Market News

by Jon Beddell

Foreign Currency Market Update – GBP / CAD Update

A slight upward revision to the UK’s second quarter GDP figures to 1.2% did little to lift Sterling last week as investors focus on the longer term impact of the government’s austerity measures. On the other side of the Atlantic the US suffered a drastic revision downward in their Q2 GDP figure, from 2.4% to 1.6%, with a rise in net imports largely to blame. Analysts had been expecting a worse revision, so markets were not unduly perturbed by the data. Canadian second quarter growth figures are due out today, with analysts expecting annualised growth of 2.5%, down from the 6.1% seen in the first quarter. A worse than expected widening in the trade balance had little impact last week.

Since last week’s report the Pound has remained in a tight range, pushing at the recent highs around 1.6400. It seems to have found resistance around these levels, and while the trend is still positive for Sterling, we advise clients to cover half of any CAD requirement here while the going is good.

by Jon Beddell

Foreign Currency Market Update – GBP / CAD Update

Sterling rebounded from the 1.60 level last week after data showed that retail sales rose 1.1% in July, more than the 0.4% that analysts were expecting. The minutes from the latest Bank of England meeting were released on Wednesday, quashing speculation that the monetary policy committee were moving toward an easing stance. The 8-1 vote showed that Andrew Sentance continued to call for a rate hike despite recent soft data on housing and reports from the BoE that mortgage and business lending are still declining. Investors took comfort from the minutes, taking some pressure off the Pound and allowing it to move higher against most other currencies with the exception of the US dollar which is benefitting from its safe haven status in the face of growing risk aversion.

The Canadian dollar strengthened in the early part of last week after BHP Billiton made a $38bn bid for Canada’s Potash Corp. The merger excited traders because it would create a surge in demand for Canadian currency in order to pay for the merger. However, once the market had factored this in it looked back to other data and decided that a raft of weaker US data and a modest dip in Canadian inflation in July was reason enough to send the currency lower again.

The technical outlook is positive. The trend is still for a stronger pound, and last week’s bounce from 1.60 puts the market in a good position to have another crack at the 1.65 level. A daily close above there would significantly increase the chances of seeing 1.70 – 1.75 over the next few weeks. On the downside, a break below 1.60 would be cause for concern.

by Jon Beddell

Foreign Currency Market Update – GBP / CAD Update

After twice bumping into a clear barrier at 1.6200 in early July we sold off four cents from the July 16th peak. Thursday’s market beating retail sales figures for June failed to help on Thursday, but the Pound was quick out of the blocks on Friday as second quarter GDP figures showed the UK economy grew at 1.1% in the second quarter, an improvement on the 0.3% first quarter figure and much better than analysts had expected. The much awaited European bank stress test results also arrived on Friday, showing that only 7 banks failed to make the cut, with all the UK banks passing. That helped sentiment, and Sterling managed to close higher for the first time in a few days. The problem with all this positive news is that it adds weight to the “global recovery” theory, which in turn gives the high yielding and commodity based currencies a boost. Even with the surprisingly strong GDP figures Sterling finds it hard to make much progress against the Loonie, especially with a background of monetary tightening in Canada contrasting starkly with the 8-1 “no change” vote that the UK’s monetary policy committee stuck to in July.

The big news from Canada last week was a widely expected rise in interest rates from 0.5% to 0.75%. Other data was actually on the weak side, with a surprise fall in retail sales, and a slowdown in consumer price inflation.

The technical outlook is positive. We are seeing higher lows forming on the chart every few weeks which means the Pound is almost in an uptrend. What would really help is if we could make a higher high! At the moment it seems that the 1.6200 level is a tough nut to crack, and until we capture that level we will remain cautious. For clients who require CAD and who have an appetite for risk, we recommend placing protective stop orders below 1.5425** and waiting to see if we have another stab at 1.6200 over the next few days.

** Suggested level based on the interbank rate. The rate you achieve will depend on the volume of currency traded.

by Jon Beddell

Foreign Currency Market Update – GBP / CAD Update

Markets greeted the UK’s emergency budget with relief last week, bidding up the value of sterling as fears of a credit downgrade receded in light of positive initial comments by ratings agencies and economists. While making cuts that may dent economic activity, the new government also produced a set of modest 5 year growth projections that markets can believe in, and a plan to reduce borrowing from 10% of GDP to 1% over the same period. That the budget was not as bitter a pill as many expected did not dent the general perception that the government is taking action to address the deficit and by doing so putting the pound on more credible footing and preserve the UK’s all important AAA credit rating.

Last week’s Bank of England minutes showed that one of the nine member committee that sets interest rates actually voted to increase rates by 0.25% at the June meeting. Andrew Sentance was alone in wanting to raise rates, but it still gave markets the feeling that rates in the UK may go up in the foreseeable future, and that helped sentiment toward the pound.

Plunging stock markets have triggered a so called “flight to quality” among nervous investors over the last few days. Traders are selling out of higher yielding (and higher risk!) currencies and instead putting their funds into the relative safety of the US dollar and the Yen. What’s interesting is that this phenomenon usually dents currencies like the Australian dollar and South African Rand which yield 4.5% and 6.5% respectively. This time however, the Canadian dollar is also taking a pounding, falling over 7% against Sterling in the last two weeks. The 4% fall in the gold price yesterday does have a negative impact on CAD, but until then gold had been performing well. More likely investors are taking weak Canadian inflation data as a signal that interest rates there will remain on hold at 0.5% for the foreseeable future following the Bank of Canada’s rate hike on June 1st. The selling of the Canadian dollar intensified after retail sales data for April showed a worse than expected 2% decline.

Sterling has scored a major victory by capturing the resistance level at 1.59, leaving nothing in the way of a further improvement toward the next noteworthy level at 1.6350. Clients with CAD requirements should consider covering some exposure now or placing a stop order below the market to lock in the recent gains, but we remain optimistic for further upside over the next week or two, especially if stock markets remain weak.

by Jon Beddell

Foreign Currency Market Update – GBP / CAD Update

Sterling has had a bad week. The election uncertainty created high levels of volatility, and the final outcome does not appear to have give the markets much comfort. Much of the downside in the GBP/CAD rate can be attributed to CAD strength as gold continues to surge (7% higher so far in May) and equity markets rebound from a wobbly patch last week.

It was trade data that drove sterling to new 2010 lows yesterday. Data for March which showed the trade deficit widened to £7.5bn for march, up from £6.3bn in February. Meanwhile, Canada also suffered a reversal in its own trade balance in March. Their net surplus fell from $1.2bn to $254m as the sharp rise in the Canadian currency started to bite. A stronger currency makes exports more expensive to foreign buyers. On the whole the Canadian data was viewed as positive on the basis that the growth in both exports and imports supported the theory of a continued economic recovery.

Bank of England governor Meryn King gave a nod of approval to the new government’s pledge to cut public spending by £6bn this year. Delivering the quarterly inflation report King warned that the UK economy was still in danger, but that the planned cuts would be useful in showing the markets that government was taking action, preventing a possible run on the pound and selling of UK gilts. We saw what happened with Greek, Spanish and Portuguese debt over the last few weeks and the new administration will be doubly keen to avoid a similar fate for gilts. When investors feel that a government may not be able to meet debt repayments as they fall due, they demand a far higher interest rate for investing in new government bond issues. Paying a high rate compounds the debt problems and can force a default. So taking steps to improve the market’s perception of how we are tackling our debt mountain is almost as important as reducing the deficit. The BoE believe inflation – which is currently well above the bank’s 2% target – will moderate back towards 2% over the next two years. That gives policy makers the flexibility to keep interest rates low for the short term.

The technical outlook for sterling is negative. Having now broken to new record lows, there are no historical price levels to point towards as possible support. That means sterling will remain vulnerable, and we cannot speculate on when or from what level it will eventually turn.

by Jon Beddell

Foreign Currency Market Update – Australian Dollar Update

A couple of key data items helped to sooth sterling investors last week. The UK purchasing managers index rose to the highest level since the start of the recession, and a final revision to fourth quarter GDP put growth at 0.4%, higher than originally indicated. House prices also rose 0.7% in February. However, despite making progress against the euro and US dollar, the Canadian dollar has retained the upper hand, buoyed by strong commodity prices and robust January growth data of 0.6%, adding to the fourth quarter annualised figure of 5%. These growth data paint a clear picture of recovery, and with manufacturing and construction activity rising in January, some analysts are now expecting an interest rate hike by June. Canada’s central bank rate is 0.25%, the same as the US. However, the gathering momentum of positive data and strong commodities makes the Canadian currency more popular than its US cousin, a trend that has seen the USD/CAD exchange rate drop below 1.000 (or parity as it’s known) for the first time since July 2008. As I type one US dollar buys you just under one Canadian dollar.

The other big story here is the imminent general election, scheduled for May 6th. There is considerable uncertainty surrounding the outcome, with a strong likelihood of the first minority government in 30 years. The pound is holding up well considering the fact that markets hate uncertainty; but this can be put down to the fact that the uncertain outcome has been well understood for some time now. Investors are growing used to this and have already acted accordingly. Setting a firm date helped, and if the polls start to swing strongly in any given direction we may even see sterling strengthen. The latest polls suggest the Tories may have extended their lead in March.

The technical outlook remains bleak for sterling. The market is anchored close to recent lows and would need to do a lot of work to improve the outlook. A break above 1.5650 would be a start, but to really break the down trend we would need to capture levels like 1.6375 and 1.6500.

by Jon Beddell

Foreign Currency Market Update – Canadian Dollar Update

Since the dramatic slide on March 1st sterling has been edging lower still, showing no inclination to drag itself out of the downward spiral.  This is worrying.  That the pound cannot muster any strength even after such a big sell off only points towards further weakness.  This exchange rate has not traded at these levels before, so there is no historical price support, and no telling how low it could go.  Sterling is under a double cloud.  Firstly the uncertainty surrounding the general election, and secondly the prospect of a possible double dip recession.  The pound has taken on some of the characteristics of the “higher yielders”.  The bad half!  It is the currency most sold when global economic news flow gets rough, and yet it does not benefit from increased risk appetite when things are looking ok.  Another factor that makes it undesirable is its very low yield, which at 0.5% contrasts sharply with yields of other currencies like the Aussie dollar, which pays 4%.  The Canadian dollar however only pays 0.25%, but the Canadian economy is performing better than ours and rates are likely to rise there before the UK.  That currency is also underpinned by strong commodity prices, in particular gold which up 5% over the last six weeks.

 The UK Consumer Price Index showed a slowing in the annual rate of inflation in February to 3.0%, from 3.5% the prior month.  That is fairly benign data, but does at least back up the Bank of England’s view that inflation will fall back below their 2.0% target.  Alistair Darling will present the budget on Wednesday.  The only hope for sterling is that he gives a more credible outline of how the government intends to address our ballooning budget deficit. 

  The technical outlook is dire.  Sterling has been trading in a trend channel for the last few weeks.  A break below the lower boundary at 1.5150 could prompt a new acceleration lower.  There are no obvious catalysts for a turnaround, so we advise clients with CAD requirements to cover any exposure here rather than speculate on a possible bounce that may never materialise.

by Jon Beddell

Foreign Currency Market Update – Sterling / Canadian Dollar

Even after last Monday’s dramatic plunge, sterling failed to retrieve any of those losses against a very strong Canadian dollar. Most other sterling crosses showed at least some bounce, but this one simply spent a few days consolidating at the lows before making fresh lows on Tuesday. It’s not surprising to see this sort of strength considering the Royal Bank of Canada issued a report on Thursday forecasting economic growth of 3.1% for 2010, driven by government stimuli and improved credit markets. There were also predictions that the Canadian dollar will reach parity with its US counterpart in the short term. Unemployment declined in January, and data on new house construction was much improved.

Meanwhile, despite a second successful gilt auction on Tuesday, sterling is failing to make any headway. Two other news items have dominated the wires this week. Firstly the latest international trade figures which showed Britain’s trade deficit reaching £8bn in January, far higher than analyst expectations, and this coming despite a weak pound which should help to boost exports! The next blow came from a report from credit ratings agency Fitch, who yesterday labelled Labour’s promise to cut the deficit in half by 2015 as “too slow”. This sort of report only helps to recycle the persistent speculation of a possible cut in the UK’s credit rating.

The technical outlook is dire. We are touching new lows almost daily, and there doesn’t seem to be any near term catalyst to turn things around. Buyers of the Canadian dollar should consider covering any requirement now rather than speculate on a recovery that may be a while off yet.

Canadian Dollar currency chart:

by Jon Beddell

Foreign Currency Market Update – Sterling / Canadian Dollar

Sterling had already broken the key support at 1.6250 last week (this was the October low) and then made a failed attempt to break back above that level at the end of the week in the foreign exchange markets. Things got dramatically worse on Monday as traders pointed to a myriad of factors that all added up to send sterling sharply lower, losing over four cents on the day. It was a weekend poll showing a high probability of a hung parliament that set the scene for things to come. Another contributor was Prudential’s announcement that it will purchase AIG’s Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran’s failure to cooperate with nuclear watchdogs the IAEA. Given the negative sentiment surrounding the pound at present, any one of these stories could have caused the sell off.

The Canadian dollar remained firm, helped by a firm US currency and buoyant commodity prices. Since posting a low of 1.5400 on Monday we’ve spent two days consolidating close to this low. In fact, the market is showing so little “bounce” after Monday’s dramatic slide that we are fearful of another imminent decline. Buyers of Canadian dollars should strongly consider covering at least half of any exposure now to reduce the risk of further downside.

by Jon Beddell

Foreign Currency Market Update – Sterling / Canadian Dollar

Sterling is rapidly deteriorating toward last year’s lows at 1.6250. The currency failed to take any lasting reassurance from Wednesday’s release of the minutes of the last Bank of England meeting, which showed that all nine committee members voted to halt the quantitative easing program.

The pound took a new bashing this morning after data showed that the UK government borrowed a further £4.3 billion in January, a month where tax receipts usually result in a surplus. Analysts were expecting a net influx of cash into government coffers, but a 7.7% fall in tax revenues combined with a 9.7% increase in public spending meant the January account fell into the red for the first time in 17 years. The figures surprised the market, sending sterling lower across the board.

The only relief has been against the embattled euro, which has taken sterling’s top spot as the world’s pariah currency; for now at least!

The technical outlook is negative. A test of 1.6250 looks like a foregone conclusion. If we make new lows below there it could signal the start of a new down leg. We are also testing record lows against the Aussie dollar today. Anyone with CAD requirements should consider covering at least half now, and also contemplate using a stop order to protect the balance against further weakness.