Sterling dips on poor manufacturing data BoE - will they extend Quantitative Easing plans? Australian unemployment not as bad as forecast
Thursday, 9 July 2009
Today's Highlights
Sterling dips on poor manufacturing data BoE - will they extend Quantitative Easing plans? Australian unemployment not as bad as forecast
FX Market Overview
Yesterday continued in the recent theme of offering an odd mix of trading compared to the underlying data. As far as Sterling was concerned, traders and investors appeared to still be smarting from Tuesday’s poor manufacturing output figures and the Pound fell to the bottom of its recent trading ranges as a result. It is unclear whether yesterday’s announcement of regulatory changes which switch power to the BoE, had anything to do with Sterling’s dip but it did timidly rebound later in the day after a positive consumer confidence index and some slightly improved house market data. In fact the rebound was quite marked against the Australian and New Zealand Dollars but these were being sold by investors running for security as several key events were anticipated.
Those events include the G8 meeting; the word is that they will reinforce the view that further monetary stimulus is likely to be required if this fragile and faltering recovery is to be sustained. There is still a debate about whether this is a recovery at all so their sentiment is right even if we are not sure if they are speaking about the correct part of the cycle and that issue could be debated ad infinitum. One of the other issues vexing investors is what the Bank of England will do when it announces its interest rate decision today. There are many who believe we will hear of an increased level of cash injection into the UK economy and that would probably, on balance, be quite negative for the Pound. Of course it is rare for the BoE to have any kind of comment if they leave interest rates on hold, as they undoubtedly will do today. So any announcement of a press conference should be met with Sterling weakness initially. Sterling buyers ought to have a window of opportunity before that ‘pressa’ as they are known by traders who perhaps don’t have time in their busy lives to say ‘conference’.
Overnights news that the Australian unemployment levels were slightly better than forecast helped the Australian Dollar to stabilise after a day in which the AUD had been heavily sold. The unemployment level still rose to 5.8% but that was below the general consensus forecast of 6.0%. However, the Pound still managed to start today at stronger levels against the Aussie Dollar in spite of that good antipodean news.
The rest of today brings German inflation data, UK housing and trade deficit figures and from the US, we will see the weekly jobless claim numbers and inventory levels which highlight the potential for later demand. We will also have the European Central Bank’s monthly bulletin and that always has the potential to move the Euro.
And finally, pay attention everyone who has ever disassembled and rebuilt a Rubik’s cube or peeled the labels off and stuck them back on just to make it look like they could do the infuriating puzzle. Mr Rubik is at it again. The next demon puzzle is the 360 which is due in shops next week. It consists of little balls inside a large ball and will almost certainly drive us all bananas again. I suggest you buy one for your kids just to show them what we went through to get to adulthood. They’ll probably hate you for it later but it is good to learn about the frustration that inanimate objects can deliver while you are young.
Those events include the G8 meeting; the word is that they will reinforce the view that further monetary stimulus is likely to be required if this fragile and faltering recovery is to be sustained. There is still a debate about whether this is a recovery at all so their sentiment is right even if we are not sure if they are speaking about the correct part of the cycle and that issue could be debated ad infinitum. One of the other issues vexing investors is what the Bank of England will do when it announces its interest rate decision today. There are many who believe we will hear of an increased level of cash injection into the UK economy and that would probably, on balance, be quite negative for the Pound. Of course it is rare for the BoE to have any kind of comment if they leave interest rates on hold, as they undoubtedly will do today. So any announcement of a press conference should be met with Sterling weakness initially. Sterling buyers ought to have a window of opportunity before that ‘pressa’ as they are known by traders who perhaps don’t have time in their busy lives to say ‘conference’.
Overnights news that the Australian unemployment levels were slightly better than forecast helped the Australian Dollar to stabilise after a day in which the AUD had been heavily sold. The unemployment level still rose to 5.8% but that was below the general consensus forecast of 6.0%. However, the Pound still managed to start today at stronger levels against the Aussie Dollar in spite of that good antipodean news.
The rest of today brings German inflation data, UK housing and trade deficit figures and from the US, we will see the weekly jobless claim numbers and inventory levels which highlight the potential for later demand. We will also have the European Central Bank’s monthly bulletin and that always has the potential to move the Euro.
And finally, pay attention everyone who has ever disassembled and rebuilt a Rubik’s cube or peeled the labels off and stuck them back on just to make it look like they could do the infuriating puzzle. Mr Rubik is at it again. The next demon puzzle is the 360 which is due in shops next week. It consists of little balls inside a large ball and will almost certainly drive us all bananas again. I suggest you buy one for your kids just to show them what we went through to get to adulthood. They’ll probably hate you for it later but it is good to learn about the frustration that inanimate objects can deliver while you are young.
Currency - GBP / Australian Dollar
If you have read the rest of this report you will see a theme developing. The Pound is trading in remarkably well defined ranges on all fronts. The upward trend channel in the Sterling - Australian Dollar exchange rate is as clear as a clear thing in a clear pool of clear water. And we are heading towards the top of that range as I write. In essence this is all part and parcel of the ambivalence that traders are feeling towards the markets. If we had a clearer idea of where we are in the economic cycle, I am sure the Pound would be far weaker because the interest rate yields are more attractive than those of the UK and the British economy, we are warned, if s likely to face a more protracted slump with a much slower recovery. If you agree, then you will use the top of this current trading range as the target to buy Australian Dollars and not get too hung up on the unrealistic levels we saw briefly last autumn.
Currency - GBP / New Zealand Dollar
The Sterling - New Zealand Dollar chart has the appearance of a wedge of cheese. It is apparent that all traders are watching this same pattern and are happy to buy their NZ Dollars around NZ$ 2.60 and just as happy to buy Sterling around NZ$ 2.54. This 6 cent range is one of the narrowest I have seen in ages in this currency pair. You can see yourself from the chart, this is one of the most volatile exchange rates in the market and sharp spikes and troughs go with the territory. However, this narrowing of the range and, we hear, a reduced volume of trade are characteristics of a nervous trading environment. Traders are a bit like Newton’s ‘body at rest’. They need an external force to get them moving and while everyone is trying to assess where we are in the economic cycle and whether the recovery phase is anywhere near the light at the end of the tunnel, thin markets are highly likely. It does though mean that when those traders are shoved into action, the action will be fast and furious. Consequently, short term requirements are best managed within this trading pattern but longer term needs might be best met by placing ‘tongue in cheek’ orders at higher levels. It’s not shown on this chart but, having covered some of my requirement to buy NZ Dollars at current levels, I would be tempted to place a limit order for the rest at NZ$ 2.66. It may not be hit but, nothing ventured.....
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