Sterling
Sterling lost its shine last week as a numbers of factors conspired to dent investor confidence in the currency. It fell sharply against all the major currencies with the exception of the Japanese Yen, reaching 9 month lows against the Euro and 8 week lows against the US dollar. The trade-weighted index as produced by the Bank of England fell to a nine nth low. The reasons for the fall were many and varied. The potential loss of the UK’s prized AAA rating was one factor with rating agency Fitch saying that the country risks a downgrade if it does not reduce its debt. The rating agency was unhappy that the Chancellor said in his autumn statement that the Treasury would miss its 2015-16 target to start cutting the level of net debt. Investors were also worried that the UK would hold a referendum on its continued role in the Eurozone, and the implications if the country were to ’go it alone’. With the economy continuing to struggle, the currency had just about everything thrown at it last week.
While the economic performance is patchy, it is a worse situation in Europe where unemployment is over 11% and some countries will likely continue to be in recession for some quarters to come. In the US things are slightly better, but with uncertainty over the upcoming debt ceiling and spending cut talks, there should be no good reason to rush into US dollars.
A lot of data out this week but it now seems that the markets will punish poor numbers and not reward positive data. Investors have lost confidence in the UK in the short term and are using every excuse to push the currency lower. A lot of this may be unjustified, but you can’t buck the trend. We don’t feel that Sterling deserves to fall further in the short term, we don’t feel that the fundamentals are that bad, at least compared to its peers. That having been said, once the snowball start rolling down the hill, it gains momentum, so we expect further losses in the short term however unjustified.
US Dollar
There was a lot of data out last week, some good, some bad and some as expected, but it all points to an economy that is stuttering along without any real signs that it will be pushing ahead in the near term. The dollar had a mixed week more due to events overseas rather than anything particularly relevant in the US. Renewed confidence in Europe, with sovereign risk issues receding, and jitters over the UK’s future roll in Europe and threats of a downgrade, all conspired to see the dollar fall against a strong Euro but gain versus Sterling. The dollar also made good gains against the Japanese Yen as the markets anticipate more aggressive stimulus from the Bank of Japan, while holding its own against the commodity currencies. The debt ceiling and spending cut issues continue to hover in the background, but the markets remain relaxed about these for now. They expect another stand-off, with a last minute deal being agreed in typical Hollywood disaster movie style.
There are hopeful signs that the US economy is beginning to move forward slowly, but the dollar is not really trading on fundamentals at the moment. Sentiment in Europe is more positive and this is giving the Euro a boost, while it is the opposite in the UK, and Sterling is falling. While you could argue against both of the moves, it’s difficult to buck the trend, so we see both moves continuing this week, albeit at a much more muted pace.
Euro
The Euro continued its rise last week reaching 11 month highs against the US dollar and 9 month highs against a sickly Sterling as investors feel that the worst may be over with regards the sovereign debt issues. The Spanish bond auction went very well late in the week as investors absorbed all that was on offer at much better rates. As an example the 3 year bond fell to a yield of 2.71 compared to 3.35 at the previous auction. Spain has now covered 9% of its 2013 medium and long term gross funding needs in just 2 auctions, a sure sign that investors feel more comfortable holding their debt.
Although the economy continues to struggle, this has now become less of an issue, and the feeling is that it will start to pick up in the 2nd half of 2013 which is what is helping to push the Euro higher. The currency did have a small sell off mid week partly due to profit taking, but helped by comments from Jean-Claude Juncker, who leads the group of euro-area finance ministers, who said that the Euro is ‘dangerously high’ and could pose a threat to Europe’s recovery. However the sell off was short lived as ECB Governing Council member Ewald Nowotny countered that the Euro was not a concern short term fluctuations in exchange rates should not be overvalued.
It looks like EUR/GBP s getting oversold in the short term, and although further weakness cannot be ruled out, fair value looks to be around the 1.20 area for now.
Australian Dollar
The Aussie spent a quiet week losing modest ground against the US dollar but making strong gains versus Sterling, touching levels last seen in August 2012. The UK currency is out of favour with investors at the moment for a number of reasons. Worries over the countries continued commitment to remain within the Eurozone, concerns that the country may lose its coveted AAA rating, soft economic data, the list goes on so all the commodity based currencies were able to push ahead. Some strong data out of China, Australia’s largest trading partner, helped the Aussie as it reduced the chances of a further rate cut from the Reserve Bank at their next meeting in February. The data also helped to push the yields up on the benchmark 10 year Bond by 12 basis points to the highest level seen this year.
On the data front the negative news came from the employment change, with employers unexpectedly cutting payrolls in December and the unemployment rate rising, signalling weakness outside the mining industry which is discouraging new hiring. The number of people employed fell by 5,500 after a revised 17,100 gain in November, the first fall in 4 months. That compares with the median estimate for a 4,000 increase in a survey of economists. The jobless rate rose to 5.4 percent compared with a revised 5.3 percent the previous month. Inflation expectations rose slightly to 2.00%, up from 1%, but still within the Reserve Bank’s target 2-3% band.
The Aussie continues to benefit from its strong fundamentals and its increasing stature as a reserve currency with a decent yield compared to its peers. The economy is not firing on all cylinders, but compared to others it’s doing ok, and as such should continue to remain steady against the US and look to improve towards 1.50 against an out of favour Sterling.
New Zealand Dollar
The New Zealand dollar held steady for most of last week, but gave up modest ground on Friday as it was announced that consumer prices fell unexpectedly in the fourth quarter, keeping the annual rate close to a 13-year low and lending support to expectations that interest rates will remain at a record low for much of this year. The consumer price index fell 0.2 percent in the three months to Dec. 31, to be 0.9 percent higher than a year ago, data showed last Friday. The index has fallen in four of the past five December quarters. With inflation stuck below the RBNZ target band of 1-3 percent, its benchmark interest rate is expected to remain unchanged at 2.5 percent for the foreseeable future. The Kiwi fell to a low of $0.8348 from around $0.8410/15 before the data, before settling at $0.8360. Interest rate futures fell a couple of points as investors pushed out the timing of a rate rise. Despite easing price pressures, the RBNZ has projected rate increases from later this year to keep prices in check as the $25 billion rebuild of Christchurch damaged by a 2011 earthquake will accelerate. In addition, the housing market has shown signs of picking up, especially in Auckland, the main business centre, and in Christchurch, due partly to supply shortage. During the December quarter, inflation was driven largely by lower food prices and furniture discounting, which offset higher housing and transport costs.
It may have some modest falls, but it remains one of the best currencies around at the moment.
Canadian Dollar
It was a quiet week for the CAD trading in a tight range against both the US dollar and Sterling. Not much in the way of stats to influence prices, but the currency fell towards the end of the week despite better than expected factory sales numbers. The loonie, as the currency is nicknamed, managed t rise early on as U.S. housing starts climbed 12.1 percent last month, exceeding most forecasts, and weekly jobless claims were lower than projected. The Bank of Canada Business Outlook Survey earlier in the week did little to ease fears that firms are still facing tough time and that economic conditions remain soft. While some forward-looking indicators of business activity have moved up from the levels recorded in the autumn survey, many firms cited concerns about demand over the next 12 months, as well as pressures related to increased competition. It stated that firms intend to increase employment and on balance increase investment in machinery and equipment but they saw soft sales growth continuing for the near term.
Overall there is not much to get excited about with the CAD for now. Uncertainty in the US over the upcoming debt ceiling talks will keep the Canadian currency in demand, although easing fears in Europe will mean investors are less risk averse and may diversify to other, more high yielding assets. On balance, don’t expect too much movement against the US dollar, while there could be further loses against Sterling down to the 1.56 area as the UK currency loses its appeal.
Steady as she goes next week, with most interest on the Bank of Canada Monetary Policy Report on Wednesday, though don’t expect too many surprises.
Chinese Yuan
A quiet week for the Yuan with the currency firming to 6.2135 against the US dollar by mid last week, only to see it lose ground by the close to be more or less unchanged around 6.22. On the data front, China’s foreign direct investment inflows fell last year for the first time since the global financial crisis, slipping 4 percent as a troubled world economy curbed investor enthusiasm for deals in emerging markets. But China still drew $111.7 billion worth of foreign direct investment (FDI) in 2012 — just shy of 2011’s record $116 billion and retaining its spot as one of the world’s top destinations for corporate expansion. The big number of the week was the fourth quarter GDP which grew more than estimates at 7.9%, breaking 7 straight months of slowing data. The fourth quarter bounce from the third quarter’s 7.4 percent – the weakest since the first quarter of 2009 when the global financial crisis raged – left full year growth at 7.8 percent, making 2012 the weakest year of economic expansion since 1999. Evidence of a burgeoning recovery in exports, stronger than expected industrial output and retail sales, together with robust fixed asset investment, all indicated that Beijing’s pro-growth policy mix has gained sufficient traction to underpin a revival without yet igniting inflationary risks.
China bought 134.4 bn worth of foreign currency in December in a sign that they are determined to maintain the Yuan at a steady level for the time being. China has now set up a new unit to diversify some of its $3.3trillion holding of official reserves, which could mean that they will move some of their dollars into other currencies and possible gold. This won’t happen overnight but over time, but in the process it might mean that some relaxation of the USD/CNY will be seen. But for now, don’t hold your breath.
Much of the same this week, figures will be important for the market as to the strength of the economy, but the impact on the exchange rate will be limite
Japanese Yen
The Yen continued on its weakening path last week, getting close to the 90 level against the US dollar and 145 versus Sterling, only to be stopped in its tracks by comments from the Japanese economics minister. However the comments were retracted later in the week and the Yen started falling again to finish near 1% down on the week. With the Yen having fallen nearly 10% since December, the currency was oversold and due a retracement. The catalyst for this came in the form of comments from the Economics Minister Akira Amari who was reported as saying that excessive yen weakness could have a negative impact on people’s livelihoods through rises in prices of imports. The Yen strengthen from 89.7 t near 88.00 as investors took this as a sign that the government were looking to call a halt to the recent run on the currency. However by Thursday a news agency was reporting that Mr Amari said it was regrettable that his comments on the yen had been misinterpreted. Investors took this as a sign that Mr Amari was not following the party line and that he had to retract the comments, so the US dollar buyers returned.
Last week’s data was mixed. Machinery orders rose more than expected in November, suggesting that companies were optimistic about the economic outlook as the yen weakened. Orders climbed 3.9 percent from the previous month easily beating analyst’s estimates of a 0.4% rise. Consumer confidence worsened in December o 39.2%, which bodes poorly for the general outlook for incomes and jobs.
The main event will be the Bank of Japan policy statement on Monday and particularly the announcement of the inflation target. It’s unlikely that the BOJ will be overly aggressive, trying to maintain some independence on policy and trying not to be seen to be led by PM Abe, so there is room for disappointment. There is potential for the Yen to firm in the short term as investors take profits.
South African Rand
The Rand was hit hard last week as more worker unrest threatened to hit the economy in the months ahead. The mining giant Anglo American announced on Monday that it would mothball some mines and cut 14,000 jobs in a bid to increase productivity and improve profitability. Almost immediately militant labour activists were calling for strikes and in a number of mines in the platinum belt workers were refusing to go underground overnight to protest at the company’s restructuring plans. The cuts have immediately brought government objections and it looks like it will be more difficult for the company to implement them than they had at first thought. They have also stirred anger from the government and ruling African National Congress (ANC) as they grapple with a jobless rate of over 25 percent and growing social discontent ahead of next year’s general elections. Anglo, for its part, said its plan is critical to creating a sustainable platinum business, and that it took its regulatory and social responsibilities seriously. Al this left the Rand weaker, falling to 8.85 against the US dollar, levels last seen i early December, and a retest of the 9.00 level cannot be ruled out. Against Sterling the currency fell to 14.24 before recovering slightly.
The rand has weakened 4.5 percent against the dollar this year, and with worker unrest looking to escalate, investors will be nervous in the next few weeks. We would look for further Rand weakness this week with the government looking to get involved to stop the social unrest getting out of hand.
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