US Dollar poised ahead of employment report

Today's Highlights

Aussie Dollar awaits possible interest rate cut

US Dollar poised ahead of employment report

CAD weak still ahead of expected unemployed rise

Sterling maintaining strength – no change expected from BOE

FX Market Overview

It's February; the spelling of which is hard to explain to children and the length of which causes most people to resort to "it isn't a leap year is it?" It isn't by the way. I hope you had a good weekend and are ready for the excitement ahead. Last week brought surprise data and further market turmoil. This week looks set fair to do likewise.

Sterling had a largely positive week; testing multi-year highs against many currencies. The Pound's challenges for this week include the Bank of England interest rate and QE announcements. I doubt any change will come from that but we also have the purchasing managers index from the UK manufacturing sector today and a British Retail Consortium report on Wednesday. Neither is hugely market moving but we expect the data to be mildly positive.

There is a verity onslaught of European data this week. This includes business and consumer sentiment indices, retail sales data, German factory orders and various industrial production statistics. However, with the battle between Greece and Germany brewing, maybe all these stats will be overlooked by traders nervous of the repercussions of Greco/Deutsche demands, threats and posturing. Meanwhile, the Euro remains at the weaker end of its ranges but more of that below.

The US Dollar is still in strong form but there are plenty of potential hiccups on the horizon for this week. As well as a number of business and consumer sentiment indices, the US data diary also includes personal consumption and expenditure data (late today), factory orders tomorrow and the January employment report on Friday. That is forecast to reflect another small decline in the numbers of new jobs being created. I suspect the US Dollar will remain strong but profit taking during the week ought to offer some opportunities for Dollar buyers. Speak to your FX Consultant to determine how you can use that to your advantage.

Friday will also bring the Canadian employment report and the unemployment rate is expected to tick a tad higher. After a week of interest rate cuts, falling commodity prices and downward pressure on Canadian economic data, that would further weaken the Canadian Dollar. Beware if you are a CAD seller.

The Reserve Bank of Australia will be all over the newswires this week. They release their monetary policy statement on Friday and that will be interesting to read but in the early hours of tomorrow morning (UK time) many analysts believe they will cut their base rate from 2.5% to 2.25% to try to ward off looming problems in the domestic economy. However, an index of labour market conditions, published overnight, suggested that facet of the economy may be picking up. So the RBA could hold tight for now and the market reaction to the index was to buy the Australian Dollar albeit not in large volume.

And today has been branded National Sickie day in the UK. Apparently the 1st Monday in February is the worst for somewhat unjustified days off when up to 350,000 workers will call in sick. According to a recent study, many of those sickies will be pulled by people attending job interviews. So have a glance around your office and see who called in sick. I am not saying the survey is correct but you never know.

Currency - GBP/Australian Dollar

Weakness in commodity prices, a slowdown in the Asian markets and concerns over the Australian economy are all weighing on the Australian Dollar. Sterling has gained 23 cents against the Australian Dollar in just 4 months. That's a 13% move and means anyone with £100,000 to convert into Australian dollars is A$23,000 better off today than they were in September. Where next? Well having broken the 2014 high which was also a technical level, there is scope for a push to A$1.96 within the current upward trend channel. The risks of that not happening stem from the potential for a bounce in commodity prices, strong data from China perhaps or maybe an upturn in the domestic Australian economy. On the Sterling side of the equation, the pound has been on such a charge, a period of consolidation is overdue and that could happen at any stage if some external factor makes traders check their confidence. It also has to be remembered that this is the cheapest the Australian Dollar has been in 5 years, so anyone who isn't taking advantage and buying some Australian dollars is running the risk of missing out.

Currency - GBP/Canadian Dollar

A slump in oil prices will always damage the Canadian Dollar and an interest rate cut from the central bank will have a similar effect. With both events going on the quick succession and the economy slowing as manufacturing output falls, it is no surprise that the Canadian Dollar is back at levels of weakness not seen for 5 years. The high we saw in 2009 was C$1.9317 against the Pound and we are on the cusp of that as I write. However traders are always looking for target rates and we have reached that in this pair. The C$1.92 level marks the 50% retracement of the fall from C$2.3565 in 2007 to the low of C$1.4826 in 2010. As such, it will be a very tough nut to crack. I suspect this move is overdone and I suspect traders will seize the first opportunity to take profit. A fall back to C$1.8350 would not be a major surprise at all so please beware of a sizable correction.

Currency - GBP/Euro

The tension in Europe surrounding Greece's impending set of debt relief demands is palpable. This comes at a time when Europe is experiencing deflation, recession and a central bank which has belatedly resorted to quantitative easing 5 years after other central banks went down that route. If you would like more reasons for Europe's weakness, I can list them but it is a very long list including record unemployment and stagnant retail activity. On the Western side of the Channel, the UK economy is improving in spite of Europe and that disparity is fuelling the current rise in the GBP-EUR exchange rate. However, the Pound has hit the top of a trading range which has been in force for 5 years and the profit takers have pulled it back from the brink. €1.35 marks the top of that range and €1.30 marks the first retracement level. Us those as your outer limits and you won't go far wrong.

Currency - GBP/New Zealand Dollar

As with the Australian Dollar, the weakness of the Chinese economy is hampering the Strength of the New Zealand Dollar and a surprise trade deficit caused a more substantial decline in recent days. The Sterling – NZ Dollar rate is fast approaching the 2014 high of NZ$2.10 and that is a similar level to the bounces in 2011 and 2012. I suspect the markets will fail to break higher in the first instance but that doesn't mean the Pound won't have the gumption to break to higher levels eventually. IF NZ$2.10 does break, there is room for a move to roughly NZ$2.20. If we reach NZ$2.10 and traders decide not to press on, the fall could drop us back to NZ$1.95 in no time at all.

Currency - GBP/US Dollar

The Sterling – US Dollar exchange rate is trading in a broad channel roughly between $1.50 and $1.72. That's a 15 per cent trading variation from bottom to top and we are at the very bottom of that range right now. The US Dollar is being strengthened by improving US data and a flow of funds from investors who are very nervous about the Russia / Europe situation and highly nervous about the weakness in the global economy as a whole. Equally, the Dollar gains strengthen when the commodities which are largely priced in USD are weaker and, right now, energy products and raw materials are at bargain basement prices. The problem is that it is hard to envisage what could change to weaken the USD other than a slump in US data and that seems unlikely. So we ought to be ready for the GBP-USD exchange rate to break to levels below $1.50. If that doesn't happen, then that would be a surprise but I suspect we will not be too surprised if in 3 months we are seeing this pair at $1.44.