FX Market Overview

It’s interesting how words change their meaning over time isn’t it. The word ‘traveller’ used to refer to a person who travelled or was travelling, now it means someone who clearly neither travels nor wants to travel but who flouts planning permission and then invokes the laws on human rights when anyone challenges their law breaking. It can also be used to refer to someone who gets support from the UK press despite their decision to ignore the law. So if you want to build that extension and steal your neighbour's views, change your job description to Traveller and tell the authorities it is your human right to do so. As an aside, I cannot eat Rice Crispies any more without feeling nauseous. That was what I was eating when I heard Vanessa Redgrave tell a reporter, in that condescending ‘I am warm and sincere’ tone that only actresses and news reporters can muster, that the council should come to the illegal site because there was “so much humanity here”. Now I feel sick at the sight of Rice Crispies. I will never forgive you Redgrave.
Anyway, there is a link with the markets here; just as the ‘activists’ or to give them their proper title ‘thugs’ were building barricades and amassing weapons and missiles, the leaders of the world and their finance ministers were making similarly drastic preparations for the changes that Greece’s default will unleash on the world. We are at the tipping point where Greeks will not take any further cuts and austerity measures and where the EU and IMF are demanding more action from the Greek Government. There is a lot of talk of Greece calling a referendum on Euro membership and the Greek public just might vote to exit. I think if they allowed Germans to vote on it then perhaps Germany would exit as well or at least opt to eject Greece. Eurozone members have always talked of there being no ‘pan B’ but the breakup of Czechoslovakia and Yugoslavia proved that there are methods available to create a new currency and economy outside of a central bloc and Greece cannot be daunted by that.
The credit ratings agency S&P is also making preparations for further problems in other Eurozone nations by downgrading Italy’s sovereign debt. Italy is the 3rd largest member of the Eurozone so the lack of confidence in their ability to get a grip on debt is a much greater cause for concern than Greek problems. The upshot of all this is that, after maintaining a form of forex market levitation for years, the Euro does now look very vulnerable and increasing numbers of banks are starting to forecast a significant drop in the value of the Euro. The problem for us Brits is that, through our trading links with Europe, the Pound is joined at the hip to the euro at the moment so the trading range is very tight. As we have seen, there is a solid resistance level in the Sterling - Euro exchange rate around €1.16 but a break here would target €1.20. Euro sellers may want to protect themselves against that potential move.
Elsewhere, the data diary was pretty lacklustre yesterday but the politicians and central bankers were in fine voice. President Obama announced yet another ‘squeeze the rich’ plan to cut budget deficits by $3.6 billion. It is a drop in the ocean compared to the vast sums being pumped into the financial markets and the fact that there may be more to come but it is probably good politics. It certainly wasn’t enough to allay fears; hence further US Dollar strength. Incidentally, the fact that the Japanese Yen and Swiss Franc also strengthened is a clear sign that these are risk-averse flows and not just confidence in the US economy.
That strength pushed the Sterling - US Dollar exchange rate down to an eight month low but the other factor at play here is the nervousness ahead of the release of the minutes from the last Bank of England interest rate setting meeting. Traders are worried that the monetary policy committee moved a step closer to injecting further funds into the financial markets. Thos minutes are released tomorrow morning.
We had the release of the Reserve Bank of Australia’s meeting minutes overnight and they are wrangling with the same problems. They didn’t discuss any interest rate hikes and feel they are well placed, with the current base rate to tackle anything the markets throw at them.
The most significant data of the day is the German ZEW business expectations index; a well respected survey that points to confidence or otherwise within the German economy. It has been in very negative territory for the past few months and another poor reading is expected today. It won’t help the Euro.
And finally, anyone who has ever travelled to America knows how strict their customs people are but Australian Foreign Minister, Kevin Rudd, needed all his diplomatic skills when he was stopped with a suspicious substance in his bags. After pleading with the staff, Mr Rudd was finally let through with his jar of Vegemite. As everyone knows, just like Marmite, you either love or hate it. It seems American border control people just don’t know what it is.