FX Market Overview

The main feature of Friday’s trade was US Dollar strength. Sterling and the Euro both suffered at the hands of the USD but Sterling fared a tad better than the Euro due to ongoing Eurozone debt concerns. The Dollar was held at bay though by the Japanese Yen which remains at uncomfortably strong levels as far as the Bank of Japan is concerned.
The Dollar may well continue in this strengthening path after it broke through and remained below very significant resistance against the Euro. Having closed the week below $1.27 against the Euro, technically speaking, the USD could well make a further three cents of gain without meeting further resistance. The move to more risk-averse trading patterns does tend to favour the USD as US treasuries remain the premier safe haven as far as international investors and institutions are concerned.
For its part, the Euro is still generally supported by the size and capacity of the economic group but Greece’s debt and problems elsewhere are tending to overshadow any good news coming from the likes of Germany and France. Traders were very concerned that ECB member Axel Weber, who is normally very hawkish, was calling for the economic stimulus provided by the ECB and IMF to be kept in place for at least another 9 months. If he is worried about the poor potential for growth and perhaps the even more worrying potential for another recession, then we should all be concerned. Today’s data brings purchasing managers indices from around the Eurozone and we get EU inflation later in the week so we may have a bit of an insight into what is troubling Mr Weber.
Sterling remains quite well supported but we have to wonder how long that will last. After several weeks of trying to make more significant gains above the existing ranges, the Pound is still trapped. That suggests the impetus is lacking and when a currency lacks momentum, traders will tend to take profit at the highs and lows of the existing trend pattern. If that is the case here, then Sterling is rising for a fall. This week’s data diary is light but Friday’s 2nd estimate of the Q2 economic growth data has the potential to cause a stir.
Elsewhere, the big news is the Australian election which produced no overall majority. The various parties are doing what is now familiar to everyone in the UK; scrabbling around trying to reach an agreement to form a coalition. Julie Gillard did what Gordon Brown threatened to do when he took over the job of PM from Tony Blair; call an election to gain a proper mandate. Sadly, as it appears it would have with G Brown, it backfired and she is left with the problem of having to water down or give up some policies in order to gain voted from other minority parties. The effect on the Australian Dollar has been muted so far but it does remain vulnerable to changes of policy brought about by political expediency.
The Canadian Dollar is also in the news by proxy really as the bid from BHP Billiton for Canadian fertiliser producer, Potash remains a major talking point. Other bidders may be emerging though so this is not necessarily a straightforward negotiation but if anyone outside Canada buys Potash, the Canadian Dollar has the capacity to strengthen sharply. Beware if you need to buy CAD because this could happen at any time if a deal is announced.
In other news, we have all laughed about the notice on packets of peanuts which says “May contain nuts” but a chap who bought a card for his granddaughter’s 2nd birthday which said “2 Today” on the front in big yellow letters was amazed to find a sticker attached which said “Not suitable for children under Three”. I do hope they don’t sort all this health and safety stuff out; we’d have nothing to laugh at.