German business confidence drops again – drags the euro lower

This Week's Highlights

Sterling pressing ahead after Carney comments

German business confidence drops again – drags the euro lower

FX Market Overview

Am I the only person in the UK who couldn't give a monkey's about that BBC bake-off programme? Rarely have I ever known such bombardment of news/marketing about such a non-event. The BBC media machine is working its little socks off to ensure you cannot look at a news site or pick up a paper without reading about some lump of bread or cake or a soggy bottom. Enough of the cake propaganda already.

The German economy is struggling; partly a result of the downturn in the rest of the Eurozone and partly due to weaker economic performance in China and elsewhere. Either way, Germany's businesses have reported 5 months of falling confidence and that will be a contributing factor in the downturn for the whole euro sharing bloc. As a result, the euro looks set to weaken to €1.30 against the Pound and may extend its losses against the US Dollar to €1.25. If you are a euro seller, you should be thinking of protecting your risk.

Sterling is in good form as it makes gains in almost all currency pairs. Improvements in UK data are one part of the equation but trouble-zones in other parts of the world are making the recovering Pound a safe haven against those concerns. As with the US Dollar, the yield on Sterling is pitiful but investors seek safety when war and terror wreak havoc elsewhere. However, other than the CBI distributive trades survey (retail sector) there was a paucity of UK data today but the Pound rallied strongly after BOE Governor Mark Carney suggested the Bank was edging closer to their first interest rate hike. I wonder if that would make the Queen Purrr.

This afternoon brought US durable goods orders and those are closely followed as a confidence indicator on the basis that people won't invest in long term durable goods unless they are confident for the future. The forecast was for a very bad number and the forecasts were almost spot on so the US Dollar weakened a little in later trade. Sterling is already bashing its head against the top of the GBPUSD trading range so a break to higher levels would give room for a rally to $1.67.

The New Zealand Dollar is weaker after dairy cooperative Fonterra cut its forecast pay out to its member farmers from NZ$6.00 to NZ$5.30 per kilo of milk solids. That's a big drop and, as dairy exports are such a massive part of the New Zealand Economy, it makes a difference to overall economic activity. The Kiwi Dollar is the weakest it has been against the Pound since May 2012 and has the potential to extend those gains not it has cleared the 2014 highs. The highest it reached in 2012 was 2.1047. I know there are a lot of people who would love to see that and we may well do so in the medium term. In the short term the channel top at NZ$2.06 looks like a good target.

And I loved the story of a seal being pursued by a great white shark who found a novel way to escape. He came across some divers in a shark cage filming the great whites off the South African coast. So he sneaked into their cage and sneaked out the other side. Fur seals know a thing or two about avoiding sharks.

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.

Good advice

If you’re being chased by a police dog; try not to go through a tunnel, then on to a little seesaw, and then jump through a hoop of fire. They’re trained for that.
Milton Jones