FX Market Overview

There was only one news story yesterday and that was the fall in the value of the Pound. Regular readers will know that I have long wondered what exactly was keeping the Pound in this position of unsupported levitation. All the news is bad, even the positive economic growth data has the potential to be revised downward, just as the previous data was, and the fears over the prospects for the UK debt levels and economic performance have been there for some time.
Oddly though it took a survey showing that the Conservative Party lead may have shrunk to just 2 percentage points to bring the fears to the surface and start a run on Sterling. The root of the fear is that a hung parliament would leave wishy-washy government without the strength or majority to tackle the massive budget deficit and debt levels. That would be very bad indeed for the Pound, as shown by the sharp depreciation in the value of Sterling that we saw yesterday.
The Pound fell below $1.50 against the US Dollar, below €1.10 against the Euro and lower against everything else on the planet; even the Zimbabwean Dollar for goodness sake. At one stage, stop loss orders were triggered and the Pound fell a cent against the Euro in a matter of a minute or so. That corrected itself a few minutes later but it did leave traders and investors rather unsettled for most of the afternoon session.
Sterling recovered some of its composure in later trade as traders took profits and closed out some of their ‘short sterling’ positions. This short covering is normal after such a sharp drop but it doesn’t necessarily mean the Pound is out of the woods. There is clearly nervousness that will continue until this Thursday’s Bank of England interest rate announcement. No change is forecast to the base rate but there is the potential for further cash injections into the financial systems through expansion of the bank’s quantitative easing program and that would also be negat9ve for the Pound.
In other news, the Reserve Bank of Australia did as forecast overnight and raised their base interest rate by 0.25 percent to 4.0 percent. That is understandable when the Aussie economy is facing its greatest job boom in three years and rapidly rising business confidence. The other overnight news from Australia was a 47.6 percent annualised rise in building permits and a 1.2 percent monthly rise in retail sales. It seems the RBA has done the right thing. The Australian Dollar is most likely to gain further strength as it offers the most attractive interest rates in the G10 and one of the most robust economies in that select group.
Today’s data is a just as likely to cause excitement with Eurozone inflation at both the producer and consumer levels, an interest rate decision from the Bank of Canada and the US Federal Reserve’s beige book to contend with. Obviously, from the Euro’s perspective, inflation going up is probably a god thing as long as the rise isn’t excessive but oil has been rising steadily over recent months and the Euro has fallen against the US Dollar and Japanese Yen so that will have spurred some gains in the cost of living. The rise in oil prices had helped the Canadian economy; it being a net exporter of oil. But Canada is also doing rather well as the US eases its way out of recession so the Bank of Canada may not look to raise interest rates just yet but it will be on the agenda some time soon.
As far as the Beige book goes, well it is a snapshot of economic trends in the US economy as seen by the various Federal Reserve boards. I would expect their view to be rather positive and the US dollar to react accordingly. However, that reaction may well be US Dollar weakness because, if investors are buoyed by what they hear, they may well sell some of their US Dollar holdings to invest in the ever more attractive yield offered by Australia for example and that may give sterling some respite.
So eyes down for another lively day in the financial markets. We haven’t had this kind of volatility for some time and I know that many of you managed to buy Sterling very cheaply yesterday, so well done you. And whilst we have a feeling Sterling is still under the cosh, anything could happen in the intraday volatility so market orders are your best friend if you want to target specific levels.
And finally, raining cats and dogs is an odd expression but one that was so apt over the weekend in the South of England. However, ‘raining fish’ is a saying that will stay with the residents of Lajamanu in the Northern Territory of Australia after hundreds of spangled perches fell on the village. The fish appear to have been sucked into the air during a thunderstorm and finally fell in a rain storm onto Lajamanu which is 326 miles from the nearest river.