BOE on hold
US employment data disappoints
ECB promises ‘unlimited funds’ to maintain Eurozone
FX Market Overview
The best image of the Paralympics so far for me was the moment when Dan Greaves left the throwing circle for the discus competition in which he was competing so that he could run across the Olympic stadium and give 100m winner Jonny Peacock a huge hug. It was a scene of pure unrehearsed and unabashed joy. If we could breathe that kind of camaraderie into the England football, cricket and rugby teams we would be world beating. (Dan went on to win a silver by the way).
Away from the Paralympics, we found out that the rumours were all true; the European Central Bank really does think it can commit unlimited funds to bond purchase programs to ensure the survival of the Euro. They can’t of course; no one has unlimited funds, but the markets are still enjoying the afterglow of a central banker laying down the gauntlet to those who would challenge them. The reason I say they can’t do what Mario Draghi said they can is that there will come a point at which the ECB runs out of funds and when they are looking so overstretched that lenders will start charging them a risk premium but are the markets prepared to take the gamble that the ECB will fail? Not yet.
It was interesting that the ECB chose to ignore its primary weapon, interest rates. They left their base rate on hold at 0.75% even though, if you want to reduce borrowing costs that is the perfect tool for the job. Of course the survival of the Euro doesn’t necessarily mean the survival of all the countries in the Eurozone or the continuation of a full membership of the euro club but these are early days and the stress and strife of discovering just how effective the ECB can be lays ahead. In the short term, share prices rose significantly but the Euro did little more than stabilise in recent ranges. That is not so surprising because most of the main thrust of Mr Draghi’s speech was leaked the day before so we were well prepared.
Within this melee it would have been easy to miss the Bank of England’s interest rate decision but they chose to sit on their hands and leave both their interest rate and QE budgets on hold. Sterling barely moved on the news but slipped a little through later trade against the Australasian Dollars which benefitted from the improved investor sentiment after the ECB announcements. This morning brings a swathe of manufacturing and industrial input and output data from the UK and we are in for some Sterling strength if the data is any better than forecasts.
After the drama of the European news, we had further drama overnight with the confirmation that Australia’s trade balance was in deficit for the 7th month in a row and the July gap was wider than expected at A$556 million. Annually that brings the deficit to A$3.96 billion, which is stark when compared to the 2011 surplus of A$18 billion. That immense swing can be attributed to falling commodity prices, flagging overseas demand and the strength of the Australian Dollar pulling in imports but it isn’t good news whichever influence you cite. The Australian Dollar, which had strengthened on the encouraging news from Europe, stopped in its tracks and flattened out.
Today’s big highlight was the release of US employment data for August. Yesterday’s weekly jobless claims figures were very encouraging so we were expecting the non-farm payroll data to be as positive but we were disappointed. Just 96,000 jobs were added to the payrolls last month and that was barely two thirds of the market expectation. We saw weakness in the US Dollar as the markets started to expect further quantitative easing from the US Federal Reserve. Investors may be wary in the short term because overnight on Sunday into Monday, we will get the next round of Chinese inflation data and that has repercussions for investor sentiment and the Australasian suppliers of Chinese raw materials.
Away from all of this, we have a weekend which promises to be rather sunny in the UK. I hope it is fine where you are and that you get a chance to sip something ice cold in the sunshine.
Currency - Euro/US Dollar
It is probably too early to call it but we might be seeing a change of direction in the Euro-US Dollar chart. For the first time since May 2011, the Euro looks like it may push the USD above the downward trend that has been in place for all of that time. The Euro has reached a Fibonacci retracement level at $1.2729 and stopped. It did the same back in June but failed to break higher and that episode was followed by a drop to $1.21. Dollar sellers will be praying history repeats itself and Dollar buyers will be hoping this is the long awaited rebound. If we see $1.28 in this pair, I will be more confident that the rebound is happening but all the time we are below that level, the downtrend beckons.
Currency - GBP/Australian Dollar
This has been a very negative week for the Australian economy. Data from China shows things are slowing down in Australia’s main export market, Australia’s trade balance showed a deficit for the 7th Straight month and Australian retail sales slipped. No wonder the Australian Dollar is weaker today than it was a week ago. It would have been much weaker but for the odd enthusiasm that accompanied Mario Draghi’s commitment to throw the kitchen sink at the Euro. That appears to have settled the minds of many investors and the flow of funds into the high yielding Australian Dollar has been a feature of Friday. If Sunday night’s Chinese inflation data is as negative as we think it might be, we could see further weakness in the AUD and it might just break out of the range it has occupied for the last 5 weeks. If the Chinese data is better than forecast, we will see the Australian Dollar push Sterling down to perhaps A$ 1.53 and even A$ 1.51 if it hits that support apace.
Currency - GBP/Canadian Dollar
The Bank of Canada left its base rate on hold at their last meeting and confirmed that they still have a bias towards interest rate hikes rather than cuts. That has helped the Canadian Dollar to consolidate its position against the US Dollar and the Pound. However, mixed data from America is causing some consternation and Canada’s potential is intrinsically tied to the potential of the US economy to import from Canada. So having pushed below the two year long trend, the Canadian Dollar retreated back to within the trend channel and we are in a pattern between C$1.56 and C$1.58 as I write. As you can see from the chart above, there is no doubting the strength of that channel and we may be in a similar pattern for some time to come.
Currency - GBP/Euro
Traders and investors have taken European Central Bank President, Mario Draghi at his word and bought into the Euro. His commitment to push ‘unlimited’ amounts of money into the European government bond markets is a bold gesture, an interesting one if any group of investors decide to challenge it through the bond markets and a bit of a lie because no financial entity has unlimited anything. The ECB will be hoping the threat of unlimited funds means they don’t have to spend a cent but the move is controversial and very unpopular in Germany, the main funder of any such commitment. We may see the Sterling - Euro exchange rate drop to €1.25 and perhaps €1.2250 in the days ahead but I still think that will be a short term adjustment prior to longer term weakness. If I am right, it may present a terrific selling opportunity for those with Euros to shift.
Currency - GBP/New Zealand Dollar
The turmoil in Europe and the slowdown in the New Zealand economy have been allowing the Pound to make gains against the New Zealand Dollar but that all seems to have stopped in the aftermath of the European Central Bank’s promises. The Pound has dropped 3 Kiwi cents in two days and is sitting on the bottom of the trend channel that has been in place since the second week of August. It’s not a long term trend but it has been tested on a number of occasions and has provided support for Sterling. Sunday night’s Chinese inflation data could be the make or break moment for this pair. We may see a spike back to NZ$ 2.01 but I wouldn’t be at all surprised if we tested the NZ$ 1.95 level in the next few days even if the longer term direction of the Sterling - Kiwi Dollar exchange rate was upward.
Currency - GBP/US Dollar
An apparent plan to fix the Eurozone and a slight softening of US employment data happened on two consecutive days and the net result is that the US Dollar weakened as investors sallied forth to seek higher yields than they were getting in the US Treasury market. The obviousness of the medium and short term upward trends in this chart almost paints a target on the $1.6050 retracement level because it coincides with the top of the trend which has been in place since May 2012. The threat of further quantitative easing by the Federal Reserve is enough to keep the US Dollar on the back foot and Sterling has found some support in spite of having UK growth forecasts downgraded. I would only start to think of a downward trajectory in this exchange rate if $1.58 is breached and we trade lower or if the European central Bank’s plans are proven to be little more than bluff.