FX Market Overview

It seems like if you have a Toyota, you will be paying a visit to the garage in the next few weeks to get the accelerator or the brakes or something fixed under one of the manufacturer’s recalls. It’s great for turnover at the local dealer level but not so good for the manufacturing end of Toyota and it should be remembered that a lot of Europe’s Toyota’s are built in the UK. We will have to wait to see if there are any longer term repercussions of all this expense. And a Commander in the Metropolitan Police has proven himself to be a bit of a Dizaei rascal. Ali Dizaei was jailed for 4 years yesterday for perverting the course of justice, amongst other things, and was described as a bully, a liar and a cheat. So at least there is a career in politics for him when he gets out of clink.
The lack of data yesterday left rumour and speculation to rule the roost. Continuing fears over the state of government debt in certain European countries meant the euro remained weak and comments from one ex IMF member that the UK should be treated in the same way as Greece, sent traders scurrying away from the Pound which ended the day lower on most exchange rates. Traders and investors know that the UK is in very much the same position as Greece, Portugal and Spain in that government debt is running at record levels and it will take whichever party wins the upcoming election many years to resolve the problem.
However, figures taken from the Chicago Mercantile Exchange and anecdotal evidence from elsewhere suggests traders are more negatively positioned towards the Euro than they have been since the currency’s launch 11 years ago. So it should just weaken then shouldn’t it? Well not necessarily; the truth is that whenever everyone thinks one thing is going to happen, the ones who most often make money in this market are the contrarians who bet the other way. The fact is that if everyone is short of Euros, it wouldn’t take a lot of good news to cause a very dramatic surge in the value of the currency. In essence, if there were just enough good news to start a bit of Euro buying as traders unwind their short Euro contracts or ‘short covering’ as it is termed, it would make traders panic and you could see a very sharp appreciation in the value of the Euro which would catch out a lot of those who are not constantly watching the financial markets.
Many traders and commentators were intrigued by the early departure of ECB president Trichet from a central bankers meeting in Sydney in order to attend an ECB council meeting. Was it an emergency discussion of Greece, could the ECB head be planning his departure, where they serving his favourite Strudel for pudding? Who can tell but I am sure there are far more theories out there than that.
Nevertheless, if you are a trader selling the Pound, selling the Euro and nervous enough to sell out of your Australasian Dollar holdings as well, where do you put your cash? Well the tried and tested US Dollar seems to be the safe haven of choice at the moment which is why the US Dollar is maintaining its recent strength as I write.
In other news, the Bank of International Settlements has warned that it thinks banks should hold much larger capital reserves just in case the credit markets shut down. They didn’t mention Greece, Spain, Portugal or the UK but I think we all know what they were thinking.

So as Monday fades into our memories, most traders are looking forward to the Bank of England Quarterly inflation report due tomorrow; which will be interesting as the UK certainly has inflation, mostly related to energy products but we barely have any growth. If the BoE was to just stick to its inflation control remit, then UK interest rates ought to be rising already but they cannot do so without shutting the door on potential growth. Dilemmas, Dilemmas. We are also awaiting the UK trade deficit data this morning which ought to have widened and tonight brings Australian Consumer confidence data which will be very closely watched.
And finally, in an unambiguous piece of ironic statement, Harriet Harman, the woman who wants to ban the word Chairman for being sexist, and who would probably replace the word manual with womanual if she could, has been nominated for the title of Rear of the Year. And just as the X factor record was kept off the Christmas No 1 spot by Rage Against the Machine, I think Harman could nick the title from Kylie, Beyonce and the Jennifers. I'd vote for her just to see whether she turned up for the awards ceremony.