Today's Highlights
ECB cuts to lowest ever rates
Sterling weaker after BOE QE expansion
Chinese rates in 2nd cut of the month
US employment report awaited
FX Market Overview
My train was only half full this morning. Are they all heading for Murray Mound I wonder as the British Number 1 tries to make it through to the final at Wimbledon. Funny that he’s always British when he’s winning isn’t he; Scottish when things don’t go so well. That is probably entirely reversed north of the border I guess. Anyway, I suspect the 7.27 am to London Bridge was full of financial market people because, after the excitement of yesterday’s triple central bank activity, none would want to miss today’s US employment data that could cause just as much volatility.
Flashback to yesterday then; the Bank of England did add £50 billion to its assets purchase budget and that brings the total quantitative easing fund to £375 billion. They refrained from cutting the base rate from its current 0.5%, a move they will probably have to make at some stage anyway. However, there is a growing cry from those who - like me - are alarmed that all this money is simply sitting in bank reserves and not circulating and creating any growth. Throwing cash at the banks is a blunt instrument that consolidates the banks but does nothing for business or consumers and it seems that, at long last, the Monetary Policy Committee might just be starting to smell the coffee. Sterling dipped initially but steadied ahead of the European Central Bank’s decision.
The ECB for their part did cut their base rates (at last) by 25 basis points. That takes the rate that banks pay when they borrow from the ECB down to 0.75% and the rate that banks receive when they deposit funds with the ECB down to zero. These are the ECB’s lowest ever interest rates. That caused an initial bout of strength in the euro but it lost ground through the latter part of the day. All the work that is being done on the Eurozone is far too short term for many analysts and the structural things that were discussed at the summit a week ago were largely delayed or face challenges. This is one of the reasons that the euro is still not out of the woods. We will watch various Eurozone countries’ bond auctions in the coming days to see if the ECB’s plan is working. The Euro itself is generally weaker across the board.
While this was going on we heard that the People’s Bank of China had cut its base rate as well. That’s the 2nd cut in a month; it brings their one-year lending rate down to 6% and their one-year deposit to 3%. Fears that a sluggish Europe is impacting Chinese exports and therefore the domestic economy are behind the move. That is good news for Australian and New Zealand exporters too because their raw materials will suffer if Chinese companies can’t sell finished goods but cheaper borrowing costs will allow for more stock holding and more production to continue. We saw the Australian and New Zealand Dollars strengthen on the move.
So having got yesterday’s excitement out of the way, all eyes now turn to the US employment report due at 12.30 GMT today. Yesterday’s ISM service sector index was poor and that is in line with other recent data. That would suggest poor jobs growth in America but the ADP private payroll report was astonishingly upbeat so analysts are in a quandary trying to estimate what the non-farm payroll count will look like. I would suggest that the ADP report is an anomaly in amongst the rest of recent US data so we should not ignore it but discount it slightly. I am no expert on the US employment market but my guess is that something like 50 to 70 thousand jobs were created last month and the markets will be disappointed. If I am right, expect safe haven buying of the US Dollar in later trade.
So this weekend brings the end of Wimbledon, the British Grand Prix and a lot of rain by the look of it. I will leave you with the thought that, if you are planning on giving up smoking, go cold turkey for your own safety. One guy who is using those electronic cigarette replacement thingies was at the centre of a terrorist alert on the M6 toll road yesterday when the coach he was travelling in was surrounded by armed police & army units and all 48 occupants quarantined. So it is true, smoking can kill you; especially if you make a false move while you are in someone’s cross-hairs.
And Scottish Scientists at the University of Glasgow have developed a pizza enhanced by seaweed and peppers which provides 30% of an adult daily dose of vitamins and mineral. Being in Glasgow I would guess someone has already tried it battered and deep fried so I won’t make that joke.
Have a great weekend everyone.
Currency - GBP / Australian Dollar
From February to mid-May Sterling managed to push the Australian Dollar from A$ 1.45 to A$ 1.62 but it all got a bit pear shaped from then onward and the UK’s proximity to the beleaguered Euro cannot compare to Australia’s lucky geographical proximity to China which takes the largest part of Australia’s exports. Equally, the UK’s paltry 0.5% base rate is nowhere near as attractive as Australia’s 3.5% and don’t get me started on the effect that the LIBOR debacle is having on the world’s attitude towards the UK economy. So this exchange rate seems set fair for a decline to A$ 1.49 and possibly A$ 1.48 and if we hit those levels with a bit of momentum, we could certainly get back to the February low of A$ 1.45. That is a depressing last sentence if you are trying to buy Australian Dollars but the upside is that you are now forewarned.
Currency - GBP / Canadian Dollar
Since breaking below the C$ 1.5820 support at the start of the week, the Sterling - Canadian Dollar exchange rate has fallen like a stone and the target of C$ 1.56 seems unavoidable at the time of writing. Obviously that is great news if you are a seller of Canadian Dollars but a pain in the proverbial if you need to buy cheap loonies. The background to this is that commodity prices have recovered a little (that benefits Canadian exporters), the US economy is doing rather better than the UK economy (good for Canada but bad for the UK) and international investors are seeking the safety of North America in preference to the troubled Eurozone and the UK economy is seen as closely linked to Europe even though we don’t use the Euro. What will happen when the Pound falls to C$1.56 is not certain; maybe a bounce or maybe a continued decline to the March low of C$1.54. Either way, it isn’t attractive for those with Sterling to sell so early action is a logical choice.
Currency - GBP / Euro
Quite why the Euro is not a lot weaker continues to evade me. Spain is seeing its debt costs rise again even after the summit6 which reached a decision to pump money directly into the Spanish banking system. Market surveys still see an expectation of at least one departure from the Euro and a row is being carried on behind closed doors over whether the EU has the right to use financial support funds to buy sovereign debt; something we were told could not happen when the funds were established. Despite all that and despite Sterling’s domestic problems, the Sterling - Euro exchange rate is finally pushing higher again but it is like pushing a large hadron collider with one finger; veeeeeery slow. Sterling’s failure to break above €1.2530 is very disappointing because until that hurdle is cleared (something we failed to do in May and June) we cannot see whether there is enough life in the Pound to see a push to the heady heights of €1.27 and beyond. At the moment, support for this pair is clear at €1.24 and resistance is apparent at €1.2550 so we are stuck in the middle.
Currency - GBP / New Zealand Dollar
Today’s monetary expansion in the UK did little to help the Pound in the eyes of international traders. In the realms of true supply and demand, the more currency is in circulation, the less each piece is worth and Sterling proved that in late trade. But while the Bank of England and European Central Banks were adding liquidity and cutting exchange rates, the People’s Bank of China sneaked a press release out showing that they too were reducing interest rates. Their rationale is that international export markets are struggling so they need to ease the burden on domestic companies. That should feed into greater demand for NZ raw materials and lower interest rates in Europe also makes the 2.5% base rate in New Zealand relatively more attractive. So there are plenty of reasons for the NZ Dollar to strengthen. The Sterling - NZ Dollar exchange rate looks like it is inexorably heading for the April low of NZD 1.92 and that marks the last of the Fibonacci retracement levels before we see a complete reversal of the spike of the last three months. A break of NZD 1.92 would open a drop zone for this exchange rate to fall to NZD 1.8650 again, so those in need of Kiwi Dollars should be prepared to act early or lose money.
Currency - GBP / US Dollar
A very strong ADP private payroll report was a ripper with 167,000 new jobs being registered. That put the cat amongst the pigeons ahead of tomorrow’s official non-farm payroll report. Many analysts had been lowering their payroll forecasts although few had changed their expectation of an 8.2% unemployment level. However, the ADP report has caused a realignment of forecasts and many commentators are seeking a figure in the 100,000 to 160,000 region when the US employment report is released at 12.30 GMT tomorrow. That optimistic view has manifested itself in a stronger US Dollar but let’s not get too carried away; the ADP report is at best flaky and at worst downright unreliable as a bellwether for the official data. A volatile day is certain for Friday and those with a Dollar buying or selling requirement would do well to place automated orders in order to avoid missing the spikes and troughs. In the week ahead, if the Pound can stay above $1.55, then a significant bounce is possible but a fall below 1.55 before the end of the week makes a return to the June low of 1.52 a real possibility.
