Headlines
UK election concerns stalk Sterling –
Both Labour & Tory victories seen as bearish.
Greek PM demands cash from local govs –
‘Grexit’ threat weighs on Euro.
GBP/USD recedes –
Psychological resistance at 1.50 remains.
RBA Governor hints at more rate cuts –
‘Aussie’ tumbles -100 pips.
Sterling
It was an uneventful day for the Pound on the currency markets yesterday because, in the absence of fresh economic data, investors were left to stew over the possible outcomes of next month’s UK general election. Generally speaking, stewed meat softens and gets easier to digest. But in terms of the upcoming British election, the longer traders spend analysing the possible results the tougher it gets to predict what will happen to the Pound. This is because both major parties – Labour and the Conservatives – are seen to pose risks to the domestic economy.
A Labour victory risks curtailing business investment, due to higher taxes, and undermining the UK’s credit rating, due to increased public spending. A Tory victory, meanwhile, carries the threat of economic uncertainty in the event of David Cameron’s promised in/out EU referendum, which could seriously hamper investment trends in Britain.
Euro
‘Grexit’ talk plagued the single currency yesterday as Greek Prime Minister Alexis Tsipras passed a decree forcing local governments to transfer all cash reserves to the central bank. The desperate decision was taken as a sign that the Hellenic nation is running precipitously low on funds as it approaches a number of large loan repayments over the next few months.
Markets were also unsettled by Austrian central banker and European Central Bank official Ewald Nowotny’s curiously sober remarks on the possible fallout of a Greek exit from the Eurozone. Nowotny noted that the currency bloc is in a better state of health to deal with a ‘Grexit’ now than it was in 2013. He even went as far as to suggest that the 19-nation bloc wouldn’t experience ‘financial and economic’ contagion following a potential debt default in Greece. His comments negatively impacted the Euro because they were seen to underestimate the psychological effect that a ‘Grexit’ could have on other embattled Eurozone member states.
US Dollar
The Pound to US Dollar exchange rate weakened by around -70 pips yesterday as Sterling once again failed to settle above key psychological resistance at 1.50.
But with Federal Reserve rate hike bets starting to wane, in light of a recent downturn in economic data, there is potential for ‘Cable’ to rally if the Pound can escape unscathed from next month’s general election. Markets are wary of investing too heavily in Sterling ahead of the election because of the economic uncertainty that could follow if, as looks most likely, neither of the main parties manages to form a majority government. So, this means GBP/USD could have to wait until after the election to mount a recovery but the possibility of an early rally cannot be discounted.
Canadian Dollar
The Canadian Dollar retained a respectable level of support against the Pound yesterday thanks to an upbeat statement from Bank of Canada Governor Stephen Poloz. The BOC man confirmed what he has been saying for a while now: that January’s rate cut ‘seems to be about right to restore our track for the Canadian economy for the next year or so’. Some analysts are still betting on another rate cut at some point in 2015 but last week’s robust inflation data seems to support the BOC Governor’s argument against further monetary stimulus.
Australian Dollar
Sterling jumped higher by over 100 pips against the Australian Dollar yesterday as markets reacted to comments from Reserve Bank of Australia Governor Glenn Stevens, which appeared to pave the way for a reduction in rates over the next few months. Stevens said that consideration for loosening policy ‘has to be on the table’ due to the risk of soft inflation in Australia. The RBA cut rates by -25 basis points to 2.25% in February and speculative investors now anticipate a further reduction in the benchmark interest rate in the foreseeable future.
New Zealand Dollar
Sterling strengthened against the New Zealand Dollar yesterday as the ‘Kiwi’ suffered a sort of ‘guilty by association’ condemnation in financial markets. RBA Governor Glenn Stevens commented on the possibility of further stimulus in Australia and this dampened demand for the ‘Aussie’. But because Australia and New Zealand share close trade relations the New Zealand Dollar also suffered a dip in demand following Stevens’ comments as investors weighed up the possibility that the Reserve Bank of New Zealand could also be prompted to slash rates following a potential RBA rate cut.
Data Released Today
10:00 EUR German ZEW Survey (Economic Sentiment) (APR) High 55.3