Euro knocked by ECB Quantitative Easing plans for December

Today's Highlights

• Sterling boosted by retail data

• Euro knocked by ECB Quantitative Easing plans for December

FX Market Overview

Two events propelled the Sterling – Euro exchange rate higher yesterday. The UK retail sales data was very impressive. As expected, the beer tokens had been in full advance during the early stages of the Rugby World Cup and the slight improvement in the weather (summer as we call it) brought the shoppers out. That gave Britain a 1.9% rise on the month of September in retail activity; a 6.5% rise on the year and 50% better than most forecasts. Sterling strengthened rather unsurprisingly.

Then we had the European Central Bank President talking about an expansion of their bond buying program (their version of QE) as soon as December. Crikey, said the markets and 'sell' was the call on the Euro. It weakened against all comers; down 3 cents against the US Dollar and up nearly 4 cents in the Sterling – Euro rate. We get Eurozone purchasing managers indices today which should be universally poor, so the euro is unlikely to gain any succour there and may well weaken further as the day eases into the weekend.

We've seen the Australasian Dollars strengthen overnight. The reason behind this move is a bit tricky to fathom but everything from US Dollar weakness to improved confidence in the Aussie and Kiwi economies to profit taking have been cited. I suspect the latter is the most likely culprit because the USD is stronger against the Euro and a tad stronger against Sterling.

This afternoon brings Canadian inflation data. Estimates vary but it is likely this will be a slight downturn on the previous month. The Canadian Dollar; like other commodity linked currencies, is more susceptible to volatility through fluctuations in those markets than anything else but inflation is one factor in the Bank of Canada's policy decisions, so it is influential.

The only other data is the US manufacturing PMI and we don't think we will see much movement there, so perhaps the USD will be relatively tranquil.

But we don't care about all that do we. We have Rugby World Cup semi-finals to watch and, judging by last week's nail-biters and exhibitions, both should be belters. Let's all boost UK retail sales again with some more beer.

Have a great weekend everyone.

AUD

The volatility in the Sterling – Australian Dollar of late has had so many facets to it that it is hard to cover all the themes in a short report. The broad themes though are the depressed state of the commodity markets which affect Australia's income from exports, the apparent indecision by the Reserve Bank of Australia over whether to move their base rate or not and the impacts of China and America on Australia's economic growth prospects. On the GBP side of the equation, after a fall in value through concern about UK growth and the direction of UK interest rates, the Pound recovered convincingly on Thursday when UK retail sales for September were reported as impressively strong. There is nothing clear cut about the future direction of the Sterling – Australian dollar rate but there is a very clear upward trend in place and there are support levels at A$2.11, A$2.08 and the psychological support at A$2.00. I suspect we will continue in that vein for the time being or until China starts to post higher demand and consumption data.

CAD

The Bank of Canada left their base rate on hold this week and that was entirely expected. Canada, like many other commodity producing nations, has been badly hurt by the slowdown in China and its impact on global commodity demand and therefore the prices of those commodities. With export income down, jobs, disposable income and business confidence is all impacted. That sounds very depressing but the Canadian Dollar hasn't slumped. We have seen a controlled recovery against the Pound after August's spike to C$2.09. Sterling's bounce yesterday only moved the GBPCAD exchange rate by 1% and that was less than against the Euro. With the downward channel topping out at 2.02, there is room for the Canadian Dollar to press Sterling lower in the days ahead but the caveat to that is that, if the Pound can regain the heady heights of C$2.04, the upward trend of the past 6 months is still intact and further gains are on the cards.

EUR

As mentioned above, yesterday's Sterling – Euro rally was prompted by influences on both sides of The Channel. After a rally of that magnitude, some degree of profit taking is inevitable; after all this $5.3 trillion a day market is 95% speculative in nature. So when this exchange rate hit the same high that it did in September, the profit takers bottled out (technical term) and the Pound slipped a tad. However, the upward momentum appears to be intact and, from a technical perspective, there is room for this pair to press on to €1.42 as long as nothing nasty comes out of the UK woodwork. If that doesn't come to pass, the Pound will find buyers around the €1.35 level and €1.33 if we get that low. Clearly, if there is even the merest hint that the ECB might boost the money supply sooner than December, the blue touch paper will have been lit and we can all stand back to watch the fireworks.

NZD

Having spiked to NZ$2.46 in September, the NZ Dollar has mounted a convincing recovery. The fact that the Reserve Bank of New Zealand has thus far avoided further interest rate cuts has helped the NZD to regain some of its composure. Obviously, if you are moving money to New Zealand, you want the NZD to be as weak as possible and it is easy to get frustrated because the current rate is 20 cents below the high we saw in September but (silver lining moment) the current rate is also 32 cents above the low we saw in April and a couple of cents above the likely nest stop which would be the half way point between that high and that low. The GBPNZD rate is looking highly oversold at these levels and I suspect we will get a bounce from NZ$2.22. If you need to sell NZD, this may be your best opportunity.

USD

As you can see from the chart above, the Sterling – US Dollar exchange rate is trapped between a long term upward trend and a short term downward one. Uncertainty over when and how the Federal Reserve will raise interest rates is weighing on the US Dollar but it is also benefitting from safe haven flows as investors run away from debt in countries more exposed to the Chinese slowdown and commodity slump. You don't need to be a technical analyst to see that there is overhead resistance at $1.5450 and short term support around $1.52. So in the short term, dollar buyers have their target, as do the sellers. If either end of that narrowing triangle is breached, all bets are off but that doesn't look likely in the near time.

EURUSD

The comments from the European Central Bank's president heralding further money supply expansion in December really punished the Euro. We can see it slumping by 2.5 cents in a single day and we are, once again, testing the bottom of the trading range for the Euro – US Dollar rate. This upward trend line has been in place since March and has been tested 4 times but has held firm throughout. If it holds again, then there is scope for a sustained rally to the $1.18 area in the space of a month or so. However, it must be considered that if the ECB does throw more money at the European markets, there is the potential for a fall through that $1.11 level and that could see the Euro slump to $1.08 without even breaking sweat. This next couple of months could set the scene for the Euro for a year to come.

ZAR

The dive in commodity prices has weakened the value of South Africa's exports and yet we saw a bout of profit taking on the back of poor US data. However, the Sterling – Rand exchange rate remains above the R20 level and there is every chance we will see another assault on the R21 peak. Much depends on China and its economic growth data. Any upturn will boost commodity prices which are at a very low ebb. That would boost the currencies of the countries that produce commodities and the Rand will strengthen if all of that happens. Meanwhile, Rand buyers are filling their boots and Rad sellers are wondering what they have done to offend the gods.