FX Market Overview

I mentioned the decision by Greek Prime Minister Papandreou to hold a referendum on the EU bailout plan in yesterday’s report and, as expected the story grew to dominate the news for the day and overnight. His decision is no more political than the whole Euro project; shift the decision on the Euro to the electorate, hold a referendum, ask the right question and the referendum will probably deliver the mandate he needs to take the funds from Germany and France and stay within the Eurozone. Dismay and rage perhaps best describe the reaction by France and Germany after they thought they had reached an agreement to agree on agreeing at least. The details of the Mer-kozy plan were yet to be fleshed out but it certainly didn’t involve delays, referenda or the potential for rejection by Greece. Papandreou has to face a confidence vote before he gets near a referendum so that’ll keep the tongues wagging. The Euro remains at a low ebb and that is great news for anyone who needs to buy Euros. I would urge you to make sure you do not fall into the trap of assuming further Euro weakness was inevitable. The Pound has reached this level on three previous occasions but slumped without making further headway and as we all know, history does have a habit of repeating itself.
It was hard to get past the Eurozone stories in the press and newswires but the UK had some better than expected news in the form of the economic growth data. According to the 1st estimate, UK Gross Domestic Product (GDP) grew by 0.5% in the 3 months to September and at roughly the same rate for the last year after three previous poor quarters of virtual stagnation. However, the markets had little appetite for celebration after manufacturing sector data showed contraction whereas it had previously been a bit of a beacon of possitiveness amidst the mantle of GB gloom. Nevertheless, sterling was emboldened by the havoc within Europe and strengthened through the day.
The mayhem that Europe’s uncertainty has wreaked on the markets has had other effects. The US Dollar is stronger as investors seek safety, commodity markets ware weaker as fears grow over growth and expansion and the currencies of the countries that produce those commodities are also weaker as a result. So we start today with the US Dollar in good shape and rather strong ahead of this evening’s US Federal Reserve Open Market Committee (FOMC) meeting. It is unlikely but there is an outside chance the FOMC could signal a 3rd round of monetary expansion (QE3 as it is known. I wonder how HM Queen Elizabeth II feels about that). It is highly unlikely the Fed will do anything with interest rates; their base rate is virtually 0% anyway but their views on growth and any comment on the impact of the EU debacle will be interesting to hear.
As for the commodity currencies, well we saw the Aussie Dollar weaken after the Reserve Bank of Australia cut interest rates and in reaction to poor Chinese growth data. However, it is pretty obvious that risk aversion is the major driver of this weakness as investors seek the safe havens. Weakness in the other high yielding Australasian currency, the Kiwi Dollar is similarly a reaction to risk aversion and the same could be said for weakness in the Canadian Dollar. As mentioned earlier, it is easy to get carried away with just how cheap these currencies could become but we have been to these sorts of levels in previous rallies and the Pound has been too limp to press ahead. It is possible to protect against a fast turnaround in the Value of the Pound or just cover some or all of your requirements with forward contracts; have a chat with your Halo Financial consultant to determine what would work for you.
Other gainers in these moves are the Swiss Franc and Japanese Yen; both currencies which have been sold heavily by their respective central banks in order to try to temper their strength. However, it is pretty clear that even with billions of Yen and Swiss Francs being sold, the demand for safety and security is great enough to strengthen these currencies come what may.
Today’s data diary is light with German employment and UK construction sector data complimenting the US interest rate decision but the Main drivers of exchange rates will be comment and rumour from within the Eurozone. Stand by for a bumpy ride.