FX Market Overview

The Two Ronnies used to start their programmes with the line” And in a packed show this evening...” and that is just how I feel this morning. There is almost too much news to cover in a short report but, committed as I am (or perhaps as I should be) I will give it a bash.
Sterling is rallying. That probably isn’t due to the EU leaders suggesting the British Government has engineered its decline to help UK exporters and it probably has little to do with the EU leaders who say the Pound can’t join the Euro while it is so weak and while UK government debt is so monumental. It may not even have anything to do with the expectation that UK interest rates will be cut by at least another 50 basis points today. It may have far more to do with the fact that traders had just got carried away with their flight from the Pound and may now be ready to let Sterling find a more sensible level. However, I am not sure that level is much higher than where we are this morning so this may be a time for Sterling sellers to take advantage of the Pound’s bounce.
Yesterday’s brought a desperately bad ADP US employment report. ADP processes payrolls in the US so it is quite well placed to monitor employment variation and they reported a drop of 693,000 jobs which bodes very badly for Friday’s official non-farm payroll report. The US Dollar, as you might expect, fell throughout the day.
Although a currency’s movement is a good measure of market confidence in the country to which that currency is attached, government debt issuance is perhaps even more precise and the fact that only two thirds of Germany’s €6 billion auction of 10 year bunds was taken up is a clear indication that investors are wary of even government backed debt. I don’t think Germany is alone in this and will watch the various issuances from around the globe in the coming weeks for clues as to who trusts who.
This has a bearing on the reports that the UK government is set to abandon all prudence and just print a whole batch of money to fund its projects and pay some of this debt. It is a highly risky and questionably effective enterprise, fraught with pitfalls at every turn. How much to print, how to use the cash and when to stop are all unknowns and most analysts will be rather horrified that it has come to this. The newspapers are referring to this as ‘quantitive easing’ but that also encompasses other actions like buying back government debt and perhaps even buying other forms of debt like mortgages. Simply printing money is pretty scary though and a brief history of this activity survey a landscape of Germany in the 1920s, various Latin American debacles and it completely does away with the independence of the Bank of England, one of the few policies Gordon Brown introduced that I agreed with.
Poor news from Australia overnight and nervousness over commodity prices strove to weaken both the Australian and New Zealand Dollars and weaker commodity markets had a direct effect on the South African Rand too. By contrast, the drop in confidence elsewhere boosted the value of the Japanese Yen which has become seen as a safe haven currency in recent months. The Yen strengthened accordingly and will have also picked up some buyers who sold out of the higher yielding Australasian currencies. The upshot of this is that those with Sterling to sell and Australasian or South African currency to buy are being offered fantastic exchange rates this morning ahead of the Bank of England decision.
Today’s news is dominated by the Bank of England’s interest rate cut; for that is almost certainly what we will see. Whether the BoE will continue to boldly go where no British interest rate has gone before and cut another full 1 percent or whether they will slow their attack on debt costs and only cut by 50 basis points is the big debate. Whatever they decide to do, it looks like Sterling is being rather better supported due to BoE action rather than the Eurozone’s clear prevarication. I don’t see a massive sell off in Sterling even if they put through the full 1.0 percent cut. However, this will be a very lively market if they don’t move the base rate at all and I am not quite sure how traders will view that.
It could be that such a move boosts Sterling in the short term and market orders above current levels could well be hit in that melee but longer term, analysts will warn that the BOE is not being proactive enough and Sterling will suffer. Then we get US weekly jobless claims data which, if it is in line with the ADP report, will further weaken the US Dollar.
The other news which I must just sneak in affects anyone who has to either buy or sell the Canadian Dollar. I read a very well constructed report this morning showing the balance of traders in the Options and futures markets who were either betting on strength or weakness in the Canadian Dollar and the markets are more convinced of impending Canadian Dollar strength than they have been for over a year. CAD buyers take note and probably take advantage of this spike and CAD sellers; it looks like your day is coming.
If I had another 3000 words of space, I would go on but I don’t and you have a life to lead. What I will leave you with is the suggestion that whatever you need to do, whether it is to buy the Pound, sell the Pound, buy the US Dollar or move in or out of the Euro, this market is best worked to your advantage when you place market orders which can be triggered in the blink of an eye and are more effective than any call from a trader which stands a very good chance of missing the move. Discuss your options with your Halo Financial Consultant and set out your stall ahead of the activity and you will do so much better than hoping to catch the market at the split second when your ideal exchange rate is on offer.
So have a great day; let’s hope all our mortgages are cheaper before the end of it.