US holiday leaves markets treading water

Today's Highlights

• Slowing Chinese data puts further pressure on commondity producing nations

• Draghi happy with QE results

• US holiday leaves markets treading water

FX Market Overview

The US Dollar is seen by those in the financial markets as a safe haven and that is maintaining the USD strength even though the Federal Reserve is likely to delay any interest rate hike and even though US data is showing a slowdown in growth. But, 'safe from what?' is the obvious question.

Well, safe from the fallout of China's slowing growth. Chinese consumer inflation is expected to have dropped last month. The expected 1.9% is below last month's 2.0% and comes in a week in which we expect to see data showing producer prices also fell and exports declined too. China is such an important cog in the global economic machine, that these effects cannot be ignored.

That slowing Chinese data (assuming the forecasts are right) will have impacts in the economies of the Commodity producing countries. So we can expect weakening pressure on the Australian and New Zealand Dollars as well as the Canadian and South African currencies.

We have to wonder though whether the expected slowdown in US retail sales and the weak inflation data will weigh on the USD. It would certainly weaken the case for higher US interest rates and that is an important factor in the strength of the Dollar.

UK CPI inflation; due on Tuesday, is expected to come in at 0.0%; give or take 0.1% maybe. UK average weekly earnings should remain strong when the data is released on Wednesday and the unemployment rate is likely to have remained at 5.5%. With zero inflation, reasonable employment levels and rising earnings, there is scope for the Pound to recover some of its recent losses.

The ECB president, Mario Draghi Said on Saturday that the bank's quantitative easing (bond buying largely) has been more successful than they could have hoped. He reinforced his claim by talking about lower borrowing costs, increased credit and more readily available access to loans for small businesses.

It's a US public holiday today, so the markets are likely to be quieter and the data diary lacks content. So we suspect the rates will largely stay in currency ranges. Things really kick off tomorrow with a rash of inflation data and business confidence indices. Make the most of the calm then.

And a chap in America caused a major fire in a petrol station when he spotted a spider hiding under his fuel cap and took steps to get it out of there. Sadly the step he took was to use his cigarette lighter to try to burn it out; setting fire to the car, the petrol pump and everything else around. Lighter + petrol filler cap = what could possibly go wrong.

AUD

The Reserve Bank of Australia boosted the Aussie Dollar when they ruled out interest rate cuts and the delay in US interest rate hikes helped it to strengthen again. Hence the Sterling – Australian Dollar rate has dropped from nearly A$2.50 to around A$2.08 in the last 6 weeks. The correction in the value of the Pound helped of course but there is scope and maybe even probability that this pair may slip to the short term support at A$2.05 and, if that breaks, we could even see a dive to A$2.00 in the weeks ahead. The caveats are that this can only happen if we don't see significantly better UK retail and employment data next week and that we don't see a slump in Australian employment or consumer inflation either. As we know though, forecasts are regularly missed and anything could happen. If the Pound does manage to bounce against the AUD the top of the range is in the high A$2.40s and maybe A$2.52 if the momentum is strong.

CAD

Today's Canadian employment data showed a small rise in those in work but also a rise in the unemployment rate to 7.1%. That's an eighteen month high and it comes off the back of a fragile energy and raw material market plus some changes in the education sector. Nonetheless, the weakness in the Pound over the last week or so has allowed the Sterling – Canadian Dollar to fall from C$2.08 to C$1.98 in the last 6 weeks. Traders will be glued to the speech by Bank of Canada's Governor Poloz on Monday to see if he has any answers to Canada's export malaise. However, from a technical perspective, there is no reason why this pair can't fall to C$1.96 where it will find support at a level which previously capped this pair. If UK data is more encouraging next week, a rebound in this exchange rate could take it to C$2.09 without breaking out of the 3 year long upward trend but it will find resistance at the psychological barrier of C$2.00.

EUR

The Sterling – Euro exchange rate has the ominous demeanour of a calm before a storm. The fall in German industrial output is a warning shot across traders' bows. German industrial strength has been the rare shining light in the gloom of the Eurozone, so if it is in decline, driven by the fall in Asian demand, ahead of the melee that will happen as the VW scandal starts to impact demand for German cars, who knows where that may end. Other than inflation data and a smattering of confidence indices (which have been pessimism indices of late) the Eurozone data diary isn't exactly overflowing for next week. Anything positive on the Sterling side of this equation is likely to give the Pound a spring in its step.

USD

The US Dollar had a mixed week and is set to have an even mixed-er-er one next week. Monday is Columbus day holiday, so the rest of the week is crammed with important data releases. The Sterling – US Dollar rate is establishing a range of $1.58 at the top to $1.51 at the bottom and for now, that $1.51 level has proven to be a very strong lure to GBP buyers. Hence the bounce from that level in 5 of the last 6 weeks. Next week's retail sales and consumer inflation data push the focus back to the consumer side of the US economy and that is by far the largest sector. We also get a barrage of speeches form members of the Federal reserve and that will also be followed with interest. As with other GBP related pairs, the UK economic data will play a part and there is scope for the Pound to increase in value as long as the UK data is as solid as the forecasters are hoping. Stand by for volatility.