Foreign Exchange

Trading Currency can be a confusing business, but using a Currency Broker will definately save you money and help get a better understanding of the costs involved.

Here is a look at how the major currencies are acting this month:

Euro : Trading around 1 Euro = $1.55 = £0.79

The Euro has remained in a dominant position against the Pound again over the last week, following the maintained tough stance from the ECB on inflation and interest rates. Indeed, as widely expected, the ECB left base rates unmoved at 4% last Thursday, with President Trichet mentioning both upside inflationary risks and downside growth risks as key issues to be monitored closely. 

As far as other data from last week is concerned, there was certainly some weakness demonstrated, with EZ retail sales falling 0.4% in March and the annual figure therefore falling by 1.6%. Furthermore German factory orders fell by 0.6% for the second month in a row, leaving an annual decline of 5%. These are a concern to the Euro Zone chiefs, as although there are improving labour markets and wages, it appears the consumers are becoming reluctant to spend which could spell longer term problems for the economy and currency.

 However, these apparent weaknesses may not be enough to nudge the ECB out of its current wait and see policy, and we believe the ECB will leave rates on hold for several more months while events unravel. In the meantime, UK bearishness should keep the Euro strong over the Pound.


Sterling

The BOE left their benchmark interest rates unchanged at 5% at last weeks meeting, as they look to gauge inflation risks.

The BOE will this week reveal a grim forecast of risky inflation and sharply weakening economic growth for the coming months. The closely watched quarterly inflation report will leave the door open for further interest rate cuts.

The banks report comes as the British Chamber of Commerce (BCC), in its new economic forecast, warns that Britain will skate close to recession over the next six to nine months, with quarterly growth remaining just above zero.

The housing market is still in turmoil, house prices are expected to drop by 14% over the next year and they could take a decade for the prices to reach the highs of 2007 according to some property brokers.

We should see a volatile week coming with the first 3 days of the week seeing the release of some reasonably significant data which includes the Trade Balance for March due for release Monday, CPI for April on Tuesday and the Bank of England’s Quarterly Inflation report released on Wednesday.

To sum up, there is a gloomy outlook for sterling as it is strongly believed that there will be a further two rate cuts before the end of the year, the first expected next month of at least 25 basis points. It is possible we may see 75 basis points cut before the end of 2008.

Last week the pound was negatively affected by Halifax, reporting that a massive 2.5% reduction on the UK housing market in March. (see UK News www.oyster-international.com/uknews.html )This was the largest drop since 1992.

US Dollar : Trading around £0.51 = Euro 0.65

Finally we appear to have seen a break in the recent trend for the Greenback as it made a reasonable rally against all the major pairs. For the week, the US data produced mainly positive surprises suggesting that the economy may be faring far better than most analysts forecast. The most impressive news on last week´s calendar was the sharp rebound in ISM manufacturing report which printed at 52.0 versus 49.1 expected. With services data which comprises the vast majority of US economic activity, squarely above the 50 boom/bust line, As a result, the arguments for an imminent US recession have become considerably less persuasive.

It´s going to be a blockbuster week for data in the U.S. with the release of tier one data. Markets will receive April´s CPI report, retail sales, import price index, industrial production and capacity utilisation, housing starts and building permits, and the University of Michigan/Reuters consumer sentiment. The U.S. trade deficit narrowed in March after an unexpected widening in the previous month, which may show a move toward recovery for the USD.

 Canadian Dollar : Trading around CAD$ 1.00 = £0.507 = US$ 0.99 = Euro 0.64

Last week the loonie strengthened against the pound following robust employment numbers and on the back of record high crude oil prices (Canada is a major producer and exporter of oil).

The economic docket did have a chance to move the market; and ultimately it did cause a stir but did not create any significant movement. Looking back over the lineup of releases, the data covered virtually the entire economy.

Canada created 19,200 jobs in April, more than expected, and although the unemployment rates rose to 6.1%, the employment data was seen as positive. Taking a look into the housing market, building permits for the month of April and housing starts for April both disappointed (housing starts fell by more than expected, to 213,900 new homes). Although Canada’s housing sector isn’t suffering from the same level of crunch that the US and UK are suffering, tough lending conditions have nonetheless quite clearly crossed the boarder.

Since February the BoC have cut interest rates to take into account the knock on effects from the US economy. They have also readjusted their growth projection to take into account diminishing exports from the US. The BoC have had more flexibility over their interest rates compared to other countries because inflation is still below their 2% target, which could allow more rate cuts. As multiple rate cuts are still expected in the UK this year, and possibly 1 or 2 in Canada, the longer term prediction is that the loonie may strengthen against the pound, provided the Canadian housing market remains robust and the impact from a US slowdown is not too severe.

Courtesy of Foremost Currency Group to find out more about Foreign Exchange email fx@oyster-international.com

 

Back to     Newsletter    front page    contact us