Today's Highlights
Euro settles on Merkel’s calming words
Buoyant UK retail data boosts Sterling
FX Market Overview
We have been in a period almost devoid of sizeable volatility. You can cite the holiday season in Europe, the Olympics, anything you fancy as a cause but there can be no doubt that range trading has rarely been more de rigueur or a la mode. It’s a shame I don’t speak French but c’est la vie. We may be starting to see the end of that period though as a little more clarity, if not certainty, is coming through the markets.
Sterling has had a couple of very encouraging days after the bank of England set out its stall to keep British interest rates flat for an extended period and their dismissal of any talk of interest rate cuts has stabilised traders’ views on the yield from British government bonds. That comfort was enhanced by a very encouraging set of retail sales data which showed an upturn of 0.3% in July and an upward revision to what were originally poor figures in June. That, with the improved employment data all combined to stabilise Sterling and it even pushed a little higher during the day. A lack of UK data today will leave Sterling to float around in the wake of the US and EU data.
The Euro took some heart from comments from the German Chancellor urging EU leaders to get a wriggle on in trying to solve the Euro debt mess. Her words were a little more diplomatic than mine but her insistence that “time is of the essence” was clear enough and her insistence that the ECB President’s pledge to d whatever it takes to secure the euro was "completely in line" with the thinking of the EU. Today brings Eurozone trade balance data which is likely to be poor if recent data is a guide so we may see further euro weakness but many traders will be bracing themselves ahead of next week’s round of meetings between interested parties across Europe. It sounds a bit like a football tournament. Greece meets Germany then Greece meets France followed by Spain meeting Germany on the same day that the European Central Bank meets the press to announce its latest interest rate decision. With so much turmoil in Europe, the ECN really ought to be making money cheaper and helping business but they are likely to sit on their hands so a volatile week is in store for the Euro next week.
The US Dollar is still finely balanced. Interest rates are at virtually 0% so the US Dollar would seem to be the perfect source for cheap funding for those seeking higher interest rate yields in Australasia and elsewhere. That, you would have thought, would weaken the US Dollar but it is barely moving because that demand if balanced by the attractiveness of the safe haven US treasury certificate and we saw an increase in overseas buyers over the last month. US share prices are rallying so risks are being taken by investors. Maybe that will feed into US Dollar weakness but we will probably need to see further clarity on the direction of the Eurozone before that really shows in the value of the USD. Today’s leading indicators and consumer sentiment data are unlikely to be majorly market moving but stranger things have happened.
That ambivalence towards the US Dollar isn’t reflected in the Canadian Dollar which is strengthening through inward investment and through encouraging domestic conditions. However, last month’s data showed a capital outflow of C$7.89 billion and that more than reverses the previous month’s inflow figure but still the Canadian dollar strengthens. That bodes well for the CAD in the weeks ahead.
The Australian and New Zealand Dollars are a little weaker this morning as softening Asian data weighs on the pair. Having export markets in China and other quite resilient economies of Asia has been a boon to the Australasian economies but China’s economy is slowing and the knock on effect on peripheral countries also has a knock on effect on Australian and New Zealand export demand.
And as the police watch the Ecuadorian embassy for signs of any 6 foot diplomatic bags heading for the airport, we head into what looks like a rather nice weekend in the UK. Meanwhile, in America, clumsy Presidential Candidate Mitt Romney is being immortalised in a song by electro/punk band Devo. That would be a good thing apart from the fact that the theme for their song is Mitt’s dog Seamus who was strapped to the roof rack of the family car (in a pet carrier) for a 12 hour journey in 1983, causing outcry amongst animal lovers. The song, "Don't Roof Rack Me, Bro!" is due for release this week. Enjoy.
Currency - GBP/Australian Dollar
After three weeks of Aussie Dollar advances against the Pound we may finally be seeing a correction. As you can see the Pound has bounced a little after a slowdown in Chinese data weakened the Australian Dollar and after the Australian treasury made it clear that the Reserve Bank of Australia has the scope to cut interest rates if the strength of the Australian Dollar is weighing on the economy, we saw the Australian Dollar weaken and break out from the downward trend it has been in since May. As regular readers of this column will be aware, a large part of the strength of the AUD is derived from the relatively high interest rates payable on Aussie Dollar assets. If that advantage is eroded or the threat of interest rate cuts become clear and present, this Sterling - Australian Dollar exchange rate could advance to A$1.54 or perhaps even A$1.56. However, if it can’t clear A$ 1.50, we may well see a drop back to A$1.48 and if we get below there then the down trend resumes.
Currency - GBP/Canadian Dollar
The encouraging signs for the US economy and improving domestic data in Canada have combined to push the Sterling - Canadian Dollar exchange rate back down to the C$ 1.5475 low we last saw in March. The decline has been pacey and, although Sterling is likely to find some technical support here, the fall may not yet be over. If we do breach this support then a further decline to the 2010 low of C$ 1.48 is very likely. That was the lowest this pair has been since February 1985 when we bottomed out at C$ 1.45. That all sounds very negative for those who need to buy Canadian Dollars but the good news is that since the 2010 low, the Pound has been establishing a gentle recovery and as long as the Pound can make it back above C$ 1.56, that upward trend will continue.
Currency - GBP/Euro
A boost to sterling from improved UK retail sales and employment data has given us another surge of optimism that the Pound bight just manage to break higher against the Euro. It hasn’t happened yet and I have to admit I am confounded by the euro’s continued support but when the Pound is testing 3½ year highs again, we have to feel there is a chance of a push to €1.30 at some stage. It may take a hint of a Eurozone exit or the failure of another bank or country within the Eurozone to prompt that kind of break but as UK data starts to show glimmers of improvement, the Pound can chip away at the Euro’s resilience and we may see a break. The levels to watch are the current resistance at €1.2750 and €1.28 and then €1.29 and the psychologically significant €1.30. Support is seen at €1.2650 and €1.2575.
Currency - GBP/New Zealand Dollar
I was convinced last week that the New Zealand Dollar was set to make fresh lows in the Sterling - NZ Dollar exchange rate but the Pound is poking out of the top of the downtrend that had me feeling that way. For all the UK’s improved data this week, we haven’t seen a massive rise in this exchange rate but the New Zealand data has been helping things along. Weak inflation and growth data from China is weighing on the prospects for NZ output and that is helping Sterling to appreciate against the NZD. In essence, the level to watch is the Fibonacci retracement level that we are currently testing at NZ$ 1.9450 and if that breaks, we are heading for 1.9750. If however, we drop back into the downward channel at NZ$ 1.93, we will see a continuation of the Pound’s decline to NZ$ 1.90 and below. I have a feeling we will be seeing higher rates though.
Currency - GBP/US Dollar
Improved UK retail sales and a fall in the unemployment rate were enough to lift the Pound from its recent malaise. However, the overhead resistance it faces against the US Dollar is considerable and all of those who have orders at or around $1.5750 know, the Pound keeps flirting with that level but not quite making it. You can see why when you look at the chart above; a 100 day moving average line, trendline and overbought RSI indicator all suggest this is overdone when it gets near that number but there is sufficient support for the Pound above $1.56 to keep the pressure on for a move higher. It is surprising that the US Dollar is not stronger as safe haven buying tends to fund strength in US treasuries and therefore strength in the USD. Nevertheless, it appears investors have convinced themselves that a resolution will be found to the Eurozone farce and we will see a return to recovery in the global economy. Eurozone data this week would debunk that theory but it may take something more dramatic than a slowdown in German factory output to cause a run on the Euro and a corresponding run of strength in the USD. Unless the Pound can trade and stay above $1.58 for a day or two, we have to assume the sterling - US Dollar exchange rate is heading for a dip back towards the bottom of this range at some stage.
