Sterling
In all it was a quiet week for Sterling with the Bank Holiday last Monday and little data for investors to bite on. The currency finished last week in mid range, but things could liven up this week with a few releases due, the Bank of England rate announcement and no doubt some wise words from the Jackson Hole symposium. On the data front, net lending figures showed that households are repaying their credit card bills at the fastest rate since 2006 and are increasingly reluctant to take on debt while Consumer Confidence figures saw a repeat of last month’s poor numbers. Unlike last year’s Royal Wedding which boosted consumer confidence, there has been no spike to consumer sentiment following the Olympics. While the lack of a Games boost is disappointing, the true story may be even more disturbing for the Government – namely, that there has been an Olympic uplift but it has been cancelled out by the grim economic outlook.
We feel there will be more movement this week and volatility should look to increase as the markets return after the summer holidays. We would look for a steady Sterling against the US dollar, but see it easing versus the Euro.
US dollar
With most central bankers and finance ministers meeting for the Jackson Hole Symposium the markets were quiet awaiting some words of wisdom from the great and good. The economic releases through last week gave little cause for investors to change their views on the currency and so we wait to see what Fed Governor Bernanke will have to say. Running through the numbers, manufacturing activity in the central Atlantic region contracted at a less pronounced rate this month, after deteriorating in July, according to the Richmond Fed.
Consumer Confidence declined in August after rising in July, with the expectations index also lower. On the plus side, the U.S. economy expanded more than previously estimated in the second quarter, reflecting an improvement in the trade deficit and a pickup in household spending on utilities. Gross domestic product climbed at a 1.7% annual rate from April through June, up from an initial estimate of 1.5%. Pending home sales rose in July to the highest level in over two years and remain well above year-ago levels. Consumer spending in the U.S. climbed in July for the first time in three months as the biggest part of the economy struggled to overcome a jobless rate hovering over 8 percent.
We feel investors are gradually becoming more relaxed about events in Europe and given that the Fed will look for more QE at some stage, we see a gradual easing of the US dollar strength across the board. Sterling could push nearer the $1.6000 area and the euro could also make small gains.
Euro
It was a very quiet week for the euro, little in the way of news to trigger any big moves, and nothing very out of the ordinary on the data front. The German Ifo Business sentiment index fell for the 4th successive month in August to reach its lowest level since March 2010. August also saw a weakening of the consumer sentiment in Germany with the indices for income expectations and willingness to buy suffering a moderate fall, while economic expectations were markedly more pessimistic. Loans to firms and households in the euro zone ticked up in July after a decline in the prior month but remained weak, adding to signs that the currency bloc is heading into recession. Euro zone retailers faced a deepening downturn in sales in August, according to PMI data. Sales fell on a month-on-month basis for the tenth successive month – the second-longest sequence in the survey history – and at a faster rate than in July.
We feel the Euro may be over the worst for now, and barring any unexpectedly bad news or complete failure to act by the ECB on Thursday, we envisage a bias to the upside on EUR/USD targeting $1.2700 or $1.2800, and further erosion of GBP/EUR with a test of €1.2450 possible.
New Zealand Dollar
This week sees no data releases of consequence, so currency moves will depend on events elsewhere. The outcome of the talks in Europe between Greece, France and Germany probably hold most weight, and a successful outcome could see further falls for the NZD against its peers. Risk would be back in vogue and as a so called safe haven currency you would expect the NZD to lose heavily against the Euro particularly. At the moment this is all speculation, but, Europe apart, we do feel the fundamentals are slowly moving away from the NZD, and further weakness against both Sterling and the US dollar is possible.
Australian Dollar
The Aussie hit a five week low against the US dollar as a slowdown in its biggest exporter, China, sent investors running for cover. Reserve Bank governor Stevens has also warned that the currency could suffer if the countries mining boom starts to ease. Economic releases were not helpful, with new home sales posting a very disappointing result in July, losing nearly all the modest ground made in late 2011/12. The New Homes sector is now the weakest part of the economy, despite sharp interest rate cuts through late 2011 and early 2012. Construction work done also fell while the building approvals were down a massive 17/3% to 11,306 dwellings in July. Private credit rose by 0.2% after rising 0.3% in June, still low based on historical figures.
We feel the AUD will continue to lose ground slowly in the week ahead, although the pace could increase if the Reserve Bank intimate that rate cuts will come sooner rather than later. A move as high as A$1.5600 is quite possible.
Canadian Dollar
It was something of a quiet week for the GBP/CAD rate over the past five days, with little movement in the rate – only briefly trading above or below the C$1.5600 to C$1.5700 range. There was a little more volatility against the US dollar, but little overall net change on the week. Some gains were made mid last week as the oil price advanced on news that inventories were expected to drop and as Hurricane Isaac approached the Louisiana cost – although once it was downgraded to a tropical storm, some of this move was reversed.
Expect the USD/CAD rate to continue in its narrow ranges, but for the pound to appreciate as it rises towards $1.6000 versus the USD. Top of the range on GBP/CAD should be around C$1.5900.
Chinese Yuan
Focus this week has remained on whether there is a significant slowdown in economic activity in China. The PMI data compiled by the Chinese government probably fell below 50 in August, the dividing line between expansion and contraction, for the first time in recent months. Whereas, in the past, the Chinese government, unencumbered by democracy, could simply throw massive stimulus at this type of problem, as was seen in 2008, a once-in-a-decade leadership shift is thought to be getting in the way at the moment.
The nimbleness that helped China steer around the worst of the global crisis is confronting political paralysis of the kind more often seen in Japan, Europe and the U.S. The upshot is that China’s 7.6 percent growth rate may fall more in the next 12 months than anyone expects. One problem is that China has run out of obvious ways to kick-start its $7.3 trillion economy. It was easy in 2008: Pump tens of billions of dollars into a sweeping stimulus project and 10% growth followed. However, local governments are now cash- strapped and awash in debts that could turn bad. The euro zone seems locked into permanent-crisis mode while the U.S. is bogged down with debt, economic stagnation and political paralysis. China proved it can live for a few years without U.S. and European customers, but not forever. The result is unlikely to be a rapidly appreciating yuan as this will only make Chinese exports even less competitive. As such the current malaise looks likely to continue for the time being.
We don’t expect any significant movement until after the ECB decision on Thursday and any subsequent movement on the EUR/USD rate.
Japanese Yen
The Yen finished a quiet week on a positive note touching its highest level for 10 days. The market ignored the economic releases which were by and large on the weak side, and brushed aside the fact that the government had cut its forecasts for growth and concentrated more of the safe haven status of the currency. The Retail Sales fell more than economists forecast in July as a winding down of government subsidies for car purchases threatens to further damp consumer spending in coming months. The 0.8% decline from a year earlier was the first drop in eight months and compared with the median estimate of a 0.1% fall. Manufacturing PMI dipped to a 16 month low in August, with output and new orders falling at a quicker rate. Household Spending held up well but Industrial Production unexpectedly slumped, raising fears that the third-largest economy has slipped back into contraction. Consumer Prices, which exclude fresh food, fell 0.3% in July putting the central banks 1% inflation target further from reach.
The yen will benefit from any mention of QE3 from Ben Bernanke and also from any failure of the ECB to satisfy market expectations this week. As a result, we expect to see it testing the lower end of recent ranges against both the pound and US dollar. GBP/JPY could see a move back towards 122.00 in the coming week.
South African Rand
Despite some significant data last week, it was commodity prices rather than eco-stats that drove the market. The rand fell as commodity prices retreated on concern that Chinese demand is slowing ahead of a meeting of central bankers at Jackson Hole. China may slow the pace of monetary loosening on concern inflation may rebound, Xinhua News Agency said this week, citing Bank of Communications Co. and China International Capital Corp. Any failure of the central banks to raise expectations of more stimulus could see the rand under significant pressure.
Not much data this week, so expect the fate of Europe following the ECB meeting, along with any comments on stimulus over this weekend to be the main driving forces. GBP/ZAR has tested, but so far not broken resistance around R13.40/45, but this may well happen this week. R13.545 and R13.700 are the next levels up.
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