Sterling
Last week was mostly quiet for sterling, barely trading outside of the €1.24-€1.25 range against the euro until Thursday’s rate announcements from the Bank of England (BOE) and the European Central Bank (ECB). Then we saw a sharp rise versus the euro and a fall against the US Dollar, as investors digested the implications of the moves. UK data releases were generally negative and the ongoing issues relating to Libor have not helped sentiment. While the ECB moves on euro rates should help sterling in the short term, the potential against the dollar may be limited for now.
Current levels on GBP/EUR have not been seen since late 2008, when the pound was in the middle of sharp 18month fall from €1.5000 down to a low of €1.0200. The UK authorities will not want the rally to continue much further as it will hurt any fragile recovery. We feel while there is room for some further upside potential, these represent good longer term levels for euro buyers.
US dollar
While US data may not be setting the world on fire, it is coming in a lot better than elsewhere, as even China felt the need to stimulate their economy by lowering rates. Events overseas continue to be the main driver of the dollar, and with the euphoria of the EU summit starting to wane, the greenback looks to retain its place as the safe-haven currency of choice. Despite a short week, there was a whole host of data releases, culminating in the Non-Farm Payrolls on Friday.
With some of the world major Central Banks (ECB, Bank of England, Peoples Bank of China, and even Denmark and Kenya got in on the act) trying to stimulate their economies, it remains to be seen if the US Federal Reserve will follow suit. Further rate cuts will not happen, but analysts are undecided if a third round of Quantitative Easing will take place. The dollar continues to be one of the best safe haven currencies around and as such will not lose too much ground in the current environment. We feel it will struggle to improve much further against either the Euro of Sterling in the short term, and would look for some small weakness in the week ahead. As a result, expect a range on GBP/USD between $1.5450 and $1.5750.
Euro
The euro suffered a bad week all round, compounded by poor data, interest rate cuts and ongoing issues concerning the recent agreement on Bond purchases. The only real saving grace is that the other major economies are also suffering, but with euphoria wearing off over the bond purchase agreement, the euro could be on the slide again. The pressure eased on Spanish and Italian bonds early last week but was back by the close. The underlying economic issues still remain, with slowing growth and high unemployment being the main problems. The single currency continues to hold up well in the circumstances, but it’s difficult for investors to feel confident in the short term.
Fixing the problems in Europe will take time and won’t be cured overnight. As a result, we feel that the euro will be under pressure for a while, so would prefer to sell it on rallies against both the dollar and sterling. A test of the recent low versus the dollar around $1.2305 is imminent, with the 2012 high of €1.2580 against sterling already breached, and likely then pushing on above €1.2600.
New Zealand Dollar
The GBP/NZD rate strengthened further over the course of last week, thanks largely to the implementation of stimulus measures in China, Europe and the UK which have boosted currencies linked to growth.
Overall the NZD should hold up well against its peers. Commodity prices are stabilising, the economy is in good shape relative to its peers, it has attractive real yields and barring another European ‘accident’, the currency should move ahead in the near term.
Australian Dollar
The Australian Dollar (Aussie) finished last week near its highs against sterling as the Reserve Bank of Australia (RBA) bucked the trend this week in holding interest rates steady at their monthly meeting last Tuesday. The Aussie moved ahead through last week from opening around A$1.5350 to finish near A$1.5100 on Friday, while the Aussie trimmed its weekly gains against the US Dollar despite interest rate cuts in Europe and China. The failure of a new stimulus package by the European Central Bank regarding Bond purchases pushed the markets back to a risk adverse mode, and the US dollar was able to make small advances.
Australia recorded its best January-to-May period of hiring in five years and a A$500 billion ($513 billion) investment pipeline is driving growth in some regions, even as export prices have slumped. These projects have helped the unemployment rate to fall to 5.1% (8.2% in the US and 11.1% in Europe) and along with a mining boom and interest rate differentials, it has seen an appreciation of 45% in the Aussie currency since 2009. The Aussie continues to benefit from fundamentals, and the only drawbacks are the ongoing Sovereign issues in Europe and the fall in commodity prices which may be coming to an end. Despite this we feel the Aussie will continue to move ahead versus the pound and a move sub A$1.5000 is likely medium term.
Canadian Dollar
A quiet week for Canada, with a Bank holiday last Monday, a US holiday on Wednesday, and the major economic releases concentrated on Friday. Nevertheless, the currency made good ground against sterling, moving from opening levels just below C$1.6000 to touch C$1.5720 at one stage before a slight sell off. The announcement of more Quantitative Easing from the Bank of England helped the CAD, as did the European Central Bank (ECB) easing of interest rates.
GBP/CAD is closing in on support at C$1.5720and could push lower still to C$1.5650 in the coming week. Resistance is now at C$1.5845.
USD/CAD is moving higher again following the jobs data, and should test resistance at C$1.0200 again this week. Support is at C$1.0120 as the pair trade in a tight range.
Chinese Yuan
This week brought signs that the slow-down in Chinese economic activity might be bottoming out as the People’s Bank of China (PBOC) cut interest rates for the second time in a month to help spur growth.
The yuan had gained on hopes for a European solution, but has since tracked the euro lower versus the dollar and looks likely to stay there for the coming week.
Japanese Yen
The yen finished last week close to its opening levels against sterling after its sharp appreciation mid week was reversed after the EU announcement on the bailout conditions for the banks. Risk was back in vogue and the yen lost ground as investors perceived that it was safe to go back into the likes of the euro and sterling. It was a heavy week for economic releases, but these were overshadowed by sovereign events in Europe as were all the major currencies.
The yen continues to be a major safe haven currency, and this will override the economic considerations for the time being. Europe has dominated the direction of the yen for some time now, and while this week’s new pronouncement from the EU will weaken the currency in the short term, it remains to be seen if it will be the long term solution. For next week we see the GBP/JPY rate weakening to 128.00 as the EU announcement continues to weigh on the currency.
South African Rand
The GBP/ZAR rate fell through support last week as the rand gained on news of economic stimulus in Europe, the UK and China which boosted commodity linked currencies, while the pound fell on the same news.
Having dipped lower through last week, the GBP/ZAR rate is now pushing back above support at R12.80. If this is broken, a resumption of the recent ranges should ensue. If not, additional support is at R12.60.
For more currency data and information on how to assist your clients with their international money transfers, please visit the International Adviser Currency Zone powered by Moneycorp.
