Sterling
Sterling managed to push higher against the US dollar towards the end of last week after some poor data early on saw the recent gains slowly erode away. Against the euro it was a different story, as investors gradually moved back into the single currency as they become more confident that the ECB are getting to grips with the debt issues. The Bank of England kept interest rates unchanged as expected, and also maintained the size of its asset purchase programme at £375bn.
Most analysts feel that they will increase the asset purchase programme by £50bn next month to further help an economy that is struggling to show some green shoots of recovery. The early week data was disappointing, but analysts still feel that Q3 growth will be well into positive territory, possibly as much as 1%.
There are a number of important releases this week which will give some more clues as to the health of the economy. Recent manufacturing surveys have pointed to a continued slowdown in the sector, so the data this week should go some way in providing a better picture.
The first estimate of October GDP by the National Institute of Economic and Social Research (NIESR) will be interesting especially as most analysts feel Q3 will show a sharp improvement and a move back to positive growth. Events in Europe will still continue to have a big impact on the pound, so watch out for announcements, especially on Spain and any potential bailout.
Overall we see a steady sterling this week, with gains versus the US dollar towards resistance at $1.6300 and small falls against the euro towards support at €1.2350.
US dollar
Some mixed data out of the US last week and a strong defence of Federal Reserve Bank policy by chairman Ben Bernanke left the US dollar slightly weaker across the board in what was a quiet week for currencies. Manufacturing PMI fell to its lowest level for 3 years, and while still above the crucial 50, it was consistent with only a modest expansion in the sector.
At odds with this was the ISM Manufacturing PMI which showed an improvement from the previous months sub 50 level, with a rebound in motor vehicle sales. The ISM Non-Manufacturing (or Services) PMI saw a rise to 55.1 while most estimates were for a fall. The ISM surveys cover approx 90% of the economy, and so should be fairly representative of what is going on at grass roots level.
As a precursor to Friday’s Non-Farm Payrolls release, the ADP Non-Farm Employment Change showed that companies added more workers than projected in September, evidence that the labour market may at last be picking up. In the event Non-Farm figures were around expectations at 114,000 new jobs, with the August and July figures both being revised up adding a further 86,000.
A nice surprise was the fall in the unemployment rate to 7.8% – although this may be due to fewer people actively seeking work. Factory Orders plunged 5.2%, the biggest decrease in 3 years, but the fall was partly expected after the recently announced large drop in Durable Goods Orders. Factories are not only feeling the effect of the slowdown in China and the European debt crisis, but are more cautious ahead of the ‘fiscal cliff’ of tax increases and benefit cuts due to come into effect early next year.
This week is light on data so there will be nothing to influence the dollar from the economics side. Europe will continue to play a big part in where prices go, watch out for developments on a Spain bailout which may come at any time, particularly if Spanish yields start to rise again.
The second debate between Ronmey and Obama will be watched with interest to see if the President can improve on last week’s performance, which most analysts feel was won by Romney. Further ahead the ‘fiscal cliff’ is getting ever closer. The politicians will need to get their act together quickly after the election to sort out the potential nightmare of tax rises and benefit cuts that could potentially knock 3% or even 4% off of GBP next year. Given all the above, and no new nasty surprises from Europe, we see a weaker dollar ahead.
Expect GBP/USD to test $1.6302/09 again this week, but it is likely to continue to struggle to break that level.
Euro
Even though economic data remains dire, the euro still managed to rise towards the weekend as ECB president Mario Draghi held rates unchanged and reiterated that the ECB stands ready to buy government bonds. Speaking in Slovenia following the latest ECB meeting,
Draghi said the central bank has put in place a "fully effective backstop" for governments struggling to fund themselves in the bond market. He also said that conditions of a bailout need not necessarily be punitive, a clear sign to Spanish President Rajoy that he may be pleasantly surprised if, or when, he does finally decide to make the phone call.
So far he has continued to insist that Spain will not be tapping the ECB for help. Rumours that the euro zone is considering aiding Spain by providing insurance for investors who buy government bonds also helped the single currency. If it did go ahead, it would enable Spain to cover its full funding needs at a much reduced cost to the European taxpayer. However, for now the status quo remains, and Spain continue to insist they do not need a bailout, much to the annoyance of the ECB.
There is plenty more data out this week which should all continue to point to a euro zone economy in the depths of a recession. ECB president Draghi testifies to the European Council on Tuesday where he will no doubt be asked some probing questions, while the ECOFIN meeting will again be discussing the debt crisis.
Even allowing for all the euro problems, it seems the heat is off the currency for now. The ECB have given Spain the backstop that they needed, and they were able to sell their bonds last week albeit at slightly higher levels. While the troubles will not go away overnight, the euro should start to find some support among investors and we feel it will make headway this coming week.
Look for a firmer euro across the board in the week to come with GBP/EUR likely to test support at €1.2350 and EUR/USD potentially pushing up to $1.3150.
New Zealand Dollar
The New Zealand dollar was hurt as signs of slowing global growth, particularly in China, saw investors move out of risk adverse currencies such and the AUD and NZD. China is New Zealand’s second largest export market, and with the announcement that Chinese non-manufacturing industries grew at the weakest pace since March 2011, the export outlook does not look bright.
Another close trading partner, Australia, also came out with some weak data as well as a cut in their interest rates, so it was no surprise that the NZD fell in tandem with the AUD. With further rate cuts expected in Australia, the NZD could continue to outshine its southern hemisphere neighbour.
It has already appreciated 5% in the last month against the AUD, and reached a one year high mid last week. Further gains could be on the way. The only economic release was Commodity prices which rose for a second month in September, showing the biggest monthly gain in nearly one and a half years. The increase was led by skim milk and aluminium, but masked the fact that prices are 14% lower than in the same month last year.
We should have a better handle on the on the economy this week with Business and Manufacturing Confidence numbers being released. The Manufacturing index, along with those of most of the industrialised world, will probably continue to show a number below the crucial 50 level, but any fall from last month’s 47.2 will be regarded as negative.
We feel the NZD will struggle to make any further gains from its current level against either the US dollar or Sterling, although it should fare well against the Aussie. Look for weaker NZD levels in the weeks ahead.
Australian Dollar
The Aussie took a hit during last week as the Reserve Bank of Australia announced a surprise cut of 0.25% in interest rates, pushing them down to 3.25%, the lowest level since 2009. The global slowdown has hit commodity prices, with prices of the key exports, iron ore and coal, falling sharply in recent months. This was an about turn by central bank governor Glenn Stevens, who said after a speech in June that he felt he need to do some ‘’cheerleading’’ on the economy to rebut vocal pessimists. The RBA chief signalled weaker growth at home and abroad, reflecting lower commodity prices, weakness in the labour market, subdued inflation, only a modest expansion in the US and falling Chinese growth. Markets are now pricing in a 60% chance of another cut next month.
The Aussie has been riding high for some considerable time, helped by buoyant commodity markets, high interest rates compared to its major counterparts, and a strong country rating giving it a safe haven status. However last week’s data, and the RBA, have spelt out very clearly that the good times may be over for now. Part of the problem has been the strength of the currency, something the central bank has pointed out on a number of occasions. The cut in interest rates and the potential for another one next month, will impact investor interest and could see some further weakness in the weeks ahead.
While the AUD will not collapse, we see a gradual fall against both the US dollar and Sterling. Expect a test of A$1.6000 in the near term.
Canadian Dollar
The Canadian dollar had roller coaster week, losing ground on the back of a slump in Chinese non-manufacturing industrial growth and a falling oil price before recovering after the European Central Bank kept rates unchanged and oil rallied a little and gaining a cent versus the pound following the US jobs data earlier today.
Ecostats were thin on the ground until late in the week, so the market had little to trade off. The Industrial Product Price Index edged down slightly in August as a result of lower prices for motor vehicles and other transportation equipment while the Raw Materials Price Index rose 3.4% mainly due to higher prices for mineral fuels. The Ivey Purchasing Managers Index release came in at 60.4, down from the previous month, but still better than analysts had predicted. While this is not normally the best measure to capture cyclical swings in growth, the slight fall is consistent with other business surveys, and is well above the crucial 50 level.
The Canadian markets are closed today for the Thanksgiving Holiday. There are a few second tier releases this week, but nothing that should provide too much excitement. We don’t see much movement away from this week’s range but longer term would look for a weaker CAD against Sterling, and range bound versus the US dollar.
Expect a range on GBP/CAD from C$1.5750 to C$1.5950 and USD/CAD to remain between C$0.9700 and C$0.9900.
Chinese Yuan
China’s economy offered more evidence of a seventh straight quarter of slowing growth last Monday, with an official survey of factory managers remaining in contractionary territory for a second successive month despite improving from August’s low. The nation’s official factory purchasing managers’ index rose to 49.8 in September from 49.2 according to the National Bureau of Statistics. September PMI readings are typically fairly strong, so the small improvement from August doesn’t offer as much comfort as it might otherwise.
The overall reading for September’s official PMI matched the prediction of economists. Market demand for food, beverages, tobacco and computers all improved, but the demand for refined metals, steel and other building materials remained under pressure, the bureau said. That is consistent with a long slowdown in China’s real estate sector following a credit crunch that has dragged on economic growth.
There wasn’t much movement last week due to the holiday, but this week shouldn’t prove much different as we move towards the Communist Party Congress. If anything, there may be some further CNY gains versus the US dollar as EUR/USD rises, but these should be limited.
Japanese Yen
The Japanese yen softened this week as investors bet that the central banks of Europe, the UK and US would all indicate ongoing support for stimulus measures for their respective economies. The resulting uptick in risk appetite saw diminished demand for the safe-haven yen. Gains were tempered by Chinese data showing factory output contracted for two consecutive months for the first time since 2009, while Japan’s Tankan report showed pessimism among the nation’s large manufacturers deepened.
Japan’s Tankan index was minus 3 in the three months ended Sept. 30, compared with minus 1 in the previous quarter, the nation’s central bank said today. A negative figure means pessimists outnumber optimists. However, the overall trend was still one of yen weakness as the Bank of Japan started a two-day meeting after expanding stimulus last month.
Data over the past week added to the case that the BOJ will need to expand stimulus to boost growth and achieve its 1% inflation goal which in turn would keep the yen in check. In the end, however, they decided against expanding stimulus at this month’s meeting. The yen rallied from near its lowest level in more than two weeks against the dollar on the news.
Following the non-farms result, the USD/JPY rate is on its way to 79.00 while GBP/JPY is heading towards resistance at 128.11/26. It remains to be seen whether this momentum will carry through this week, but barring bad news in the meantime, it looks likely that the yen will start on the back foot.
South African Rand
The rand declined for a third day against the dollar on Friday to a four-month low as strikes in South Africa’s mining and transport industries spread, raising concern the government may miss its fiscal targets. Illegal strikes have spread across South Africa’s mining industry since a stoppage that began Aug. 10 at Lonmin Plc resulted in pay increases of as much as 22%.
South Africa’s current account deficit, the broadest measure of trade in goods and services, widened to 6.4% in the second quarter and may increase further after the trade deficit jumped to the most in seven months in August. Investors who had been buying up South African bonds sold them again, along with equities after strikes spread in the country’s mining and transport industries.
Foreign investors sold a net 1.9 billion rand ($224 million) of South African bonds last Wednesday, according to JSE Ltd., the first day of outgoings since the country’s debt was included in Citigroup Inc.’s World Government Bond Index on Oct. 1st. Expectations that the central bank will cut interest rates and amid concern about weakening economies from China to Europe are also weighing on the currency.
With the GBP/ZAR rate now over R14.00 following last week’s domestic turmoil, there is little in the way of resistance before R14.76 – the half way mark between the 19.3305.
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