Sterling steady after positive manufacturing and productivity data

This Week's Highlights

Sterling steady after positive manufacturing and productivity data
USD awaits US employment report

FX Market Overview

After Wales held it together against Fiji, England has a hurdle to get over when they take on the Aussies tomorrow. Every game in this tournament has been a 'must win' event but there is a definite must win for both teams if ever there was one. Good luck gents.

In the markets, the hurdle is all about restoring confidence which has clearly been rocked by the slowdown in China and the unwillingness of the US Federal Reserve to grasp the nettle and start raising interest rates. As well as share prices being depressed, manufacturing confidence has fallen and we have seen various poor consumer confidence indices as well.

This morning brings the UK construction sentiment index and that too is expected to be subdued, although the UK manufacturing PMI was better than forecast and domestic demand was pretty strong. Add to that a measure of productivity that puts the UK economy ahead of its pre-recession levels and there is every reason for the Pound to out-perform other currencies. It isn't doing that oddly enough but Sterling is looking over-sold right now, so there is scope for a recovery if next week's UK data is stronger.

Today's headline data is the US employment report. The September data ought to show employment growth the non-agricultural sectors of the US economy and that will pour more pressure on the Fed to start the normalizification (I think that's how they refer to it) of US interest rates. I suspect they will start that process in the new year with teeny-tiny adjustments but there is a chance they will take the first step in that direction with a 0.15% rate hike before the year end. We shall see. The US Dollar remains the currency du jour and will become more popular if the non-farm payroll gain is higher than 200,000 jobs. We get a speech from one of the Fed Chairmen on monetary policy later in the day, so that'll be interesting. The counterbalance to this positiveness is the US factory orders data, due at 14:00 GMT. That is expected to be very poor and, if the forecasts are proven to be right, the Dollar will be hit by that.

We heard overnight that Australian retail sales rose by 0.4% last month. That was entirely in line with forecasts and the Aussie Dollar was unmoved but traders are likely to be nervous ahead of next week's RBA interest rate decision and the inflation data later in the week. Understandably, the Australian Dollar is likely to be pretty flat until then.

In other news, my favourite quotes of the week come from Princess Michael of Kent who said, “I’m a great animal lover and I’m involved in a lot of conservation, but animals don’t have rights. They don’t have bank accounts. They don’t vote.” She added, “You only have rights if you pay your taxes.” How about if you live rent free in Kensington palace for 23 years, do you still have rights after than then? Apparently you do.

Currency - GBP / Australian Dollar

The impact of the slowdown in China, the fall in commodity income and the nervousness over the timing of US interest rate hikes can all be seen in the weakness of the Australian Dollar. As mentioned above, traders are likely to be a little quiet until the Reserve Bank of Australia makes its interest rate announcement next week and we get inflation data as well. Meanwhile, the Sterling –m Australian Dollar rate is capped at A$2.21 and supported at A$2.15. We could conceivably see a dip to A$2.08 and yet remain in the upward trend but any break below there would threaten a fall back to the psychologically significant but technically irrelevant A$2.00.

Currency - GBP / Canadian Dollar

The same fears that dog the Australian and New Zealand Dollars are affecting the Canadian Dollar. Weakness in the value of their exports and a fall in demand have put pressure on the loonie, as the Canadian Dollar is commonly known. (That has nothing to do with Canadians and everything to do with the birds on their C$1 coins by the way). Most analysts are forecasting further weakness in the Canadian Dollar and that concern was exacerbated by a suggestion that the Chinese authorities are sitting on billions of Canadian Dollars and any decision by them to adjust their reserve holdings would significantly impact the loonie. Technically, the Sterling – Canadian Dollar rate failed to reach C$2.10 a few weeks ago and has fallen into a holding pattern between C$2.00 and C$2.05. If the pound falls back to C$1.95, it looks like it will find plenty of support but the more interesting move would be a break of C$2.10 which would appear to be the most likely as far as the markets are concerned.

Currency - GBP / Euro

Barring the first few days of the year, 2015 has seen the Sterling – Euro rate consolidate in a 10 cent range between €1.34 and €1.44. UK data has shown growth in most aspects of the economy but at a slowing pace and has shown smattering of Eurozone recovery; albeit fragile. Greece didn't exit but neither has it forged a lasting solution to its debt problems and little has been done about Finland's problems or those of Italy and Portugal for that matter. The slowdown in China has impacted German exports and the fall in energy prices has, as with most countries, caused inflation to stagnate. With all of these factors playing out, a period of consolidation is probably the most likely outcome but the levels to watch for threats of a breakout are €1.44 at the top and €1.32 at the very bottom of the current range. Unless either end of this pattern is properly tested, we can go on buying Euro at the top and selling it at the bottom with relative impunity.

Currency - GBP / New Zealand Dollar

An 11 cent range contains the Sterling – NZ Dollar rate at the moment. NZ$2.46 is the highest we have seen other than a spike on one day in August. NZ$2.34 provides a target for GBP buyers and that is likely to be seen again. The technical tool at the bottom of the chart above is called a moving average convergence and divergence and it signals that the Pound is likely to weaken against the NZD in the weeks ahead. The level of NZ$2.23 would make a 50% retracement of the rise from the low in May to the high in August. I suspect we are heading there.

Currency - GBP / US Dollar

Weakness in commodity prices and the expectation of US interest rate hikes are combining to strengthen the US Dollar. It does also benefit from 'safe haven' flows as investors seek the certainty of investment in Uncle Sam through the US Treasury markets. At the same time though, the UK economy is looking like one of the few strong ones in global terms. Hence we can see the GBP-USD rate sitting smack bang in the middle of its 2015 range around the $1.51 level. Not only is it pretty central but there is almost no momentum in either direction. What will change that? Well the federal Reserve could surprise everyone with a rate hike but I doubt that. The Bank of England could do likewise but UK data doesn't support a hike at this stage. Ultimately, we may well be in this narrow trading pattern for the

Efficiency

An elderly man sitting on a park bench is watching two guys in Hi-Viz jackets working. One is digging holes and the other is filling them back in. After they have done 4 holes and are starting the 5th, the old man is so intrigued that he asks them what is happening.
"We're the Park Service's tree planters." Says one of the workers. "I dig the holes, Mike plants the trees and John fills the hole in again. It's the most efficient way we have found to do it."

"But no trees are being planted", says the old man

Without looking up from his digging, the first guy says, "Yeah, it's Mike's day off".