Guide: Banking on good rates

By on April 8, 2013
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As we start 2013, the Euro is showing signs of recovery after Greece is given more time and the ECB hints at lower rates. How this might affect the Western markets?

EURO

Rates in the Euro zone remain at the historically low level of 0.75 per cent and ECB President Draghi hints that even lower rates are to come in the first quarter of 2013, with markets now expecting them to be cut by 0.25 basis points to 0.5 per cent. “Greece has now been given more time over the implementation of their austerity measures,” says John Redmond, Senior FX Consultant at Worldwide Currencies. “This has led to lower bond yields in the likes of Greece, Portugal, Spain and Italy thus easing the strain on these governments financing of budget deficits. For the time being the bad news is on the `back-burner’ and the Euro has benefitted since November 2012.” Despite the Euro Zones economic problems, we have seen the Euro recover to date, 2.5 per cent against the USD and 3.2 per cent against the GBP.

Opinion: Short term relief for the Euro which is trying to recover, market sentiment is slightly bullish for Q1.

Interbank rates (as of Jan 7): EUR/USD 1.3040. GBP/EUR 1.2315 

USD

As Obama returns for another term in office, the bill to avoid the US falling off the `fiscal cliff’ was finally passed by US law makers giving confidence to global investors as stock markets made a reasonable recovery. “Under `normal circumstances’ the USD does tend to weaken when confidence returns to global stocks (and vice versa), as the major reserve currency is exchanged by investors to purchase stocks globally,” explains Redmond. Helping this confidence was the commitment by the Federal Reserve to extremely low rates for the longer term (this has since been questioned by some panel members within the Fed).

Opinion: Trading with a slightly negative bias for Q1, keep eyes on global stock markets.

Interbank rates (as of Jan 7): EUR/USD 1.3040. GBP/USD 1.6060. AUD/USD 1.0500

GBP

As reported in our last update, the GBP also benefited over the Euro due to the austerity policies the UK have in place in order to reduce deficits. “This is something Euro leaders have failed to do and as a result the Pound has indeed been the safe haven of Europe as UK government gilts maintained their AAA status,” says Redmond. “However, the pound has lost some ground against the Euro, with the somewhat positive news on Greece and European yields.” Going forward, some economist are suggesting that should UK economic data continue to disappoint in Q1, then ratings agencies may well down grade UK gilts (UK already on negative watch with several ratings agencies).

Opinion: Eyes on economic data.

Interbank rates (as of Jan 7): GBP/USD 1.6060. EUR/USD 1.3040. GBP/AUD 1.5300

AUD

Rates now stand at 3 per cent in Australia, having been cut by the RBA (rates were 3.5 per cent at time of last report). “Although the initial reaction was for AUD to trade lower, the fact of the matter remains that yields in Aussie are still higher than the US and Europe – a reason for investors as well as Central Banks to hold onto the currency,” says Redmond. “Since the Russia Central Bank announced they intend to increase their reserve holdings in AUD, the Aussie’s looks set to hold firm going forward.” Stock market rises tend to benefit the AUD also.

Opinion: Cautious optimism, market sentiment, buy on any signs of weakness but keep eye on global stocks.

Interbank rates (as of Jan 7): GBP/AUD 1.0500

YEN

The major mover over the turn of the year has been the weaker Japanese Yen. “The return of newly elected PM Shinzo Abe means the Yen is continuing the same trend with which it ended the year,” says Redmond. “Shinzo Abe has made it very clear that he expects the Bank of Japan to get all the weapons in the Central Bank arsenal to bring Japan out of a recession.” This includes depreciating the Yen, increasing inflation targets and stimulus programs. The Yen has weakened 11 per cent against the USD, 12 per cent against GBP and 14 per cent since mid November 2012. A very aggressive move.

Opinion: Weaker Yen is anticipated over time.

Interbank rates (as of Jan 7): USD/JPY 87.85  GBP/JPY 141.20  EUR/JPY 114.60  AUD/JPY 92.20

Photo credit: Mukumbura / Foter.com / CC BY-SA