Sterling
The Pound traded with little directional bias yesterday as investors paused for thought ahead of this week’s big announcements: Chancellor George Osborne’s budget on Wednesday and the Bank of England’s interest rate decision on Thursday.
Traders are fearful that British growth expectations could weaken following the budget if Osborne opts to rein in on spending to help get the defiantly high deficit down towards his target.
Given the BoE Governor’s comments last week positing ‘Brexit’ as the biggest risk to the UK economy, it will be interesting to see whether March’s central bank statement will feature any hints that policy could be loosened in the event of Britain leaving the European Union.
Euro
The Pound to Euro exchange rate drifted slightly higher yesterday as traders continued to adjust positions following last week’s surprisingly strong stimulus package from the European Central Bank.
The ECB’s decision to focus on alleviating credit risk rather than driving down the single currency is likely to encourage foreign investors to buy into European assets. However, because these European stocks are liable to depress bond yield values there is a ‘channel rebalancing effect’ beginning to take place whereby investors buy European stocks and simultaneously bet against the Euro to insure their stock market gains are not erased by depreciations of the single currency.
This effect could continue to put mild pressure on the Euro going forward but this week’s important UK announcements could prove more threatening to GBP/EUR stability in the near term.
US Dollar
After reaching its highest level in almost a month at the end of last week’s session the Pound to US Dollar exchange rate slid by around a cent yesterday.
The move appeared to reflect three things: a bout of profit taking from Friday’s appealing gains; a shift in risk sentiment as oil prices drifted lower; and concern ahead of the UK budget and BoE policy announcements later in the week.
The Federal Reserve is also due to discuss monetary policy this week but traders are more positive regarding the Fed’s desire to raise interest rates in 2016. Although most forecasts of four rate hikes this year have been reduced to two, only a very small contingent of investors anticipate a Fed rate cut. In contrast, there are lots of analysts who fear that a ‘Brexit’ vote would prompt the BoE to start loosening policy and cutting rates.
Canadian Dollar
Sterling lost a little bit of ground against the Canadian Dollar yesterday even though demand for the ‘Loonie’ was hit by falling oil prices.
Crude declined -3% during the New York session when markets got wind of a disappointing statement from the Iranian oil minister. Bijan Zanganeh said Iran would not join discussions to cap oil output until it ramped up production from 3.1 million to 4 million barrels per day. The news hurt hopes of a deal between the major oil producing nations to curb output in order to drive prices higher because other ministers had previously stated they would only agree if all other nations imposed an output cap.
Australian Dollar
Sterling ticked higher by around a third of a cent during the London session as falling oil prices reduced investors’ appetite for risk and analysts geared up for the Reserve Bank of Australia’s March meeting minutes, which saw the central bank talk up prospects for the labour market but leave the door open to future rate cuts if necessary.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate appreciated by around 150 pips yesterday as fears of plunging dairy prices dampened investor demand for the commodity-sensitive ‘Kiwi’. Dairy prices have halved over the last two years and if milk market values don’t increase soon the impact on the wider economy could be profound.
The Reserve Bank of New Zealand forecast that if prices remain at the current low level for another three seasons then banks could be forced to wipe off up to 15% of the loans on their books due to knock-on effects such as mortgage defaults and spiralling lower land prices as the market is flooded with cheap farm plots.
Data Released
12:30 USD Advance Retail Sales (MoM) (FEB) High -0.1%
NZD Dairy Auction Avg. Winning Price MT (MAR 15) High $2,253