There is no doubt a contraction in the UK economy in the 4th quarter of the year was feared even if it wasn’t in the headline forecasts. Nevertheless, the fact that Britain’s output shrank by 0.2% in Q4 still caused a fair amount of consternation in the markets and the Pound weakened on the news. It should be remembered that the UK economy did grow by 0.9% on the year and we are not yet in a 2nd recession. However, if a technical recession is two consecutive quarters of economic contraction, we are half way there and the press reporting seems to have a touch of glee about it that they can use the expression ‘double dip’ a lot over the next three months. Sterling dived on the news and I know a lot of orders were triggered for those seeking to buy cheap Pounds. For those people it was a good day but Sterling bounced before the close of business and that is perhaps a measure of the fact that the UK is in no worse state than Europe or many other countries. It is perhaps also a reaction to the fact that the Bank of England will inevitably decide to expand the money supply when they meet in February and that is not an entirely bad thing for the UK economy. It would just be nice if some of that money were pushed straight into the job creators in industry rather than shoring up bank balance sheets.
The US Dollar had a better day as fear does tend to boost US Treasury buying. In comparison with Europe, America is a good place to invest. However, people like George Soros are buying Italian bonds in search of attractive yields and a certain degree of guarantee that the European leaders aren’t yet prepared to see Italy default. The same cannot be said for Greece which is being widely condemned for failing to meet its targets on debt reduction and on the introduction of austerity measures. Even German Chancellor Angela Merkel is talking about the inevitability of a Greek debt default. That would be bad news for the Eurozone and probably bad news for Sterling due to Britain’s close trading relations with most European countries.
However, Chancellor Merkel is also under fire from the former French Finance Minister who is now the head of the International Monetary Fund. Christine Lagarde said of Germany’s handling of the debt crisis that a mix of "inaction, insularity, and rigid ideology" was damaging the prospects of recovery from the crisis.
Sorry, I lost my place a bit there; I started talking about America and then, like most of the press agencies, I got sucked back into speculating 0ver Europe. However, the US Federal Reserve met last night and announced there would be little chance of an interest rate rise before 2014. They spoke of modest growth over the next two years and many interpreted this as code for the Fed downgrading their forecasts in light of the problems in Europe.
There is a lot of data due for release today but probably only the US Durable goods figures and US new home sales plus perhaps Japanese inflation are likely to move the markets. Traders are less focussed on data than they are on the rhetoric seeping out of Europe, so we will listen to the utterances of the French, German and Greek authorities with great interest.
As with every day this week, it’s going to be a busy one so I will let you get on with it. Have a great day.
Thursday, 26 January 2012
Wednesday, 25 January 2012
FX Market Overview
Happy Anzac day to our readers in the southern hemisphere! Nearer to home in the Northern hemisphere there is less to cheer about with news dominated by events in the Eurozone; a deal in the Greek debt swap seemingly not quite as imminent as first thought, EU finance ministers rejecting the Private Sector Involvement (PSI) plan, the International Monetary Fund (IMF) warning that the world economy is “deeply in the danger zone” because of risks from the Eurozone. Happy days indeed. That said, the data was not however universally negative as the Euro received a boost yesterday when manufacturing activity in the Eurozone was shown to have improved by more than expected in January, gaining at the fastest pace since August 2011. The preliminary Purchasing Managers Index (PMI) rose by 1.8% to 48.7 in January from 46.9 in December although positive was crucially still below the 50.0 level which indicates that manufacturing is still contracting on the whole. The improvement was largely due to improved conditions in Germany as the rest of the region is still going through a steep downturn.
Whilst Britain’s public debt surpassed £1 trillion yesterday and the growth forecast for the UK was trimmed to 0.6% for 2012 by the IMF, there was a fillip for the Chancellor as overall borrowing in December came in lower than expected at £13.7bn in December from £15.9bn a year earlier. This has ensured that UK Chancellor Mr Osborne is still on target to meet his objective of bringing borrowing down by £10bn this financial year. This news helped boost the Pound in early trading.
Australian Quarter 4 Consumer Price Inflation (CPI) came in a little weaker than expected at 3.1% year on year, raising expectations of an interest rate cut from the Reserve Bank of Australia (RBA). Most economists had expected a rise of 0.2% and the fact that inflation pressures appear to be stabalising and growth has been relatively sluggish will only increase talk of a further loosening of policy possibly as soon as February. The Australian Dollar actually strengthened on this news becuase inflation is still within the RBA's long term underlying inflation target band.
German IFO data is the first release to demand our attention this morning and that will be released at 9am GMT with the market expecting a figure of around 107.6 which would be a slight improvement on last month. Whilst this figure is normally closely watched, this month it may well lose some of its lustre given the events in Greece taking centre stage unless the number deviates significantly from expectation. That said if it does report a positive figure that will be the third consecutive month that the confidence guage has increased it may provide enough confidence to push the Euro stronger on short term profit taking.
Wednesday also brings the first glimpse of tier 1 macro data in the form of the preliminary release of fourth Quarter GDP from the UK at 9.30am. Finally we will get to see if we are on the brink of a double dip and most economists are predicting that growth will be anaemic at best. The market is now expecting figure of -0.1% and anything less could send the Pound tumbling. At the same time we will have the first chance to see the minutes of the recent Bank of England meeting which will give us clues as to whether or not further quantitative easing will be on the agenda in the near future. Monetary Policy Committee member Adam Posen certainly thinks so and it will be interesting to see if any other members of the committee agree with him. On that note overnight Mervyn King, the Governor of the Bank of England, hinted that further quantitative easing could be on the cards. He stated that “if necessary there is scope for further asset purchases, to prevent inflation falling below the 2% target”. Expect the Pound to weaken if this is confirmed in the minutes.
Finally this evening the US Federal Open Market Committee (FOMC) will almost certainly leave interest rates at their historically low levels in the United States at 5.30pm GMT. We'll also await an interest rate decision by the Reserve Bank of New Zealand (RBNZ) at 8pm GMT which is widely expected to see rates left on hold at 2.50%, a situation that may remain until the second half of 2012.
Whilst Britain’s public debt surpassed £1 trillion yesterday and the growth forecast for the UK was trimmed to 0.6% for 2012 by the IMF, there was a fillip for the Chancellor as overall borrowing in December came in lower than expected at £13.7bn in December from £15.9bn a year earlier. This has ensured that UK Chancellor Mr Osborne is still on target to meet his objective of bringing borrowing down by £10bn this financial year. This news helped boost the Pound in early trading.
Australian Quarter 4 Consumer Price Inflation (CPI) came in a little weaker than expected at 3.1% year on year, raising expectations of an interest rate cut from the Reserve Bank of Australia (RBA). Most economists had expected a rise of 0.2% and the fact that inflation pressures appear to be stabalising and growth has been relatively sluggish will only increase talk of a further loosening of policy possibly as soon as February. The Australian Dollar actually strengthened on this news becuase inflation is still within the RBA's long term underlying inflation target band.
German IFO data is the first release to demand our attention this morning and that will be released at 9am GMT with the market expecting a figure of around 107.6 which would be a slight improvement on last month. Whilst this figure is normally closely watched, this month it may well lose some of its lustre given the events in Greece taking centre stage unless the number deviates significantly from expectation. That said if it does report a positive figure that will be the third consecutive month that the confidence guage has increased it may provide enough confidence to push the Euro stronger on short term profit taking.
Wednesday also brings the first glimpse of tier 1 macro data in the form of the preliminary release of fourth Quarter GDP from the UK at 9.30am. Finally we will get to see if we are on the brink of a double dip and most economists are predicting that growth will be anaemic at best. The market is now expecting figure of -0.1% and anything less could send the Pound tumbling. At the same time we will have the first chance to see the minutes of the recent Bank of England meeting which will give us clues as to whether or not further quantitative easing will be on the agenda in the near future. Monetary Policy Committee member Adam Posen certainly thinks so and it will be interesting to see if any other members of the committee agree with him. On that note overnight Mervyn King, the Governor of the Bank of England, hinted that further quantitative easing could be on the cards. He stated that “if necessary there is scope for further asset purchases, to prevent inflation falling below the 2% target”. Expect the Pound to weaken if this is confirmed in the minutes.
Finally this evening the US Federal Open Market Committee (FOMC) will almost certainly leave interest rates at their historically low levels in the United States at 5.30pm GMT. We'll also await an interest rate decision by the Reserve Bank of New Zealand (RBNZ) at 8pm GMT which is widely expected to see rates left on hold at 2.50%, a situation that may remain until the second half of 2012.
Tuesday, 24 January 2012
FX Market Overview
Despite the disappointment at the Ecofin meeting and the Greek PSI negotiations which are still ongoing risk sentiment was markedly improved yesterday with EUR/USD breaching $1.3000. Markets ignored news articles discussing the need for a further Portuguese bailout which is gathering more momentum and instead took their cue from the fact that the French and German debt auctions went well yesterday with decent demand seen from both.
Whilst Berlin has been unflinching in its efforts to increase fiscal discipline in the Euro zone to avoid throwing more money at the European debt crisis, comments from a member of the German parliament suggesting Germany are considering the option of running the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) alongside each other and, perhaps increase the size of the packages to €750 Billion, has helped to give risk appetite a lift. German Bunds moved into negative territory and the Euro rallied pushing Sterling/Euro down to €1.1930. Any loosening in policy from Germany will of course have consequences and my guess would be that governments would have to sign up for tighter scrutiny and harsher penalties should they break the rules regarding budget deficits and public debt.
It was not all good news though as there appears to be a high risk standoff between Greece’s private sector creditors and Eurozone governments over the size of any potential haircut. Finance ministers rejected the latest proposals and this should weigh heavily on the Euro in the short term.
In the UK this morning the International Labour organisation ( ILO) has reported that the UK risks falling back into recession as the global jobs crisis continues unabated and economic activity decelerates across the Eurozone. This significantly increases the risks of a double dip recession and they have called for urgent action to create more jobs as UK unemployment has already hit 8.4%. This has done nothing to improve the fortunes of the Pound which has struggled to hold on to any gains recently particularly as Adam Posen has again stated that the UK's Monetary Policy Committee (MPC) is right to consider further quantitative easing and that in fact the MPC can step up Quantitative Easing “without limit” as inflation fears begin to wane. Tomorrow’s Bank of England minutes will be watched very closely for any further clues to future monetary policy direction and it is unlikely the Pound will make significant gains before then.
This week is also a week for central bank interest rate decisions with announcements from the Bank of Japan, they kept rates on hold at 0.1% this morning, US Federal Reserve tomorrow at 7.15pm GMT and the Reserve Bank of New Zealand at 8pm GMT. Whilst both central banks are not expected to alter rates from their current levels at 0.25% and 2.50% respectively, it does leave the door open for volatility leading up to the event.
Today’s focus will be in Europe with the start of the World Economic Forum in Davos and manufacturing data from France and Germany due this morning. The Purchasing Manager's Indices from the Eurozone’s two largest economies are expected to make for gloomy reading and will give investors an insight into how deep the recession in the Eurozone is likely to be. In a similar vein, Industrial orders from the Eurozone will also be closely watched later this morning in a day devoid of tier 1 data. Have a good day.
Whilst Berlin has been unflinching in its efforts to increase fiscal discipline in the Euro zone to avoid throwing more money at the European debt crisis, comments from a member of the German parliament suggesting Germany are considering the option of running the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) alongside each other and, perhaps increase the size of the packages to €750 Billion, has helped to give risk appetite a lift. German Bunds moved into negative territory and the Euro rallied pushing Sterling/Euro down to €1.1930. Any loosening in policy from Germany will of course have consequences and my guess would be that governments would have to sign up for tighter scrutiny and harsher penalties should they break the rules regarding budget deficits and public debt.
It was not all good news though as there appears to be a high risk standoff between Greece’s private sector creditors and Eurozone governments over the size of any potential haircut. Finance ministers rejected the latest proposals and this should weigh heavily on the Euro in the short term.
In the UK this morning the International Labour organisation ( ILO) has reported that the UK risks falling back into recession as the global jobs crisis continues unabated and economic activity decelerates across the Eurozone. This significantly increases the risks of a double dip recession and they have called for urgent action to create more jobs as UK unemployment has already hit 8.4%. This has done nothing to improve the fortunes of the Pound which has struggled to hold on to any gains recently particularly as Adam Posen has again stated that the UK's Monetary Policy Committee (MPC) is right to consider further quantitative easing and that in fact the MPC can step up Quantitative Easing “without limit” as inflation fears begin to wane. Tomorrow’s Bank of England minutes will be watched very closely for any further clues to future monetary policy direction and it is unlikely the Pound will make significant gains before then.
This week is also a week for central bank interest rate decisions with announcements from the Bank of Japan, they kept rates on hold at 0.1% this morning, US Federal Reserve tomorrow at 7.15pm GMT and the Reserve Bank of New Zealand at 8pm GMT. Whilst both central banks are not expected to alter rates from their current levels at 0.25% and 2.50% respectively, it does leave the door open for volatility leading up to the event.
Today’s focus will be in Europe with the start of the World Economic Forum in Davos and manufacturing data from France and Germany due this morning. The Purchasing Manager's Indices from the Eurozone’s two largest economies are expected to make for gloomy reading and will give investors an insight into how deep the recession in the Eurozone is likely to be. In a similar vein, Industrial orders from the Eurozone will also be closely watched later this morning in a day devoid of tier 1 data. Have a good day.
Monday, 23 January 2012
FX Market Overview
Happy New Year to all our Chinese readers and have a great week off.
I don’t know what it is but I am struggling with the logic of giving the green light to the High Speed rail link to Birmingham. Why an expensive train rather than to some other major construction project like urban regeneration or brown field site reclamation or something? It seems that the only people escaping the full wrath of the recession are the very wealthy; footballers, bankers, showbiz types and RPGs (that’s Rich Pointless Girls like the Ecclestone daughters and Tara Palmer Tomkinson) but I can’t see why we should make it quicker for them to get from London to Birmingham because they are the only ones who will be able to afford the tickets and what has Birmingham done to deserve that?
Another government project that appears to have little point is the on-off plans to rescue Greece. One minute the Greek authorities have reached agreement with their creditors and the next minute it’s off, one minute the EU Ministers have reached an accord on the way forward to rescue the Eurozone and the next minute it is all reliant on yet another meeting. No wonder the markets are so uncertain about what to do with the euro. The credit ratings agency, Fitch thinks a Greek default is already factored into the value of the Euro but I would hazard a guess that if Greece cannot agree a plan with those they owe money to, the euro will still be hit. The euro remains rather weak in spite of better than expected bond auctions in France and Spain. These had been approached with a lot of trepidation after both countries had their debt ratings downgraded earlier in the month.
Sterling had rather a god Friday after UK retail sales for December met market forecasts of 0.6% growth. It has to be expected that a lot of that growth was created by discounting so there may not be as much profit in there as retailers would have hoped for but turnover could be a decent prelude to further profit if properly managed. This week brings government debt levels and the 1st estimate of UK economic growth for the 4th quarter of 2011. There has been a lot of speculation over whether the UK is back into recession or not. Most market analysts believe the British economy grew by 0.5% in the year to December and that is pretty lame but growth nonetheless. Sterling will do rather well as long as the actual figure meets that target or betters it. There is clearly confidence in the UK economy though, China is buying into our water companies, Warren Buffet has taken a sizeable stake in Tesco’s and other supermarkets are planning expansion. It would be nice for those who have to sell the Pound for whatever reason if some of that confidence could convert into more substantial Sterling strength.
The US economic growth data for q4 is also published this week but that is likely to be a rather more upbeat affair with 2.6% annualised growth or thereabouts. The confidence that economic growth and recovery is building in America can be seen in the flow of funds away from the low yielding US treasury certificate and into higher yielding assets elsewhere. That is one of the main reasons for the Euro -US Dollar exchange rate flirting with $1.30 again last week and for Sterling’s excellent showing against the US Dollar over recent days.
Stronger Chinese data over the last week has boosted the Australian and New Zealand Dollars which benefit from Aussie and Kiwi exports to China. The fact that China is now on a week long, New Year celebration should slow the advance of the Australasian Dollars but perhaps not for long. That said; both currencies are substantially overbought and ripe for a correction. Whether we will get a correction from here is an open debate.
And finally, it seems you can only get on in American politics if you have a single syllable 1st name. Newt, Mitt, Rick, George, Bill. So Barack is always at a disadvantage. Maybe that is why he has chosen to sing a line from an Al Green song at a rally in Harlem. Perhaps singing is his Unique Selling Point; that and a two sylable first name. A guy’s gotta do what a guy’s gotta do I guess.
I don’t know what it is but I am struggling with the logic of giving the green light to the High Speed rail link to Birmingham. Why an expensive train rather than to some other major construction project like urban regeneration or brown field site reclamation or something? It seems that the only people escaping the full wrath of the recession are the very wealthy; footballers, bankers, showbiz types and RPGs (that’s Rich Pointless Girls like the Ecclestone daughters and Tara Palmer Tomkinson) but I can’t see why we should make it quicker for them to get from London to Birmingham because they are the only ones who will be able to afford the tickets and what has Birmingham done to deserve that?
Another government project that appears to have little point is the on-off plans to rescue Greece. One minute the Greek authorities have reached agreement with their creditors and the next minute it’s off, one minute the EU Ministers have reached an accord on the way forward to rescue the Eurozone and the next minute it is all reliant on yet another meeting. No wonder the markets are so uncertain about what to do with the euro. The credit ratings agency, Fitch thinks a Greek default is already factored into the value of the Euro but I would hazard a guess that if Greece cannot agree a plan with those they owe money to, the euro will still be hit. The euro remains rather weak in spite of better than expected bond auctions in France and Spain. These had been approached with a lot of trepidation after both countries had their debt ratings downgraded earlier in the month.
Sterling had rather a god Friday after UK retail sales for December met market forecasts of 0.6% growth. It has to be expected that a lot of that growth was created by discounting so there may not be as much profit in there as retailers would have hoped for but turnover could be a decent prelude to further profit if properly managed. This week brings government debt levels and the 1st estimate of UK economic growth for the 4th quarter of 2011. There has been a lot of speculation over whether the UK is back into recession or not. Most market analysts believe the British economy grew by 0.5% in the year to December and that is pretty lame but growth nonetheless. Sterling will do rather well as long as the actual figure meets that target or betters it. There is clearly confidence in the UK economy though, China is buying into our water companies, Warren Buffet has taken a sizeable stake in Tesco’s and other supermarkets are planning expansion. It would be nice for those who have to sell the Pound for whatever reason if some of that confidence could convert into more substantial Sterling strength.
The US economic growth data for q4 is also published this week but that is likely to be a rather more upbeat affair with 2.6% annualised growth or thereabouts. The confidence that economic growth and recovery is building in America can be seen in the flow of funds away from the low yielding US treasury certificate and into higher yielding assets elsewhere. That is one of the main reasons for the Euro -US Dollar exchange rate flirting with $1.30 again last week and for Sterling’s excellent showing against the US Dollar over recent days.
Stronger Chinese data over the last week has boosted the Australian and New Zealand Dollars which benefit from Aussie and Kiwi exports to China. The fact that China is now on a week long, New Year celebration should slow the advance of the Australasian Dollars but perhaps not for long. That said; both currencies are substantially overbought and ripe for a correction. Whether we will get a correction from here is an open debate.
And finally, it seems you can only get on in American politics if you have a single syllable 1st name. Newt, Mitt, Rick, George, Bill. So Barack is always at a disadvantage. Maybe that is why he has chosen to sing a line from an Al Green song at a rally in Harlem. Perhaps singing is his Unique Selling Point; that and a two sylable first name. A guy’s gotta do what a guy’s gotta do I guess.
Monday, 16 January 2012
FX Market Overview
Aside from the Scottish debate, last week’s major news involved Europe. I know that comes as no surprise but the repercussions of that news may be very extensive. The good news for Europe was that Spain, Italy and others had their debt auctions oversubscribed and the interest rates they ended up paying to their lenders were much lower than had been feared. It has to be said that most of the money loaned to the various countries by banks and institutions would probably have been borrowed from the European Central Bank by those banks and institutions at even lower interest rates. So in spit of Germany’s abhorrence of the ECB loaning money directly to countries within Europe, they are doing so through these filtering means. It also means that the cheap loans being shunted into the markets by the ECB are going nowhere near businesses and individuals who need the assistance but as long as the Eurozone is OK, that is all that seems to matter to the powers in Europe; no EU leader wants to preside over the collapse of the Euro project.
The bad news for the Euro came on Friday afternoon when credit ratings agency, Standard and Poor’s chose to downgrade France from its triple A credit rating and also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia as well. This had been mooted on a number of occasions so it was generally expected by everyone other than president Sarkozy apparently. Nevertheless, it could be very damaging to Europe’s plans to rescue the Eurozone. France has a debt auction today; the first since the downgrade obviously so we expect their interest rates to rise or even to ‘soar’ in true tabloid style. That cheap ECB money will be very valuable to banks who plan to lend to France but none of it benefits the European economy nor does it promote growth and that is a big issue. And the bad news just kept on coming as unexpectedly, Greece’s talks with its creditors collapsed n Friday before agreement had been reached on plans to roll over a substantial portion of Greece’s debt. Talks will resume today but this is perhaps the worst crisis Greece has faced since the end of the 2nd World War. As you might expect, the Euro weakened after Friday’s news and we see the Euro- US Dollar rate at the bottom of its 18 month low and the Sterling - Euro rate at another 16 month high today.
For its part, aside from the weakness of the euro, Sterling is in nervous territory ahead of this week’s release of the 1st estimate of Britain’s quarter 4 economic growth. The debate is raging over whether this will reflect a step into recession with contraction rather than growth or whether we will skim contraction with a small but very welcome plus figure. We estimate the growth will be between 0.3% and 0.5% which will be enough to keep the wolves from the door.
US data was rather upbeat last week and Europe’s problems clearly flatter the US economy and US Dollar by comparison. This is also a big week for US Data with both business and consumer inflation data due alongside capacity utilisation and industrial production numbers. However, as long as this data isn’t dire, the main driver for the US Dollar is likely to be strength derived from fear of a Eurozone collapse. Nervous investors are likely to run for cover after Friday’s news and that will mean buying US treasuries and other assets.
The big news for Australasia this week will be the release of China’s 4th quarter economic growth data. It is widely forecast this will show a fairly marked slowdown in China’s business activity and that is a negative for the countries which export to China; countries like Australia and New Zealand. After a few weeks of rampant Aussie and Kiwi Dollar strength, a few days of weakness would be welcome and it would be worth preparing for that with automated orders.
Canadian Dollar traders will be awaiting this week’s interest rate decision from the Bank of Canada. No change in interest rates is forecast but their view of the economy and the effects of an apparent disparity between US recovery and European dilemmas will be interesting to hear.
In fact this will be an enormous week for data from all parts of the world and we are expecting a highly volatile week in the foreign exchange market. In true Boy Scout fashion, being prepared is the key to taking advantage and making your own preparations is most successfully done if you speak with you Halo Financial Consultant and get the lowdown on how the markets might affect your funds.
I’ll leave you with news that US politics is all so centre ground these days that prospective presidential candidates are running out of differences to exploit in their campaigns. A new advertising campaign derides Mitt Romney for ....you won’t believe this ... it’s almost too awful to write but I must let you know; he’s been pilloried by his opponents for.... for... speaking French. There I’ve said it. Shock Horror. The chap is portrayed as elitist for being able to speak another language. I suppose the fact that he can walk and talk at the same time is also a problem and the vile elitist man probably knows which fork and knife to use in a fancy restaurant. The despicable swine.
The bad news for the Euro came on Friday afternoon when credit ratings agency, Standard and Poor’s chose to downgrade France from its triple A credit rating and also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia as well. This had been mooted on a number of occasions so it was generally expected by everyone other than president Sarkozy apparently. Nevertheless, it could be very damaging to Europe’s plans to rescue the Eurozone. France has a debt auction today; the first since the downgrade obviously so we expect their interest rates to rise or even to ‘soar’ in true tabloid style. That cheap ECB money will be very valuable to banks who plan to lend to France but none of it benefits the European economy nor does it promote growth and that is a big issue. And the bad news just kept on coming as unexpectedly, Greece’s talks with its creditors collapsed n Friday before agreement had been reached on plans to roll over a substantial portion of Greece’s debt. Talks will resume today but this is perhaps the worst crisis Greece has faced since the end of the 2nd World War. As you might expect, the Euro weakened after Friday’s news and we see the Euro- US Dollar rate at the bottom of its 18 month low and the Sterling - Euro rate at another 16 month high today.
For its part, aside from the weakness of the euro, Sterling is in nervous territory ahead of this week’s release of the 1st estimate of Britain’s quarter 4 economic growth. The debate is raging over whether this will reflect a step into recession with contraction rather than growth or whether we will skim contraction with a small but very welcome plus figure. We estimate the growth will be between 0.3% and 0.5% which will be enough to keep the wolves from the door.
US data was rather upbeat last week and Europe’s problems clearly flatter the US economy and US Dollar by comparison. This is also a big week for US Data with both business and consumer inflation data due alongside capacity utilisation and industrial production numbers. However, as long as this data isn’t dire, the main driver for the US Dollar is likely to be strength derived from fear of a Eurozone collapse. Nervous investors are likely to run for cover after Friday’s news and that will mean buying US treasuries and other assets.
The big news for Australasia this week will be the release of China’s 4th quarter economic growth data. It is widely forecast this will show a fairly marked slowdown in China’s business activity and that is a negative for the countries which export to China; countries like Australia and New Zealand. After a few weeks of rampant Aussie and Kiwi Dollar strength, a few days of weakness would be welcome and it would be worth preparing for that with automated orders.
Canadian Dollar traders will be awaiting this week’s interest rate decision from the Bank of Canada. No change in interest rates is forecast but their view of the economy and the effects of an apparent disparity between US recovery and European dilemmas will be interesting to hear.
In fact this will be an enormous week for data from all parts of the world and we are expecting a highly volatile week in the foreign exchange market. In true Boy Scout fashion, being prepared is the key to taking advantage and making your own preparations is most successfully done if you speak with you Halo Financial Consultant and get the lowdown on how the markets might affect your funds.
I’ll leave you with news that US politics is all so centre ground these days that prospective presidential candidates are running out of differences to exploit in their campaigns. A new advertising campaign derides Mitt Romney for ....you won’t believe this ... it’s almost too awful to write but I must let you know; he’s been pilloried by his opponents for.... for... speaking French. There I’ve said it. Shock Horror. The chap is portrayed as elitist for being able to speak another language. I suppose the fact that he can walk and talk at the same time is also a problem and the vile elitist man probably knows which fork and knife to use in a fancy restaurant. The despicable swine.
Currency - GBP / Australian Dollar
The Pound has remained relatively stable against the Australian Dollar for the past 6 months or so. There is very clear technical support at A$1.48 which came into play when the Pound fell below the previous support at A$1.49 a few days ago. As you can see, A$ 1.48 provided support through July and August and, considering the Pound is oversold, as shown by the RSI measure at the bottom of this chart, we may well see this support level hold again. Sterling, as mentioned elsewhere in this report, is struggling due to the UK’s relationship with Europe and that will continue to be the case until we start to see stronger UK data and perhaps until Europe starts to sort its problems out. If anyone knows when that might happen, please let the rest of us know. For now, those who need to buy the Aussie Dollar may want to protect themselves against a fall below A$1.47 but look to take advantage on any bounce to A$ 1.53. Aussie Dollar sellers may be looking a gift horse in the mouth if they don’t protect some of their requirements at this level or cover the risk of a reversal with a Stop Loss Order.
Currency - GBP / Canadian Dollar
The strength in the US Dollar hasn’t directly translated into Canadian Dollar strength but there is no doubt that, against the Pound at least, the CAD is doing rather well. The Sterling - Canadian Dollar exchange rate is at the lowest level it has been since September 2011 and , if it breaks this C$1.56 level there is a chance the loonie (as the Canadian Dollar is known) could sprint through to the July low of C$ 1.52. That then would match the low of July 2010 which makes it a very significant and pretty pivotal exchange rate. Commodity markets are very mixed with oil prices higher on the threat of a Nigerian oil workers strike and yet the slowing Chinese economy is weighing on other raw materials. However, the confidence exuding from the US (relative to other economies) is keeping confidence in Canada’s ability to earn from exports at a very elevated level. For that reason, and for the reasons of Sterling weakness, unless something significant changes, it looks like we will test that low of C$1.52 in the days ahead.
Currency - GBP / Euro
For months we have been impressed by how well the Euro has maintained its strength and mightily surprised that it hasn’t weakened to a greater extent. Oddly though, we were all a little taken aback when it did finally dive and we saw the Pound rally from €1.16 to €1.21 in a matter of 3 weeks. That rally was clearly overextended at that level and a period of correction was inevitable. So when the Pound started to give up some of those gains on Wednesday and continued to do so into Friday, we shouldn’t have been at all surprised. However, there was undoubtedly more bad news to come from the beleaguered Eurozone and another punch up to €1.21 was highly likely. That move finally happened on Friday; triggered by the credit ratings downgrades as mentioned in the main section above. I won't bore you by going over it again but you can see the effect in today's rates. Euro buyers who don’t like risk should be buying anywhere around €1.20 or above if you can get it but protect against a proper decline. Euro sellers may want to protect against a break of €1.21 and take advantage if there is a drop to €1.18.
Currency - GBP / New Zealand Dollar
Sterling’s weakness is the driving factor in the Sterling - NZ Dollar exchange rate. The Kiwi Dollar is being buoyed by Asian market confidence and by the lure of New Zealand’s 2.5% base rate. Investor confidence, whilst relatively buoyant in America and Asia, is at rock bottom as far as Europe is concerned and the Pound is suffering from that malaise. You can see that pattern very clearly in the dive from NZ$2.08 to the Pound in mid December to just NZ$ 1.92 today. This decline has been relatively orderly, within a fairly obvious trading channel but it is a decline nonetheless. From a technical perspective, there is little to stop this pair hitting NZ$ 1.91 in the days ahead and it may even get to the same low that we saw in September and October around NZ$ 1.89. If however, we do finally see the Pound rediscover its backbone, the top of this channel at NZ$ 1.97 is the obvious target.
Currency - GBP / US Dollar
The overall downward trend in the Sterling - US Dollar exchange rate is clear but we are seeing some Sterling buying interest - or more likely USD profit taking - at the October low of 1.53. Sterling bounced off this rate today and may well find a bit of buying interest from here. There is every reason for the US Dollar to be strong though; positive employment data, improving manufacturing and industrial data, growing business and consumer confidence. However, the US housing market is still dire and that is a drag on the US Dollar. Sterling, on the other hand, is being battered due to our close trading links with Europe and uncertainty over how well the UK economy is really doing. There are constant reports suggesting the UK economy barely grew in the 4th quarter of 2011 and until we see anything to suggest this is not the case, the Pound will continue to find it tough. Many analysts are pointing to $1.50 as an obvious psychological target although there are no particular technical reasons why that should happen. If we do manage to stay above $1.52, then a bounce to $1.56 is perfectly possible in the short term.
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