FX Market Overview

Welcome to the Year of the Tiger and Happy New Year to all our Chinese readers.
If you haven’t read any newspaper, watched the TV news, spoken to a friend or left your house in the last 7 days you can be forgiven for not knowing that the Greek economy has been at the centre of all reports. The depth of the Greek economic woes are such that the European Central Bank and the heads of the other European countries have been forced to voice their support for Greece even if no money has been put on the table to support their assertions that they will stand by Greece in their time of crisis. Such support ought to have strengthened the Euro and averted further talk of crisis but the offer of assistance was made so begrudgingly and the offer so vague that the markets were not at all impressed and the Euro weakened throughout the latter part of the week.
And things got worse when the Eurozone economic growth data was announced. Germany’s economy failed to grow at all in Q4 of 2009 and Greece’s shrank by 2.6 percent through the year; in fact the entire Eurozone only grew by 0.1 percent. Portugal’s economy; another one on the list of those to be watched, also shrank and that really set the cat amongst the pigeons. The European Central Bank has been wary of starting to raise its base interest rate even though they were being urged to do so as recently as December. Contrary to recent positive rhetoric and the assertion that things were getting better the ECB may even have to cut their base rate and add further cash to the financial system if that kind of negative growth continues.
The Pound would certainly be commanding better exchange rates against the Euro were it not for the fear that Britain could be the next Greece. As we all know only too well, UK government and personal debt is monstrous; whichever party or parties are successful at the next election will have to cut spending, raise taxes and watch the pennies, all of which will stifle growth to some degree. So Britain’s economy isn’t out of the woods yet. Traders and investors are mostly steering clear of the Pound and that is keeping the Sterling based exchange rates within rather tight ranges. Against the US Dollar, Sterling is sharply lower that it was at the start f the year and that would be replicated in the Sterling - Euro exchange rate as well, were it not for the Greek story. As it is, those with Euros to buy are being offered the best exchange rate of the year. However, with all the bad news coming from Europe, the temptation for those needing to buy Euros is to wait for better levels but all the bad news is almost certainly factored into the value of the Euro by now. Figures from the Chicago Mercantile Exchange suggest the markets are positioned at their most negartive towards the Euro since Europe’s common currency was introduced more than a decade ago. Consequently, traders are only likely to react to good news rather than adding to their ‘short euro’ positions. That could result in a sharp appreciation in the value of the Euro, if (and it is a very big ‘IF’) anything positive comes from the Eurozone.
The Eurozone fall out has consequences elsewhere in the financial markets. Shares in banks were hit as investors feared their exposure to Greece and other economies caught in the Greek flak; commodities slipped for a while but regained some composure but oil dropped as the fear of a double dip recession knocked demand expectations. Risk became a four lettered word again so the Australasian currencies weakened as funds flowed back into the US safe haven but Sterling wasn’t able to capitalise on this weakness because it is being tarred with the Greek debt brush.
One currency that is picking up strength is the Japanese Yen after confirmation that Japan’s economy grew at 4.6 percent last year. That was above expectations and can only add to the Yen’s allure as a safe haven currency. Safe havens are likely to become increasingly attractive in the week ahead after China raised the level of reserves required by Chinese banks in yet another step to curb excessive growth.
Despite the fact that today is an American holiday and was a far East holiday at the start of the Chinese New Year; the rest of the week is big on data, especially from the UK. Inflation is forecast t have risen above the Bank of England’s outer limit of 3.0 percent prompting a sorry letter from the BoE Governor to the Chancellor, UK retail sales are expected to have slipped in January even on a seasonally adjusted basis and the minutes from the last BoE meeting will be published. This will be very interesting to read - if you like that kind of thing of course - the decision to leave the base rate alone and stop the Quantitative Easing program was seen as quite controversial at the time and we will hopefully get to read their reasoning. The week also brings inflation adn retail data from the US and a whole heap of other snippets of data from Europe, Canada and Australasia. Hang on to your hats.
And finally, what a terrific weekend of sport. I am, as I assume everyone else in the UK is, now an expert on everything to do with winter sports but I had to tear myself away from some gripping rugby to watch. Well done Wales for that comeback although it was interesting that Jonathan Davies wasn’t whingeing this week about only scoring when the opposition was down to 14 men. Well done France who had the cutting edge that Ireland lacked for some reason and well done to England who won despite the lack of finishing finesse but who will have to do much better next week.
And absolutely finally, did anyone see Gordon Brown’s interview? Nah me neither.