Currency Market Commentary - Summary of March 2008

GBP/EUR

Key data out this month:

From the UK: 

• Mortgages Approval
• Business Investment figures
• Nationwide House Prices
• Consumer Confidence
• Bank of England's Credit Conditions Survey

From the E.U:  

• German IFO business index at 104.8 (104.1 previously)
• 26th of March EUR ECB'S Trichet Attends EU Parliament Debate
• Euro-zone trade balance 

Impact of data in the market place:

We saw the Euro exchange rate remain strong against other major currencies as data from the IFO business climate index showed a rise in German business sentiment. This was measured by the IFO business index, and figures rose from 104.1 in February to 104.8 in March, being the third consecutive monthly rise in the data and a surprise to many who were expecting a slight fall.

This news was described by analysts as another indication that the Eurozone economy is continuing to resist following in the woeful footsteps of the US economy. So far the ECB has refused to follow in the footsteps of the Federal Reserve in slashing interest rates in the face of the credit crisis and it appears that there is little chance of any interest rate cuts facing the Eurozone in the near future.

The ECB continued to take a tough stance on policy with President Trichet continuing to concentrate on the inflation risks. In particular, there is a strong determination to minimise the risk of secondary pressures from the high level of energy prices.

Markets responded by moving to lessen expectations for interest rate cuts later this year with futures markets cutting the chance of any rate cut to around 50%. There were further stresses within the money markets and the ECB added additional liquidity to help ease the tensions.
There were reports of European irritation over the US Administration's dollar policy, but comments in public by European officials were still relatively restrained. French president Sarkozy was more vocal in the opposition to Euro strength.

Jean-Claude Trichet has continued to focus emphasis that the main goal of the ECB at the present time is to control Eurozone inflation which is predicted to remain significantly above 2% throughout most of 2008. This leading to an indication that conversely to cutting interest rates, there is a much greater chance that there will be a rise in the Eurozone interest rates in order to control inflationary pressures.

A strengthening Euro exchange rate quite simply makes buying Euros more expensive, the stronger a currency, the less of it you get for your money. The fact that the ECB are likely to increase interest rates in an attempt to control inflation means that the strength of the Euro currency is only likely to become greater, making buying Euros continually more expensive.

The strength of the Euro and the weakness of the Pound has caused the GBP/EUR exchange rate to fall continually over recent months finding little resistance. The fact that for reasons explained above the Euro is likely to strengthen will only mean that contrary to the opinion of hopefuls looking to buy Euros with their Sterling, the GBP/EUR exchange rate will continue to fall. Just because the rate has come down, doesn't mean it has to go back up!

Central bank rates:

UK: (MPC) 5.25%

EU: (ECB) 4.00%

High & Low of the month:

High: 1.3161 (10/03/08)

Low: 1.2524 (31/03/08)

Difference of cost on a £200k property:

High: 263,220 euros

Low: 250,480 euros

A difference of 12,740 Euros

GBP/USD

Key data out this month:

From the UK:

• CIPS Services PMI for February. Previous 52.5 index Actual 52.1
• BOE Leaves interest rates unchanged at 5.25%
• UK Trade Balance for January. Previous £-7.6bn Actual -£7.5bn

From the US:

• Non-farms Payroll in March fell dramatically to -17k, was predicted to come out at 70k
• US Trade Balance for January. Previous $-58.8bn Actual -$61.1B and came out -$58.8B
• Housing starts for January, previously 1004K, came out higher than expected 1012k
• FOMC lowers interest rates by 0.75% to 2.25%
• CPI for January Previous 0.4%m/m, came out flat
• Consumer Confidence came out lower than expected at 75, forecasted at 82

Impact of data in the market place:

The Bank of England elected to keep rates on hold at 5.25% during their meeting last month as risks to the economy remain finely balanced. The release of the minutes from the meeting revealed a 7-2 in favour of no change with the two dissenters both voting for a 25bps cut. The overall tone of the minutes suggested that the committee remain concerned about the outlook for the UK economy and that further rate cuts remain likely in the months ahead.

UK House prices fell for the fifth consecutive month according to the Nationwide building society which again weighed heavily on the Pound. The survey indicated that prices fell 0.6%m/m in March, bringing the annual rate of inflation to 1.1% y/y; the slowest rate of growth in 12 years.
Further evidence of the credit crisis taking its toll on the UK housing market was seen when First Direct closed its doors to new customers. Other lenders also began reducing their offerings with reports suggesting that the number of products available has fallen by half compared to twelve months ago.

In the US, data releases continue to paint a mixed picture of the economy with many commentators talking of the possibility of a recession. The employment report showed that the number of new jobs created fell to a negative 17k jobs whist the unemployment rate remained steady at 4.8%. The news kept the Dollar on the back foot against all its major counterparts.

At the FOMC meeting, the Fed again cut interest rates, this time by 0.75% to 2.25%. Since September ’07 the Fed have cut by a total of 3.0% from 5.25% to 2.25% in an attempt to shore up the economy and prevent a recession.

Central bank rates:

UK: (BOE) 5.25%

US: (FED) 2.25%

Difference of cost on a $200k property:

High = £101,421.42   

Low  = £98,057.00

EUR/USD

Key data out this month:

From the EU:

• Euro-zone gross domestic product released in line with expectations at 0.4% QoQ and 2.2% YoY.
• ECB interest rates decision. Interest rates held at 4% as expected.
• German ZEW economic sentiment survey more positive than expected at -32.0 compared to expectations of – 40.
• Euro zone Consumer Price Index (CPI) released at 0.3% MoM and 3.3% Yr on Yr.

From the U.S:

• US Non-farms weaker than expected at -22k. 
• US unemployment rate at 4.9%.
• US Trade Balance shows further deficit from a previous $-57.9billion to $-58.2billion.
• US Consumer Price Inflation released at 4% in comparison to a previous 4.3%.
• FOMC interest rate decisions released showing a further interest rate cut of 0.75%.
• New Home Sales fall again to -1.8% MoM.

Impact of data in the market place:

Data being released from the Eurozone remains robust as the European economy continues to be resistant to the pressures created in financial markets by the credit crunch. The ECB still have had no cause to amend interest rates since June 2007 and many commentators expect their rates to remain steady in the months ahead.

Although there are some clear inflationary pressures within the Eurozone the outlook in comparison to the US markets is much more bullish with further potential for growth.

US Non-farms payroll figures show that for 2 months in a row the US economy has lost jobs. This in turn puts pressure on the FED to cut interest rates to ease the pressure currently within the market.

Inflationary pressures however, are a concern. With CPI registering at a high 3.3% this is a full 1.3% above the European Central Banks official target of 2% inflation. Technically above target inflation rates should call the ECB to action to raise interest rates and tighten monetary policy going forward. In contrast price growth in the US slowed to 4% compared to a previous 4.3% in Jan, this is the slowest rate of expansion in four months. Looking in to this in further detail it can be seen that cooling energy prices have helped to curb the impact of increasing food costs.

The FEDs most recent cut to interest rates now leaves the US Dollar as the second lowest yielding currency in the developed world. Since the last meeting of the FED the credit crisis has continued to rampage the US economy. The US dollar has fallen to record lows with the fear of risk having severe implications on liquidity in the market.

Central bank rates:

US Federal Reserve; 2.25%

Bank of England; 5.25% (next meeting 10th April)

High & Low of the month:

High: 1.5904 17/03/08

Low: 1.5145  03/03/08

Difference of cost on a €250k property:

$7,880.41

GBP/AED

The AED is pegged to the USD dollar, averaging around 7.35 this month although as already mentioned it is an extremely volatile time at the moment, thus having an impact on the GBPAED.

Difference of cost on an AED 200k property:

High = £27,662

Low = £26,702

GBP/CAD

Key data out this month:

March 4th BoC Interest Rate Announcement

March 7th Unemployment Rate for February

Impact of data in the market place:

Despite seeing interest rates cut to 3.50% at the start of the month the Canadian Dollar has remained strongly underpinned by record highs in oil prices earlier in the month, reaching above $110 a barrel. This was the third rate reduction in three months and furthermore, authorities signalled that more rate cuts were likely as they struggle to keep the economy growing amid lower export demand from the US. Some relief came for Canadian migrants (and fuel prices!) when oil prices tumbled towards the end of the month in a pre Easter sell off, moving the GBPCAD rate above the 2.00 level. The Canadian Dollar failed to capitalise on the resurgent oil prices at the end of the month, weakening further against sterling. However, we could see a re test of the record highs soon with supply worries in Iraq.

The unemployment number remained steady despite possible expectations of an increase in unemployment levels plus new house prices continued to rise, in contrast to the trend that we are seeing south of the border of falling prices in the USA. There are concerns over slowing in growth; GDP rose only 0.8% which is the weakest performance in more than 4 years and due to a drop in exports. It will be important for those needing to purchase the Canadian Dollar over the coming year to consider how they will be affected by developments in the US. For example, the downturn in the US housing sector is hitting timber exports plus, the weakness of the US car industry (with which Canada is closely linked) will also dampen the demand for Canadian exports. The US accounts for the more than three quarters of Canada’s exports so the slowdown in the US is certain to have an impact on Canadian exports and their economy. With this in mind, clients should certainly prepare for further volatility.

Central bank rates:

Bank of England: 5.25% Interest Base Rate (Next meeting April 10th)

Bank of Canada: 3.50% Interest base Rate (Next meeting April 22nd)

High & Low of the month:

High:  1.9517

Low:   2.0608

Difference of cost on a $200k property:

CAD$ 5,425.08

GBP/AUD

Where is it going? The Aussie Dollar Update for March

It’s been another testing month for Sterling. Although interest rates were kept the same at 5.25%, the Bank of England minutes kept outlook lower with future cuts possible. House prices are again showing signs of more slowdowns with the RICS house price balance dropping for the seventh month in succession signaling more than half a year of negative market sentiment.

Australia is still booming, and the continued strong employment growth has eased concerns that recent interest rate hikes (to 7.25%) are harming the economy. But despite this continuing strength,  prolonged global equity declines prompted renewed risk aversion this month, with speculators withdrawing their funds from commodities such as gold and minerals (key exports), resulting in the $AUD going above $2.20 for the first time since the beginning of February. This was an improvement of over 10 cents from the lows at the start of the month, giving migrants some long awaited good news!

So does this mean that the downward trend has now stopped? Not necessarily, as it could just be a corrective adjustment and we have already dropped back to around the $2.17 levels, but it is very hard to tell where it is going from here. There is still so much doubt in the market which is causing the volatility we are seeing, and the market has been moving as much as 4 to 5 cents a day, so many sleepless nights watching the computer screens no doubt!

The RBA did leave their rates on hold in their decision on April 1st in a widely expected move, and this could signal the tightening global credit conditions have started to filter through to Australia. However, as stated, the moves we have seen have largely been as a result of cautious speculators taking their profits and just biding their time, waiting to see what happens. Should risk appetite return, then we could easily see a continuation of the Aussie Dollar strength that has seen the rates drop so dramatically over the last 18 months.

You need to make a decision when to buy, and what your budgeted rate is. Many people will be renting for 6-12 months and feel they have time to watch the markets and hope they improve. HiFX have a fully regulated Australian office that can help you monitor the markets and work with you to achieve an agreeable rate, if this is a strategy that you wish to adopt.

Bear in mind, however, that there is no guarantee that your target rate will be hit. How much can you afford to gamble? If the rates were $2.00 in 12 months time then how does that affect your new life in Oz? Those who adopted a similar strategy this time last year and decided to gamble on the market have seen a significant drop in the rates and thus the amount of dollars they have to purchase a house and start their new life with.

There are different ways to buy currency when you are moving your funds abroad and many different things to consider, so you should start thinking about your options and watching the rates of exchange as early as possible. Even if you are not leaving for another 6-12 months, or will not be moving money over just yet, the more information you get at this stage the easier your decision about when to buy will be.

HiFX have a bespoke team who will happily talk you through your options in more detail and discuss a best fit strategy with you. For a free, no obligation consultation please call the Migration Team on + 44 (0)1753 859159 or email migration@hifx.co.uk.

GBP/NZD

Another Volatile Month for £ vs $NZD; What is happening with the Exchange Rate?

It’s been another testing month for Sterling. Although interest rates were kept the same at 5.25%, the Bank of England minutes kept outlook lower with future cuts possible. House prices are again showing signs of more slowdowns with the RICS house price balance dropping for the seventh month in succession signalling more than half a year of negative market sentiment.

There was, however, better news for those moving to New Zealand as the Dollar weakened against Sterling following sharp falls in commodity prices across the board. The aftermath of the Bear Sterns collapse in the US also aided the Pounds rally, bringing about renewed risk aversion and hence the unwinding of the carry trade, something New Zealand is particularly vulnerable to due to its 8.25% interest rates, the highest in the industrialised world.

This resulted in the Dollar losing over 10 cents against the Pound, going over $2.55 for the first time since January. The question on everyone’s lips is will this last? Have we seen a reversal in the overall downward trend of the last 12 months? It seems to be stuck in a range at the moment, between $2.45 and £2.55, but current market conditions makes it very difficult to predict where it will go from here.

Should the tightening global credit conditions filter through to New Zealand then that could have an adverse affect on their economy and as such the performance of the $NZD. There was some mixed data out of New Zealand in March, with encouraging growth figures and strong consumption and business investment, but less positive news from the NBNZ’s business confidence survey. However, the correlation between the strength of the currency and the carry trade is what has really been driving the market of late. Should risk appetite return, we could easily see the dollar strengthen again.

If you look at just the first 3 months of this year, there has already been a 20 cent difference between the high and the low, or $40,000 if you were moving £200,000 across! You need to make a decision when to buy, and what your budgeted rate is. Many people will be renting for 6-12 months and feel they have time to watch the markets and hope they improve. HiFX have an office in Auckland that can help you monitor the markets and work with you to achieve an agreeable rate, if this is a strategy that you wish to adopt.

Bear in mind, however, that there is no guarantee that your target rate will be hit. How much can you afford to gamble? If the rates were $2.20 in 12 months time then how does that affect your new life in NZ? Those who adopted a similar strategy this time last year and decided to gamble on the market have seen a significant drop in the rates and thus the amount of dollars they have to purchase a house and start their new life with.

There are different ways to buy currency when you are moving your funds abroad and many different things to consider, so you should start thinking about your options and watching the rates of exchange as early as possible. Even if you are not leaving for another 6-12 months, or will not be moving money over just yet, the more information you get at this stage the easier your decision about when to buy will be.

HiFX have a bespoke team who will happily talk you through your options in more detail and discuss a best fit strategy with you. For a free, no obligation consultation please call the Migration Team on + 44 (0)1753 859159 or email migration@hifx.co.uk.

There are many strategies available to minimise your risk when transferring funds, all of which will be explained clearly by your personalised dealer should you open a trading facility with HIFX. To discuss your requirements in more detail and for a free currency consultation please contact HiFX plc on 01753 859 159 or email info@hifx.co.uk.
 

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