FX Market Overview

The dramatic recovery by England in the 1st Ashes test has divided opinion dramatically in our dealing room. The arguments vary from ‘How can you get excited about cheering for a draw?’ to ‘That is what test cricket is all about’ and ‘How can you play a sport for 5 days and still not get a winner?’ I can fully understand the non-cricket-fans but I have to say that sporting tension doesn’t get much more intense and whilst Ricky Ponting was disappointed, I bet he would be jumping for joy if the boot had been on the other foot.
Financial markets can turn on a sixpence (for younger readers, that’s a small pre-decimalisation coin worth 2.5p in current value) but the point is that small changes in the nuance of comments made by central bankers or government spokesmen or a minor shift the data can alter investors’ perception of risk and money that had flooded into a particular investment will leave like a scolded cat. With investors having sheep-like tendencies, there is never just one scolded cat; it is always a flow or flood or deluge that occurs and that is what causes the ebb and flow of exchange rates, equities, bonds and commodities. ( I apologise for the mixed sheep and cat metaphores but I think you get my point).
This is worth bearing in mind when you consider the rise and fall of the Pound in recent days. Sterling did not necessarily strengthen on its own merits in recent weeks. The flows back into Sterling from those who had been selling the pound came as US data dials started to twitch into the improvement zone and as funds flowed away from the US treasury markets and into higher yielding currencies. This statistic should be confirmed by May’s US Treasury Purchases data is published on Thursday. Obviously the UK interest rate at 0.5% is hardly high yielding but the Pound had been oversold and the potential for some Sterling recovery was an attractive lure.
However, many analysts are downgrading their economic growth expectations for the year ahead and that has changed investor perceptions. Funds are moving away from the higher yielders and Sterling which has probably reached its potential for the time being. This is causing weakness in the Australian and New Zealand Dollars which would both be much more affordable for those holding Sterling were it not for the fact that the Pound is weaker too.
Those funds are seeping back into the US Treasury certificates; strengthening the US Dollar. The other gainers in this environment are the Japanese Yen, from whence a lot of funds flowed while riskier investments were in fashion, and the Swiss Franc. The Canadian Dollar has also been swept along by USD strength and that is making life hard for those moving to Canada.
This week could change all that with inflation data from the UK, EU, New Zealand and the US, producer price and manufacturing data from America, retail sales numbers from the UK and US and unemployment numbers from the UK. If I had to put money on it, I would anticipate poor UK employment data, further declines in inflation across the globe, continued declines in retail activity and more doom, gloom and despondency. That is pretty much what most analysts are assuming, which means that any positive news is likely to be greeted with a very positive currency activity.
I think I managed to find the silver lining but we will have to wait for the data itself to see if that expectation becomes reality. Meanwhile, have a great week and I’ll leave you with this story. Dozens of people have been arrested in Bangladesh after a scam in which they called people on their mobile phone, claimed to be genies with supernatural powers and demanded the victims sent money to avert disaster for them or their families. So what happened to the ‘three wishes’ tradition then? If I was one of the victims, I would be suing for the money tree, the unlimited supply of Toblerone and peace in the Middle East as well. What’s wrong with that? What would you have wished for?