FX Market Overview

Welcome to September and how ironic that the 1st day of autumn brings the best weather of the week in the UK. Must be all that global warming I guess. That seems to be what we blame everything on these days but scientists at CERN, the European Organization for Nuclear Research, have directly linked climate change to solar activity. Sadly, the inconvenient truth is that you can’t tax solar activity so we will continue to be taxed on anything that produces carbon because it is the more useful theory to governments; the external threat that can’t answer back. CERN are not shouting about their results though; as an organisation which relies on government backing, it could be very inconvenient to bite the hand that feeds by diminishing the argument for extra taxation.
Eurozone inflation was unchanged in August at 2.5% according to the 1st estimate of the figure. That prompted analysts to up their annual forecasts to 2.7% or thereabouts for the rest of the year. It would suggest the European Central Bank should be looking hard at whether they should be increasing interest rates but, as we heard last week, that is not on the current agenda. The Eurozone unemployment level, at 10% is a strong argument against higher interest rates and, although it didn’t grow last month, it didn’t shrink either. That remains a worry for the Eurozone authorities. Meanwhile, the plan to increase support funds for the rest of the Eurozone passed one test in Germany yesterday but Chancellor Merkel has a serious battle on her hands from within her own party if she is to get the expansion of the catchilly titled, European Financial Stability Facility (EFSF - even the acronym is awkward to say) passed. There is significant cross party resistance to the size and scope of the funding program and that could even split the government. The Euro remains rather sanguine considering the turmoil taking place behind the scenes. Against the Pound, €1.126 remains a major support level which has been tested 6 times and been rock solid on each occasion. This morning that exchange rate is right in the middle of its current range.
The Month end didn’t do the Pound any favours; it remains trapped at the bottom of its recent ranges against all but the US Dollar. A surprise rise in US factory orders gave US investors a boost and the US Dollar weakened a little as a result. Those investors were tempted enough by the data improvement to venture out into other markets. That move was enhanced by a Chicago Purchasing Managers report which was better than forecast. These positive results caused a spontaneous eruption of confidence and resulted in share markets doing rather well and the safe havens like the Japanese Yen and Swiss Franc losing some strength at last. That must have felt like the lid being taken off a pressure cooker for the Swiss and Japanese authorities.
We had a surprise from Canada though; the Canadian economy contracted by 0.4% in the 2nd quarter of the year. That was worse than expected and extends the time that the Canadian base interest rate is likely to remain at the current 1%. A bit of weakness in the Canadian Dollar should have followed the announcement but stronger commodities and a slightly better US Dollar strengthened the CAD which is likely to get to C$1.58 against the Pound and perhaps as low as C$1.5680.
Overnight news that Chinese factory activity pepped up a little in July gave the Aussie and Kiwi Dollars a bit of a boost. Both countries are reliant on Chinese orders for their exports, so increasing Chinese activity will always gibe the Australasian currencies a fillip. The Australian Dollar was also boosted by better than expected retail sales data. An increase of 0.5% in July was up from June and the 1st rise in 3 months. Aussie data also showed a rise in business investment so the chances of interest rate cuts subsided and the Aussie Dollar rose as a result.
Today’s data started with a warning from the British Chambers of Commerce that they feel the UK economy is slowing. They downgraded their growth forecasts. That doesn’t appear to have damaged the Pound too much; probably because it’s nothing new to see Brutish growth forecasts downgraded. Through the rest of the day we get a slew of Eurozone data 1st thing and a raft of US data through the afternoon session. The highlights will be the Purchasing Managers Index for the UK manufacturing sector, US productivity, labour costs and construction spending. We will also see the institute of Supply Management index for the US manufacturing sector. All this and the first day of the month is enough to get pulses racing so the volatile conditions are likely to continue.
And the RAF has started to missions to get £1 billion worth of currency to the new leaders in Libya. There are rumours that they planned to send the packages via a commercial carrier but they were worried the funds would end up in Liberia or Lisbon or just be left on the tarmac at Heathrow along with all the other bags that go missing in transit.