Greece plan not to everyone’s taste
Buoyant British service sector boosts Sterling
Interest rate decisions dominate
Thursday, 4 March 2010
FX Market Overview
Greece came through on its promise to increase its planned cuts by half as much again and deliver €4.8 billion of cuts to try to appease the rest of Europe and hopefully (from the Greek side of the equation) give Germany and France enough incentive to provide some level of financial support for the troubled Greek economy. At first glance, they may not have reached that goal after German Chancellor, Angela Merkel suggested that her meeting with Greek Prime Minister, George Papandreou today would not be about cash from Germany to Greece but about Greece raising its own funding and she felt that Greece may have done enough to encourage the financial markets to invest.
Both Prime Minister and Chancellor are treading a narrow path with their own electorate; Germans aren’t happy to pay for Greece’s past problems and Greeks aren’t happy to see services cut. Such is the joy of politics guys. Papandreou sees this as “a historic moment for the European Union.” and he may well be right. Either the EU will come out f this looking like the unified force that it always claims to be or it will look like a group of nations more involved in individual nationalist aims. Only time will tell but the financial markets are ambivalent thus far and the Euro is meandering in a narrow range.
Sterling had a better day but I think the headline that said “Sterling soars” was overplaying the moves just a tad. Sterling may have gained a cent against the US Dollar and the Australasian currencies but that is no more than a normal intraday movement. If you could call the flight of paper dart ‘soaring’ than Sterling may well have done so. My paper darts tend to make it to the other side of the room before crashing into the sofa but I digress. Sterling’s slightly better form came after the Service sector purchasing managers’ index rose to its highest level since January 2007. This was well above expectation and, it must be said, slightly out of kilter with recent data from other sectors like retail and construction. So whilst it is great that the buyers in the service sector are happier and super that many analysts see this as evidence that the UK may be exiting recession faster than previously forecast, I would urge caution before believing this to be the swallow that makes the summer. Surely, unless other sectors start to gather pace, there will be no one for the service sector to service. Sterling’s gains haven’t followed through into this morning’s trading.
Sterling was also supported by the rumour that the sharp fall in the Prudential’s share price may jeopardise the deal with AIG; hence no need for Sterling to be sold to fund the buyout. That story continues; this is only a rumour after all.
From the US last night we heard that the institute of supply managers report was, like the UK equivalent, very upbeat on the service sector and the ADP report on payrolls was one of the most encouraging on record and the Federal reserve’s Beige Book was quite upbeat as well but warned that the heavy snow storms in washington and elsewhere will have dampened growth in the 1st quarter of 2010.
In other news, the rise in oil prices back above $80 per barrel kept the Canadian Dollar in demand and, because oil is priced and traded in US Dollars, this will keep demand higher for US currency. But today’s big news is the twin interest rate decisions from the Bank of England and the European Central Bank. I say big news but to be honest, nothing is expected to be changed or announced and we ought to end the day with the Eurozone base rate at 1.0 percent and the UK base rate at 0.5 percent, no change is forecast to the BoE’s quantitative easing program and we are highly unlikely to even get a press conference from the BoE. The ECB does give a press conference after its meeting which can yield clues to the future policy but not always. It will be interesting though to see if the ECbn speaks about Greece after Chairman Jean Claude Trichet was rumoured to have described the Greek problem as a roadblock on the slip road to recovery. So if you can tear yourself away from news of Carla Bruni’s slinky dress and John Terry being booed, then there are things to watch out for today.
But if central bankers blathering on about fiscal prudence and the like is not your cup of tea, firstly that means you are of sound mind, so congratulations on that, and secondly, you could always do as polish plumber Jacek Slominski did, search under your house for a magic stone and use it to heal bad backs and other ailments. Apparently the stone, found in the garden of his home in Bialystok, has a large Z carved into it and as soon as he touched it, his bad back got better. People now travel from miles around to touch the stone and it heals them. Now that’s a business opportunity...and it is recession proof.
Both Prime Minister and Chancellor are treading a narrow path with their own electorate; Germans aren’t happy to pay for Greece’s past problems and Greeks aren’t happy to see services cut. Such is the joy of politics guys. Papandreou sees this as “a historic moment for the European Union.” and he may well be right. Either the EU will come out f this looking like the unified force that it always claims to be or it will look like a group of nations more involved in individual nationalist aims. Only time will tell but the financial markets are ambivalent thus far and the Euro is meandering in a narrow range.
Sterling had a better day but I think the headline that said “Sterling soars” was overplaying the moves just a tad. Sterling may have gained a cent against the US Dollar and the Australasian currencies but that is no more than a normal intraday movement. If you could call the flight of paper dart ‘soaring’ than Sterling may well have done so. My paper darts tend to make it to the other side of the room before crashing into the sofa but I digress. Sterling’s slightly better form came after the Service sector purchasing managers’ index rose to its highest level since January 2007. This was well above expectation and, it must be said, slightly out of kilter with recent data from other sectors like retail and construction. So whilst it is great that the buyers in the service sector are happier and super that many analysts see this as evidence that the UK may be exiting recession faster than previously forecast, I would urge caution before believing this to be the swallow that makes the summer. Surely, unless other sectors start to gather pace, there will be no one for the service sector to service. Sterling’s gains haven’t followed through into this morning’s trading.
Sterling was also supported by the rumour that the sharp fall in the Prudential’s share price may jeopardise the deal with AIG; hence no need for Sterling to be sold to fund the buyout. That story continues; this is only a rumour after all.
From the US last night we heard that the institute of supply managers report was, like the UK equivalent, very upbeat on the service sector and the ADP report on payrolls was one of the most encouraging on record and the Federal reserve’s Beige Book was quite upbeat as well but warned that the heavy snow storms in washington and elsewhere will have dampened growth in the 1st quarter of 2010.
In other news, the rise in oil prices back above $80 per barrel kept the Canadian Dollar in demand and, because oil is priced and traded in US Dollars, this will keep demand higher for US currency. But today’s big news is the twin interest rate decisions from the Bank of England and the European Central Bank. I say big news but to be honest, nothing is expected to be changed or announced and we ought to end the day with the Eurozone base rate at 1.0 percent and the UK base rate at 0.5 percent, no change is forecast to the BoE’s quantitative easing program and we are highly unlikely to even get a press conference from the BoE. The ECB does give a press conference after its meeting which can yield clues to the future policy but not always. It will be interesting though to see if the ECbn speaks about Greece after Chairman Jean Claude Trichet was rumoured to have described the Greek problem as a roadblock on the slip road to recovery. So if you can tear yourself away from news of Carla Bruni’s slinky dress and John Terry being booed, then there are things to watch out for today.
But if central bankers blathering on about fiscal prudence and the like is not your cup of tea, firstly that means you are of sound mind, so congratulations on that, and secondly, you could always do as polish plumber Jacek Slominski did, search under your house for a magic stone and use it to heal bad backs and other ailments. Apparently the stone, found in the garden of his home in Bialystok, has a large Z carved into it and as soon as he touched it, his bad back got better. People now travel from miles around to touch the stone and it heals them. Now that’s a business opportunity...and it is recession proof.
Currency - GBP / Australian Dollar
We have to resort to long term charts to get any picture of what is going on with the Sterling - Australian Dollar chart. This pair fell to test the bottom of a trading range which has existed since 2006 after the Reserve Bank of Australia raised the base interest rate to 4.0% and after very strong employment and housing data. You would have to be a Gobi Desert hermit not to know that the Australian economy is amongst a very small handful which have not entered recession and which are exiting the downturn with aplomb. Think China, Canada and Australia and you have probably covered the major ones already.
So, at a time when the UK is in such dire straits and when British government debt is being compared to the embattled Greece, it is hardly surprising that the Sterling - Aussie Dollar exchange rate is at its lowest ebb in 25 years. It is hard to say whether this will get worse before it gets better but the impending UK election and the potential for a hung parliament may well make things tricky for the Pound.
So, at a time when the UK is in such dire straits and when British government debt is being compared to the embattled Greece, it is hardly surprising that the Sterling - Aussie Dollar exchange rate is at its lowest ebb in 25 years. It is hard to say whether this will get worse before it gets better but the impending UK election and the potential for a hung parliament may well make things tricky for the Pound.
Currency - GBP / Canadian Dollar
The major headlines for this week for the Canadian Dollar have been the fact that the Bank of Canada left their base interest rate on hold at 0.25 percent and that the price of oil (a significant Canadian export) has stabilised around $80 per barrel making Canada’s sand oils economical viable to extract. Beneath the interest rate story is the prospect for a rate hike as early as June. The BOC made it clear that they wouldn’t hike until then but most traders are assuming that June will therefore be the start date for a sequence of interest rate hikes. The Canadian Dollar is also picking up strength from investors seeking somewhere safe away from the beleaguered Euro and are dodging the dodgy Pound on their way across the Atlantic. The next Canadian interest rate decision is 20th April, followed by the Bank of Canada’s Monetary Policy Report on 22nd April and that will include a new quarterly forecast which will be very closely followed.
In the meantime, stronger commodities, an upturn in America’s fortunes and a steady demand for currencies in countries which look to be emerging well from the global slowdown will keep the Canadian Dollar in a position of strength. Thais is clearly fantastic news for anyone moving funds eastward across the North Atlantic but not so welcome for those migrating to, importing from or investing in Canada from the UK. The saving grace is that we haven’t fallen all the way down to 1976 low of C$ 1.52 or the 1986 low of C$ 1.4580 but we are very close as the long term chart above shows. I am fearful that we will slide towards these levels in the weeks ahead unless something significant changes in the market sentiment towards Sterling or we have a sudden news story which unsettles the commodity markets.
In the meantime, stronger commodities, an upturn in America’s fortunes and a steady demand for currencies in countries which look to be emerging well from the global slowdown will keep the Canadian Dollar in a position of strength. Thais is clearly fantastic news for anyone moving funds eastward across the North Atlantic but not so welcome for those migrating to, importing from or investing in Canada from the UK. The saving grace is that we haven’t fallen all the way down to 1976 low of C$ 1.52 or the 1986 low of C$ 1.4580 but we are very close as the long term chart above shows. I am fearful that we will slide towards these levels in the weeks ahead unless something significant changes in the market sentiment towards Sterling or we have a sudden news story which unsettles the commodity markets.
Currency - GBP / Euro
Greece has offered a package of austerity measures which ought to save the beleaguered country some €4.8 billion in the year ahead. That seems to have appeased the rest of the Eurozone for the time being and should ensure Greece gets some financial support from its bestest mates the Germans and the French but the announcement wasn’t greeted with a sudden rush of Euro buying. That suggests the financial markets are either more wary of the plan than the EU finance ministers appear to be or that traders always knew something would be resolved but not necessarily the full detail of the shape that resolution would take or perhaps that the old adage that there’s ‘many a slip twixt cup and lip’ may well apply. Greece has a long road to follow to get all their plans in place and the resistance of the Greek people is the most sizable hurdle.
Germany and France also have the problem of sneaking funding into Greece through proxy banks because, by the letter of the Euro agreement, they shouldn’t act to bail out another member state and the German and French public don’t seem any keener than Angela Merkel to be paying for Greece’s profligate and corrupt past. So here we sit with Sterling being battered slightly more than the Euro because we have just as many debt worries as Greece and we have the hassle of anm election and the potential for a hung parliament to contend with. No one can be at all surprised that the Pound is on the back foot and no one should be under any misunderstanding that the Pound could well fall further in the months ahead. Thanksfully we are getting spikes and troughs in this currency pair and these are offering slivers of hope in amongst all the doom and gloom but capturing a spike in this market manually takes the skill of the Karate Kid’s mentor Mr Miyagi using chopsticks to catch flies. A simpler technique is to place an order in the market to sit in wait for the right exchange rate and then strike automatically like a ninja. This martial arts analogy has probably gone too far so I’ll leave it there. Yours sincerely. Grasshopper.
Germany and France also have the problem of sneaking funding into Greece through proxy banks because, by the letter of the Euro agreement, they shouldn’t act to bail out another member state and the German and French public don’t seem any keener than Angela Merkel to be paying for Greece’s profligate and corrupt past. So here we sit with Sterling being battered slightly more than the Euro because we have just as many debt worries as Greece and we have the hassle of anm election and the potential for a hung parliament to contend with. No one can be at all surprised that the Pound is on the back foot and no one should be under any misunderstanding that the Pound could well fall further in the months ahead. Thanksfully we are getting spikes and troughs in this currency pair and these are offering slivers of hope in amongst all the doom and gloom but capturing a spike in this market manually takes the skill of the Karate Kid’s mentor Mr Miyagi using chopsticks to catch flies. A simpler technique is to place an order in the market to sit in wait for the right exchange rate and then strike automatically like a ninja. This martial arts analogy has probably gone too far so I’ll leave it there. Yours sincerely. Grasshopper.
Currency - GBP / New Zealand Dollar
The Sterling - New Zealand Dollar exchange rate has at least had the decency to bounce a little bit after plummeting as most other Sterling related exchange rates have done. After trying hard to bget to NZ$ 2.30 twice in January and February, this pair plunged nearly 17 cents to the 1st March after a string of warnings about the state of the UK economy and fears over the potential for a hung parliament after the impending UK election. On the other side of the coin, the New Zealand economy is performing very well and my colleague Sam Stanley has been back in New Zealand visiting his family for the last three weeks which is curiously correlated with the advance of the Kiwi Dollar. I am sure there is no connection but it is a little spooky don’t you think.
Either way, Sterling managed to find some buyers as profits were taken and having fallen through the NZ$ 2.1850 support on the last day of February, has been back up to test that level in the last few hours. Sadly the Pound didn’t have the momentum to push back above that level so we are in no man’s land as I write. The problem is that the UK election is getting nearer, even though we are only guessing at 6th May as a likely polling day and the opinion polls are just as vague as ever. Consequently, we are still seeing weakness in the Pound through nervousness over the UK’s political and fiscal position. I remain concerned that the Pound may well drop back to the NZ$ 2.12 we saw a couple of days ago and perhaps to the NZ$ 2.10 level last seen in 1984.
Either way, Sterling managed to find some buyers as profits were taken and having fallen through the NZ$ 2.1850 support on the last day of February, has been back up to test that level in the last few hours. Sadly the Pound didn’t have the momentum to push back above that level so we are in no man’s land as I write. The problem is that the UK election is getting nearer, even though we are only guessing at 6th May as a likely polling day and the opinion polls are just as vague as ever. Consequently, we are still seeing weakness in the Pound through nervousness over the UK’s political and fiscal position. I remain concerned that the Pound may well drop back to the NZ$ 2.12 we saw a couple of days ago and perhaps to the NZ$ 2.10 level last seen in 1984.
Currency - GBP / US Dollar
The US economy is easing its way out of recession and the US dollar is displaying the enthusiasm of investors and traders for that recovery. There is also an element of safe haven buying into the US Dollar from investors who see the Euro as problematic and the Pound as a major concern. On the UK side of the Sterling - US Dollar exchange rate things are not good. The UK government debt is worrying credit ratings agencies, any election is likely to unsettle a currency but one that seems to be heading for a tight result is even more nerve racking and the UK may have just about exited recession in Q4 of 2009 but the annualised figures were revised downward and that doesn’t help Sterling.
So we saw the Pound fall from $ 1.6450 to $ 1.48 in just 6 weeks; that 10 percent drop will have benefitted UK exporters and caused all manner of hassle for UK importers who will be delighted to see that when this exchange rate hit the trendline support at 1.48, a line that can be tracked all the way back to January 2008 and a rate which coincided with the 61.8% Fibonacci retracement level, it bounced. This is the clearest signal you could have that this market is being traded very much on a technical basis and that is often the case when things are so unsettled. As long as the Pound manages to remain above $1.48, we could see further gains in this pair but I am very fearful that a fall below this level opens up the potential for a fall to 1.4336; the next Fibonacci level.
So we saw the Pound fall from $ 1.6450 to $ 1.48 in just 6 weeks; that 10 percent drop will have benefitted UK exporters and caused all manner of hassle for UK importers who will be delighted to see that when this exchange rate hit the trendline support at 1.48, a line that can be tracked all the way back to January 2008 and a rate which coincided with the 61.8% Fibonacci retracement level, it bounced. This is the clearest signal you could have that this market is being traded very much on a technical basis and that is often the case when things are so unsettled. As long as the Pound manages to remain above $1.48, we could see further gains in this pair but I am very fearful that a fall below this level opens up the potential for a fall to 1.4336; the next Fibonacci level.
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