US shares slide, traders worry about repercussions of Russian sanctions

Today's Highlights

Sterling still strong

US shares slide. Traders worry about repercussions of Russian sanctions.

FX Market Overview

US Share prices were hit yesterday by trouble over the software and new product offerings from Apple and by news that Russian courts could allow seizure of foreign assets in retaliation to the EU and US sanctions being applied to the overseas assets of some Russian nationals. Aside from this though, traders are nervous that the falls in share prices could be the start of a proper correction in US equity markets and that would have far reaching repercussions for other financial markets as well.

The Australian and New Zealand Dollars remained weak overnight as the markets continue to be concerned over the nature of the tools the RBA will use to tighten the housing market in Australia. They have largely ruled out interest rate hikes but other instruments could also impact investment decisions and that is causing nervousness. And across the Tasman Sea, New Zealand's trade deficit is causing enough concern to weaken the Kiwi Dollar as well.

The Pound is still on the front foot in spite of the recalling of parliament and the seemingly imminent military action against ISIL. Nothing has changed in the rationale behind the Pound's resurgence since yesterday and the lack of UK data today means only the Parliamentary vote and US data is likely to affect the value of Sterling.

The US data is the final calculation of Q2 economic growth. There is a pretty strong feeling that the figure will be upgraded from 4.2% (the 2nd estimate) to 4.6%. We will also get the University of Michigan consumer sentiment index which is also expected to be in positive territory. This combination of good news ought to boost the US Dollar and bring forward the Federal Reserve's interest rate hiking plans to earlier in 2015.

And that is about all the news we have for the market today. I'll leave you with this story. You know those 'we tried to deliver a parcel but you were out' cards that appear when you have waited in all day but had to pop to the end of the garden for 30 seconds? We've all had them. The delivery driver has a range of options to choose to confirm the reason for a letter or parcel not getting to the recipient but they also have an 'Other' box to tick if the reason is not listed. A postman in Canada ticked the 'Other' box for the best reason of all; there was a large Bear sitting on the doorstep. So he ticked 'Other' and wrote, 'Bear at Door' as the reason. I think that's fair enough; don't you.

Currency - GBP/Australian Dollar

The closer the US Federal Reserve moves to its first interest rate hike, the greater the downward pressure on the carry trade currencies like the Australian and New Zealand Dollars. The attractiveness they enjoy through the higher interest rates on offer is very quickly counterbalanced by the threat of higher borrowing costs elsewhere and by the threat of geo-political risk. Add the improvement in the value of the pound since the Scottish independence debate was settled, and the scene is set for a rise in the Sterling – Australian Dollar rate. Technically, if the Sterling – Australian Dollar can stay above A$1.85 through the end of the week, there is plenty of scope for further gains in the days ahead. A41.87 is on the cards at that point and maybe we can start to dream of another trip up to A$1.90. Or maybe I am just being too optimistic at this stage.

Currency - GBP/Canadian Dollar

Until the end of August, the Sterling – Canadian Dollar exchange rate had been in a very obvious pattern for almost the whole of 2014. The drop in the value of the pound in late august was partly due to the fear of Scottish independence and partly due to safe haven buying of the US Dollar which heavily influences the Canadian Dollar. Sterling's recovery is widespread and the drop off in the value of the USD is similarly widespread albeit a little less striking. Nonetheless, it has allowed the Pound to push back into the previous range and the door is open to a rally which could easily take us back up to the C$1.84 range ceiling. IF Sterling does push through there, the 2014 high of C$1.8646 is an obvious target. However, if the Pound slumps back for any reason and falls below C$1.80, the downward trend will be confirmed and a slide to C$1.75 will be on the cards.

Currency - GBP/Euro

This upward push in the Sterling –n Euro exchange rate is a very significant moment in the life of this currency pair. It is the first time since 2000 that the Pound has been above the downward trend line and Sterling is at its strongest level against the Euro since July 2012. A push to €1.30 seems almost inevitable although there is no guarantee that path will be a direct one. In the short term, Sterling looks overbought and some correction is highly likely. In spite of that, the problems in Europe and the hints of an earlier interest rate hike in the UK are pushing the Pound in one direction and that is upward.

Currency - GBP/New Zealand Dollar

I wrote at the beginning of the day in our daily report that I believed the Sterling – NZ Dollar exchange rate would make a push to NZ$2.06 but I wasn't expecting that to happen in a day. To be fair to myself, I also wasn't aware that BOE Governor Carney was going to speak of pressure to hike the base rate. The channel top is roughly where the market is now and anyone with a short term NZ Dollar requirements ought to be seriously considering covering some of their requirement or protecting against a decline from these peaks. If the Pound manages to break above NZ$2.06, NZ$2.10 is beckoning but I wouldn't be at all surprised if the Pound dipped from here for a breather before any further gains – assuming there are any.

Currency - GBP/US Dollar

Global threats resulted in 'flight to quality' US Dollar strength in August and the threat of a divided UK caused Sterling weakness. As such, there could be no surprise that the Sterling – US Dollar exchange rate dropped below the upward channel it has occupied for the last 14 months. Having bounced, the downtrend that developed after mid-August appears to be intact. Further Sterling weakness against the US Dollar ought to follow. However, the Pound is being bought in its own right and we can see Sterling strength right across the board. So there is no foregone conclusion here. Sterling could break back into the upward trend with a break above $1.67 or it could capitulate and test $1.60 again. Both outcomes are perfectly feasible. In essence, the only sure way to succeed in a market like this is to cover the risk of the market doing the 'wrong thing', as far as you are concerned. That could either mean covering some or all of your position straight away or using stop loss orders to manage the risk.