Canadian economy slows

This Week's Highlights

Sterling slips on profit taking

US GDP improves

Canadian economy slows

Yen gains on improved data

FX Market Overview

Sterling gave up some of its gains yesterday as profit taking set in before the month end. This was in spite of an improvement in consumer confidence to a 5 month high as reported by GfK. I apologise for the techie talk but the Pound dropped against the Euro back from €1.34 into the €1.32 area and is sitting atop the previous resistance level at €1.3250. This is a very important level; a break below here signals a return to the previous range but if the Pound can stay above that level, the scene is set for further Sterling strength. Drum roll please. We will see at 9.30 GMT whether credit and mortgage data will change those perceptions.

The Euro rebound seems also to have been prompted by profit taking. It happened in spite of a fall in German retail spending, relatively limp data from across the Eurozone and the ongoing Greek drama. We get Eurozone inflation and unemployment data at 10.00am UK time. German inflation fell into negative territory last month and the Eurozone is in minus figures as well. I doubt that will change with today's data. The euro remains under pressure.

US Markets have been buoyed overnight by upbeat earnings reports from Google and Amazon amongst others. That maintains the strength in the US Dollar. Thus far, the Sterling - US Dollar exchange rate has held up above $1.50 but it may only be a matter of time before that breaks and we see the Dollar eying the 2010 lows. That is down at 'gulp' $1.42. This afternoon's GDP data cheered traders and the US Dollar strengthened again.

By way of contrast, the Canadian Dollar, hampered by the recent interest rate cut and a falling oil price, is weaker than it has been since 2009 and seems destined to hit C$1.93 against the Pound. Events in OPEC countries will probably decide what happens then but this is undoubtedly a great opportunity for CAD buyers. This afternoon's GDP data disappointed as manufacturing slowed and that was the trigger for a move to C$1.93.

A small scale rise in factory output and a minor drop in consumer inflation allowed the Japanese Yen to make gains overnight. In fact, against the Pound, the Yen has gained Y12 in the last month after 30 months of decline.

And then it is the weekend and January ceases to be. It is hard to believe a month has flashed by since we were all singing Auld Lang Syne and pretending to know the words to the second verse. I hope yours is a good weekend. I don't know what your plans are but after the publication of comments made by Boris Johnson about the typical jihadist, I am guessing he will be out shopping for a bullet proof vest.

Dib Dib Dib

Two Scouts woke up in a forest clearing in the middle of night. It was still and cold and the sky was as clear as a bell without any light pollution.

“Wow, look at the stars, said one Scout." That constellation looks like Orion and that one over there is The Big Dipper. The light we can see took millions of years to get to us, so in effect we are looking at prehistoric history right there. It makes you really wonder doesn't it?"

“Yeah," said the other. "The thing it makes me wonder the most is ....where the hell is our tent."

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.