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GBP/EUR

Sterling fell to all time lows against the Euro last week as fears of recession in the UK mounted.

Responsibility for this seems to lay at the feet of Mervyn King, the governor of the Bank of England, who appeared reluctant to rule out the possibility of cutting interest rates further in a speech he made last Wednesday. Sterling weakness was compounded by the subsequent comments of Gordon Brown, who did little to protect the beleaguered currency.

The Pound’s recent performance against the Euro suggests that the market has priced in further rate cuts by the BOE, and the likelihood that these cuts will be more aggressive than those of their European counterparts.

The cross may gain some relief from the poor performance of both Italy and Germany, (Germany are the largest single economy in the Euro zone), both of which have announced that they are in recession, a situation narrowly avoided by France. Despite this Sterling has shown little in the way of strength, highlighting the disappointing economic performance this side of the Channel and the difficulties ahead for UK fiscal policy setters. The poor performance has led to most analysts revising their futures outlook, with the majority pointing to further Sterling weakness before we see any significant recovery.

All things considered, there may be some short-term recovery for GBP, based simply on the deteriorating economic climate in the EU, but the longer term outlook holds little optimism as it appears that here in UK we are bracing ourselves for a major economic slowdown.

GBP/USD

Last week saw the GBP/USD cross continue to deteriorate, dropping below the significant resistance point of 1.50 on Wednesday afternoon, despite starting the week at almost 1.59. We saw a low of 1.4550, before Asian trading showed some support for the Pound early on Monday morning, which continued up to the 1.50 mark, where we have seen a great deal of resistance as the mid-market struggles to break through.

This week sees few key data releases, with inflation data coming from both sides of the Atlantic likely to show a slight reduction in the flash rate, although this is unlikely to have a significant impact on the cross. We may see the largest swing following the release of the Bank of England minutes from this month’s meeting, where interest rates were cut by 1.5%. These are likely to reveal more about the Monetary Policy Committee’s reasoning behind the unprecedented cut, and the likelihood of further rate cuts before Christmas. We also see minutes from the Federal Reserve, although their 0.5% cut was wholly expected and unremarkable, hence the markets are unlikely to see a significant reaction.

This week we will see whether the mighty Dollar will continue its march over the weak Pound, or whether the Pound can sustain its recent rally and move back towards the 1.6 mark. Although talk of parity is premature, the GBP/USD cross is at a 7-year low, and many analysts are predicting a move into the low 1.40s. Although Dollar buyers may rue not purchasing their currency at a higher level, it may be advisable to secure currency as soon as possible to prevent any further slides.

CAD

The Canadian Dollar fell further against a basket of other currencies, after a dismal finish to the end of the week with the Toronto Stock Exchange and Dow Jones Industrial Average trade leading to further US Dollar strength. Continued losses in crude oil prices likewise boded poorly for the Canadian currency; the downtrodden Loonie falling especially hard against the resurgent Greenback due to plummeting raw materials prices.

The effect of lower oil receipts could already be seen through the past week’s Canadian Trade Balance report, and a further deterioration in its trade surplus would weigh heavily on the highly export-dependent country. Subsequent forecasts for the future of the Canadian Dollar will largely depend on outlook for commodity prices and global equity indices. Given that oil and other key commodity costs have been trading from broader financial market risk sentiment, it is perhaps unsurprising to note that the Loonie has remained especially sensitive to equity market declines. As such, stock market reactions to key US economic event risk will be closely watched during this week. Wednesday will bring a combination of US housing, inflation, and Federal Reserve Open Market meeting minutes, likely to force noteworthy reactions out of US and Canadian equity indices. Also out from Canada this week will be the whole sales report on Thursday and the CPI index out on Friday.

Over this coming week we expect the GBP/CAD cross to remain quite volatile, mainly dominated by Sterling weakness, meaning that the range is likely to remain between 1.80 and 1.90.

AUD

The overall sentiment for the Aussie dollar is still bearish, although this has not been enough to counter the antipathy surrounding Sterling like a storm cloud. The result of both of these forces have appeared to act in almost equal measure leaving the cross particularly range bound, especially when compared with some of Sterling’s other major crosses. The large shifts caused by Sterling weakness against the US Dollar and Euro have failed to materialise against the AUD with the cross oscillating around a 2% range for the last week.

The reasons behind the Aussie weakness are actually very similar to over here in the UK, with economists forecasting a near standstill 0.4% growth figure for Q3, a figure noteworthy for it’s similarity with a growth expectation in the UK not too long ago. Some of the key industries such as motor sales have been equally as hampered in Australia as here and are helping drive these figures, and indeed direct the bank of Australia towards potentially equally drastic monetary easing as seen in the UK. Overall we see the Australian economy as at least a few months behind the UK on the recession curve with their worst further away than ours. The Australian dollar is thus likely to retain it’s strength for a while longer and potentially weaken against the pound next year, as long as the UK economy does not fall by further than expected.

NZD

A trail of despair followed the Kiwi Dollar last week, with grim economic data revealing retail sales tumbling for a third consecutive quarter and investors continuing to curb their appetite for risk.

The tightening of demands for carry trades reflects a bearish outlook for the NZD and as fears of a global recession intensify the Kiwi is likely to experience increased selling pressures. Deteriorating fundamentals continues to spur bets that the Reserve Bank of New Zealand will aggressively cut borrowing costs well into the next year in order to avoid a deep and severe recession.

Volatility is likely to remain high and a lack of data emerging from New Zealand may potentially have a negative effect on the Kiwi. The usual push and pull factors will remain added to by carry trade movements, therefore creating some opportunities for both buyers and sellers. Speak to your FCG account manager to assist with taking advantage of any high points in the market.

ZAR

South Africa's Rand weakened against a basket of major currencies including GBP in early trading on Monday morning

South Africa’s Finance Minister Trevor Manuel said he predicted that economic growth will slow to 3.7 percent this year from 5.1 percent in 2007.

South Africa's currency also fell after reports showed manufacturing contracted for a sixth month running in October and the pace of house-price growth slowed to an annual 1.2 percent last month, the weakest in over fifteen years (since January 1993).

The South African Reserve Bank said that compared to September the nation's foreign-currency reserves declined 4.4 percent to $32.9 billion by the end of October.

We expect trading to remain between 14.8 and 15.6 in the short term. For those who are looking to buy rand in the near future, it would be wise to take advantage of any short term gains and talk to your account manager about putting stops and limits in the market.

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