This Week's Highlights

  • EU and UK rates on hold but outlooks vary

  • Chinese data weakens commodity exporters


FX Market Overview

Ahead of yesterday’s Bank of England and European Central Bank decisions, no one was really expecting any change on either the monetary supply or the base rates but some traders had positioned themselves with trades which would have taken advantage if either central bank had acted. When both the BOE and ECB decided to leave everything on hold, those positions were unwound and that strengthened Sterling and weakened the Euro. The feeling now is that the BOE is highly likely to keep the base rate at 0.5% perhaps even until 2016 and the rebound in economic growth in Q3 has killed any chance of further quantitative easing.

However, with Germany now suffering from the debt crisis, mass unemployment across the Eurozone, a delay on the next tranche of Greek bailout funds and growing fears over Spain’s need for financial support, there is a suspicion that the European Central Bank could cut the base rate from 0.75% as early as December; hence the weakness in the Euro. I believe we could see a lot more Euro weakness into 2013 now that Germany, the pillar which supported the whole edifice, is struggling. It would make absolute sense if the ECB were to try to engineer a weaker currency and support enterprise. People much cleverer than I, suggest the effect of a weaker Euro on inflation would be negligible with growth so flat so you could argue that the ECB has very little to lose in such a plan. Whether they’ll take that hint is another matter entirely but Mario Draghi seems like a man who wouldn’t baulk at that risk. It seems likely that today’s French and Italian industrial production data will be dire so that adds weight to the imperative to act.

Overnight news that China’s inflation slowed more than expected has worried the markets. China has become the power gauge for global growth because of the diversity of China’s export markets. It does give the People’s Bank of China more leeway if they want to ease the cost of money or even to inject more money into the economy which they tend to do through adjusting banks’ reserve holding percentages. That could boost demand to some degree but anything which looks negative in the Chinese economy tends to weaken the Asian markets and the Australasian Dollars. That happened overnight.

The US Dollar gains when fears are raised over ....well anything really. China’s slowing data worries traders and investors and their synaptic reaction is to buy the safety of the US treasury certificate. That is happening at the moment although, against the Pound, there is a real mental block about trading much below $1.60. We saw that bounce back yesterday so well done to everyone who managed to offload US Dollars below that level. Today’s US data diary is a tad light but we still get import data, consumer sentiment and wholesale inventories, so we could see some volatility ahead of the weekend.

The Canadian trade deficit narrowed from C$1.5 billion in August to just C$826 million in September as exports rose and imports stayed pretty static. US demand was responsible for the export side of things but Canadian consumers were at the heart of the drop in imports. So, what looks like a good news story on the face of it, has worrying undertones. The Canadian Dollar weakened a little on the day.

And finally, would you like a job where you get to slap your clients and charge them for doing so? No I am not talking about some variation of the 50 shades of grey phenomenon; this is a Thai massage technique which it is claimed will remove wrinkles without surgery. Sadly it is not without pain though. The technique is that the ‘therapist’ slaps you around. It is supposed to remove wrinkles and tighten pores to improve the skin. I can hear it now, ‘...and that proves this was a beauty therapy and not domestic violence. The Defence rests, Your Honour.


Currency - GBP/Australian Dollar

GBP

Surprisingly good employment data gave the Australian Dollar a boost earlier in the week but fears over China’s economic slowdown are definitely impacting the countries that supply China with their raw materials and Australia is at the fore in this regards. So that explains the sudden drop to A$ 1.53 in the Sterling – Australian Dollar exchange rate earlier in the week and the narrow ‘consolidation’ as it is termed for the latter part of the week. Where next? Well that is a terrific question when this currency pair is sitting on the 100 and 200 day moving averages, on a 50% Fibonacci retracement level and the same low we saw back in September. On balance, Sterling should hold its ground here and we should see a push back up towards A$1.5650, a level which proved to be stubborn throughout the 2nd half of this year. Further poor data from China could herald that move and we could even see another test of A$ 1.59 but another climb of the mountain to A4 1.62 would seem a long way off unless something dramatic happens in either the UK or China. In essence, if you have Australian Dollars to sell, this is a very attractive time to do so.


Currency - GBP/Canadian Dollar

GBP

The Sterling – Canadian Dollar exchange rate is climbing at a reasonable pace in line with declining economic data in Canada. The volatility can be measured as roughly 3.5 cents from the top to the bottom of the short term range. As mentioned above, the Canadian trade deficit narrowed from C$1.5 billion in August to just C$826 million in September as exports rose and imports stayed pretty static. The fear over the state of consumer demand in Canada is keeping the Canadian Dollar on the back foot and nervousness over the rapidly approaching deadline on America’s lawmakers to agree a budget is keeping the pressure on. The Canadian Dollar is also under pressure from the effects of a Chinese slowdown because of the effect that has on commodity prices. So, in the short to medium term, (I envisage further weakness in the Canadian Dollar and I see Sterling maintaining its strength so a push to C$ 1.6150 is the most likely scenario. If something happens to strengthen the Canadian Dollar and it manages to push Sterling below the 200 day moving average line and below trendline and Fibonacci support at C$ 1.5830, then C$ 1.5750 and C$ 1.5650 are the obvious technical targets.


Currency - GBP/Euro

GBP

The break of the 80 pence (€1.25) level is very significant in the Sterling – Euro exchange rate. It came once the UK economy had emerged from recession and just as Germany showed signs of economic stress brought on by a very strong currency and slowing export markets both within and outside the Eurozone. Now that we have a clearer picture of an unchanged BOE and perhaps a cut in ECB rates in the next few months, there is certainly scope for the Pound to strengthen and the euro to weaken. However, the Pound is finding it hard to breach the 100 day moving average at €1.2540 and will face further technical tests at €1.2570 and €1.2650. also, from a technical standpoint, what the Pound should do is slip back to the top of that trendline at around $1.2425 in order to confirm the break and then power ahead to higher levels,. So don’t be at all surprised if we see that kind of correction before we get higher Sterling – Euro exchange rate. Sterling sellers should start to worry though if we see anything starting with €1.23 at the interbank level.


Currency - GBP/New Zealand Dollar

GBP

A sharp decline in new Zealand employment levels damaged the NZ Dollar and brought the Sterling – NZ Dollar exchange rate to the top of its trading range. The Pound is butting its head against the downward trendline at NZ$ 1.9650but it has been tap, tap, tapping against that level all the way through October as well. There doesn’t appear to be any upward momentum so we could find this is the top of the range for now and Sterling could easily slip back to NZ$ 1.93 which has marked the bottom of the range since August. Improving sentiment towards the UK has the potential to ignite this pair though, and a push to NZ$ 1.98 is a definite possibility on the back of any positive UK data. If we do see levels above NZ$ 1.98, be ready for a spike to NZ$ 2.00 just like we saw in August but that should cap it for now. It would take very poor data from China and/or Australia to cause a push beyond that level and that kind of negative data is not looking likely right now.


Currency - GBP/US Dollar

GBP

Having secured another 4 years in office, President Obama now has a whole heap of hills to climb. The most pressing item on his agenda is getting some kind of consensus about the level of debt the US government is allowed to run. The current agreement expires at the end of the year and no replacement has yet been agreed. Until it is, we are facing the prospects of the largest economy in the world not having a fiscal plan in place and that would be embarrassing to say the least. It won’t happen of course but it does give all parties an opportunity to wrangle for concessions they want in return for an agreement. The next 6 weeks will consist of all sorts of posturing and an attempt to see who blinks first. Yes it will be a tedious study in self-interest but it will also bring volatility and that is what you need whether you need to sell or buy US Dollars. The Pound is being supported at $1.59 on the trendline and Fibonacci support but it cannot make any headway above £1.61 so if you can work within that tight trading range, you will do well.


Currency - Euro/USD

GBP

The Euro tripped up at the end of October and dropped through the 200 day moving average line which had underpinned the Euro- US Dollar exchange rate through September and October. This pair is currently finding support at $1.2750 so we should be concerned for a more sizeable decline in this exchange rate if that level breaks. The worsening economic conditions in Europe are being balanced against the relief that the US election is over but the impending doom of a lack of a debt budget in America is hanging over the US Dollar too. Hence the slightly lacklustre levels of volatility in this pair. Threats on the horizon include a potential interest rate cut from the ECB in December, Spanish requests for bailout funds, further delays in the Greek bailout payments, continued decline in Germany and, from the US side, the damaging effects of Hurricane Sandy and the over-discussed ‘fiscal cliff’ which will resolve itself by the year end after heaps of brinksmanship.


The hat box

As a new bride, Aunt Edna moved into the Coach house with her new husband on his family’s estate. She put a hat box on a shelf in her closet and asked her husband NEVER to touch it. He agreed.

For fifty years Uncle Jack left the box alone until Aunt Edna was old and dying. One day when he was putting their affairs in order, he found the box again and thought it might hold something important. Opening it, he found two kitted scarves and one unfinished scarf plus £82,500 in cash.

He took the box to Aunt Edna and asked about the contents.

“My mother gave me that box the day we married,” she explained. “She told me to knit a scarf to help ease my frustrations every time I got mad at you.”

Uncle Jack was very touched that in 50 years she’d only been mad at him three times.

“What’s the £82,500 for?” he asked.

“I got that at the auction when I sold all the other scarves”