Today's Highlights

Australian election limbo leaves Aussie Dollar in same state
Stronger US Dollar could continue through the week
Canadian Dollar in the spotlight

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.

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 was still intact until Friday but we are seeing a test below the bottom of that channel. $1.2750 was crucial; as long as this pair stayed above this level in the short term, we remained in a medium term uptrend but the break below that line could bring a sharp fall to $1.22 or thereabouts.

Currency - GBP / Australian Dollar

The Australian Dollar is very mixed after the weekend’s Australian election. That is certainly not surprising when there is likley to be a coalition government emerging after the voteing was inconclusive. The issue that 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 currencies 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 appears to lack the gumption to shove the Euro to higher levels.

Currency - GBP / New Zealand Dollar

It is perhaps tempting fate to think it but the Pound might just have pushed the New Zealand Dollar to more attractive levels for those migrating to or importing from New Zealand. Last week's comments from the governor of the Reserve Bank of New Zealand opened a few eyes and made traders believe that the RBNZ is going to leave their base interest rate on hold for some time to come. If the RBNZ is happy with a brief spell of 5% inflation, there is no pressure on them to hike interest rates anytime this years and the higher yielding Australian Dollar will draw more funds from abroad, leaving the NZ Dollar to weaken in its wake. As you can see from the chart, the push above a trend line which has capped this pair for the last 12 months is a pretty significant event. Currently, the previous high level of roughly NZ$ 2.22 is still capping the market but a break of that resistance would open up a push to NZ$ 2.26 and perhaps, with a bit of luck and a fair wind, a rally to the top of the larger downtrend channel at NZ$ 2.36. I have my fingers firmly crossed for those in need of NZ Dollars in the longer term but short term buyers should be very wary of the effects of profit taking which could very easily undo all this good work.

Currency - GBP / US Dollar

As mentioned in the Euro- Dollar section above, these are turbulent times for the US Dollar. It is the bellwether for the whole global economy; if US consumers are busily buying up the shops, then the demand that pushes back up the supply chain increases production which increases wages which increases demand etc etc. However, US consumers are still struggling to get jobs, are finding the housing market tough, are saving rather than spending and are finding it tougher to borrow so the slowing pace of growth is not a surprise. As this happens, those with large sums to invest rend to seek assets which will guarantee they get their money back even if they won’t get a massive interest rate or dividend and that generally means they buy US Treasury’s (well the US government won’t default on its loans will it) and bonds of the 2nd largest economy in the world, Japan. Now I know that Japan was replaced by China as No2 after this week’s growth data but it is easier to buy Japanese government bonds than Chinese ones and if you buy Chinese assets, you have to use US Dollars to buy them anyway because the Yuan is so restricted. So the net result is that in times of stress, the US Dollar tends to strengthen. That has been the pattern of the last two years in the Sterling - US Dollar exchange rate and although we have seen some correction in that path over the last 4 months, we are still in the same downtrend as I write. Therefore, anywhere near to $1.60 is a great level to be buying US Dollar and anywhere near $1.54 is a great USD selling level.

Currency - GBP / South African Rand

Concerns over the pace of the global recovery are weighing on the South African Rand. This nervous reaction is understandable as investors sweep their funds into safe havens; in spite of all of the positive’s the South Africa Rand is still seen in the markets as an ‘exotic’ which is code for slightly risky and far less liquid than the ‘majors’. As a consequence, when investors are seeking safety, the lure of high interest rates in South Africa is offset by the certainty that comes from US or Japanese government debt. In essence the Rand should be far weaker than it is but it is at its strongest level against the Pound since mid June. The reason for that must have something to do with the value of South Africa’s exports which include gold, silver and diamonds. These too are seen as safe haven assets due to their intrinsic value and they are priced and traded in US Dollars which, as we can see is very strong at the moment. In the very short term however, R11.30 is a very good support level and R 11.60 is solid resistance. A break of either end of this narrow range would be highly significant but in the meantime, using this trading range as your guide is a very good plan.