Today's Highlights

Strong UK data boosts Sterling
Canadian Dollar in the spotlight
Beware the profit takers

FX Market Overview

It has been a week which has done nothing to allay fears over the slowing pace of the global economic recovery. The bright spots in the UK were a fall in government debt levels and rising retail sales but stubbornly high inflation and sluggish growth have kept the pressure on. Three of yesterday’s data releases make the case for the global economy bears; the Philadelphia Fed survey of factory sentiment fell to its lowest level since July 2009, the weekly measure of fresh claims for US unemployment welfare payments rose by 12,000 and, in Canada wholesale shipments fell by 0.3 percent last month.
Understandably the Canadian Dollar had a poor day, slinking back to its weakest level against the Pound within its current range. However, the potential for a takeover in which Australian company BHP Billiton is seeking to buy Canadian company, Potash Corp in a deal worth some C$40 billion is keeping traders on their toes. A trade of this size would definitely have a short term effect on the value of the Canadian Dollar; strength if it goes through and weakness if it doesn’t plus an equal and opposite effect on the Aussie Dollar. Few traders have the inside track on the progress or otherwise of the bid so sitting on their hands is probably the most astute position to take. This afternoon’s Canadian inflation data is likely to add more weakening pressure on the Canadian Dollar if the numbers are as poor as forecasts suggest.
The US Dollar was far more mixed. There is a dilemma amongst investors when poor US data emerges; sell the US Dollar and run away to safe havens elsewhere or buy US Treasury’s as a safe haven and therefore buy the US Dollar to fund the purchase. When they run away from the USD, the Japanese Yen and Swiss Franc both strengthen and so does the Pound but to a far lesser extent.
However, Sterling had quite a good day yesterday, rising to the top end of its ranges after the positive data mentioned above. It remains at those levels this morning but he markets are edgy and after a week in which the Pound has gained strength, a period of profit taking before the weekend should be expected. This is especially so when there is absolutely no meaningful data due to be released from the UK today.
Comments from the Governor of the Reserve Bank of New Zealand about expected higher levels of inflation have weakened the NZ Dollar overnight. Governor Bollard commented that he felt tax hikes would push inflation up to 5 percent and didn’t show any alarm at inflation around those levels. That would suggest he is pretty sanguine about such a move and that poured very cold water on anyone looking for higher NZ interest rates in the short term. Without the lure of higher yields and in an environment where risk is a four letter word, NZD weakness was inevitable. Sterling is pressing the NZD against the same ceiling it has visited a number of times but failed to break. If, as I suspect, traders are likely to take profit on Sterling’s strength, today is the day that NZ Dollar buyers may want to cover some of their requirements.
The big news in Australia is the Election taking place this weekend. The outcome is very uncertain and a coalition is a real possibility. I wouldn’t be at all surprised if the Australian Dollar was sold off in late trade in New York before the markets shut down for the weekend and that is a perfect opportunity to place an automated order at perhaps a slightly tongue in cheek level. Who knows; you may just get your wish and the cost of an order is zippo, nish, nada. Mad not to really.
Other than the Canadian inflation numbers, there is really nothing of note in today’s data diary. Whilst that probably means traders will just take profits on the week’s movements which mean a bit of correction in exchange rates, it does mean I may have the time to get out and see the Spitfire flying over London. This flypast to mark the 70th anniversary of Churchill’s “never in the field of human conflict was so much owed by so many to so few” speech, is set to pass over many of the airfields used during the Battle of Britain and along the Thames. I hope you get to see and especially hear the flight because you are probably the same as me. The sound of Merlin engines in the sky and the silhouette of those elegant aeroplanes never fails to raise the hairs on the back of my neck and yet I wasn’t even born until 14 years after the war ended so it must just be an inherited subconscious thing I guess.

Euro - US Dollar

I don’t normally cover this pair specifically because all the details are generally covered in the Sterling - Euro and Sterling - US Dollar sections but this currency pair is the centre of the universe at the moment. What happens in America has a direct impact on the rest of the global economy because America is the world’s consumption engine. And what happens in Euro has a direct impact on the Pound because Britain does such a lot of its overseas trade with European countries. What you can see in the chart above is a recovery in the Euro as the US Dollar started to weaken. The Euro strength was a long overdue reaction to 18 months of decline and what has happened to the US Dollar is weakness derived from improving confidence amongst investors; leading to them moving money away from the US safe havens and into more lucrative assets. However, August has been a month of correction as nervousness over the state of the US economic recovery has sucked funds back into the US treasury market and as fears re-emerged over the state of the Greek and Spanish economies. The upward trend is still intact as I write but we are seeing a test of the bottom of that channel. $1.2750 is crucial; as long as this pair stays above this level in the short term, we remain in a medium term uptrend but a break below that line would bring a sharp fall to $1.22 or thereabouts. If we stay in the uptrend, another test of $1.33 is very plausible and US Dollar buyers may just get the second chance that many have been praying for.

Currency - GBP / Australian Dollar

The Australian Dollar is very mixed as we head into this weekend’s Australian election. That is certainly not surprising when there is a distinct chance of a coalition government emerging after the votes have been counted and when the very issue which caused the downfall of the previous Prime Minister is likely to rear its ugly head in the weeks ahead. Kevin Rudd lost his job over the plans to tax mining companies at 40%; it was seen as damaging to an industry which is so important to the Australian economy and as soon as his successor took office, she negotiated that down to 30% with other concessions to minimise the impact. The fear amongst miners is that if the Green party manages to become the power broker in a hung parliament, they will demand an increase in this tax and that, they say, will damage jobs and incomes. All this uncertainty has rocked the Aussie Dollar and funds have flowed out of Australian bonds into places like New Zealand and Japan ahead of the voting. Whether those funds will slope back in again is open to debate and dependent on the outcome but, as we have seen since the end of July, Australian Dollar buyers do well if they can exchange their funds anywhere near to A$ 1.74 which is roughly where the interbank market is trading right now.

Currency - GBP / Canadian Dollar

The Sterling - Canadian Dollar exchange rate has been in a broad downward trend since the beginning of 2007. It is a broad range with the top being around C$ 1.63 and the bottom at C$ 1.43 and we tested the top of that channel in the last few days. As I write, we are in a downward track below the upward trend line that supported this pair through June and July. As long as we stay below 1.6290, there is every chance we will see further falls to C$ 1.58 and perhaps as low as C$ 1.5645. The Pound is just finding it hard to make gains as analysts and commentators try to determine whether the UK government’s cuts are slowing the economy. However, the Canadian Dollar is less buoyant than it was as its near neighbour and major client, America sees slowing growth. So the fact that the Pound has managed to maintain itself at the top of the channel above C$ 1.60 may be just a short term benefit for CAD buyers rather than a change of direction. There is a saying in trading that ‘the trend if your friend’ and if that is true, then this is the right level at which to be buying Canadian Dollars because the trend is still downward.

Currency - GBP / Euro

The Greece story remains in the background even as German and French data shows twitches of improvement. Traders and investors are still very nervous about getting too heavily involved in the euro until they are much more confident that the worst is behind us. Traders took heart from the fact recent European government bond auctions have been well received by the markets and the interest rates demanded by those bidding for the bonds have been lower than most had feared but that hasn’t been enough to boost the Euro. Events elsewhere have made investors slip away from the Euro and into lower yielding but intrinsically safer assets including US treasury certificates, Japanese Yen and Swiss Francs. The Japanese and Swiss central banks are very concerned about this move but will find it hard to weaken their respective curr3encies in the current environment. So the gently improving Pound has managed to push the euro up above €1.20 where it has languished for the last few days. It may not be a very technical term but the Pound does look tired at these levels and certainly lacks the gumption to shove the Euro to higher levels.