation target still well above at 2 percent – the statement said that further “stimulus” would likely be needed in the “near term.”
Looking ahead to this month, the fate of USD/CAD will likely depend more upon the status of the greenback given the major event risk looming in the US. Meanwhile, Canadian economic data may not prove to be extremely market-moving though they could contribute to Loonie weakness. The orders component of the Business Conditions index is anticipated to drop to a one year low of -6.5, as the combination of an economic slowdown in the US and a stronger Canadian currency prove to be a major hindrance for manufacturers.
Meanwhile, November GDP figures are forecasted to reflect tepid growth, though the Q4 GDP reports (which will not be released until early March) will be a far better gauge of the status of the Canadian economy. Regarding USD/CAD, according to Technical Strategist Jamie Saettele’s Daily Technical Report on Friday, “potential resistance is at 1.0128,” and a failure to break above this level may find the pair falling back below 1.0012. Nevertheless, traders should keep an eye on broad US Dollar trends, as they may dictate the next move for USD/CAD.
Nevertheless, there is potential for Canadian dollar weakness in the future judging by the policy statement that accompanied the BOC rate announcement. While the outlook for growth was still relatively upbeat, as the bank said it expected domestic demand to “remain strong,” the group lowered its outlook for growth in 2008, saying it was “significantly weaker” than its October projection given the negative impact of the rapid appreciation of the Canadian currency on export sector activity.
On the inflation front, the BOC forecasted core CPI to fall below 1.5 percent by mid-year - which appears entirely possible after the bank’s inflation measure surprisingly dipped to 1.5 percent in December – and with the BOC’s inflation target still well above at 2 percent – the statement said that further “stimulus” would likely be needed in the “near term.”
Looking ahead to this month, the fate of USD/CAD will likely depend more upon the status of the greenback given the major event risk looming in the US. Meanwhile, Canadian economic data may not prove to be extremely market-moving though they could contribute to Loonie weakness. The orders component of the Business Conditions index is anticipated to drop to a one year low of -6.5, as the combination of an economic slowdown in the US and a stronger Canadian currency prove to be a major hindrance for manufacturers.
Meanwhile, November GDP figures are forecasted to reflect tepid growth, though the Q4 GDP reports (which will not be released until early March) will be a far better gauge of the status of the Canadian economy. Regarding USD/CAD, according to Technical Strategist Jamie Saettele’s Daily Technical Report on Friday, “potential resistance is at 1.0128,” and a failure to break above this level may find the pair falling back below 1.0012. Nevertheless, traders should keep an eye on broad US Dollar trends, as they may dictate the next move for USD/CAD.
Thursday, April 10, 2008
Fundamentals Harm Emerging Market Currencies
Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation. The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year. Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits. However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:
Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital. However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."
Barclays Introduces Carry Trade ETN
Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade. In accordance with this strategy, this note is linked to the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields. This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona. Traditionally, carry traders have sold one specific currency (i.e. Japanese Yen) in favor of another currency (i.e. the New Zealand Dollar). By instead purchasing this note, which will trade under the ticker ICI, investors can buy a share of an entire portfolio, optimized expressly for this strategy. Comtex reports:
The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.
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