FX Market Overview

So we’ve all sent our leaders off to the EU summit, shoes polished, packed lunches in backpacks and we hope they can agree something of substance that will stop all this debt nonsense. There is no guarantee that they will agree anything of course; we could find that, come Sunday, all we have is a lot of angry politicians and a scapegoat for all the trouble in the guise of David Cameron. Mrs Cameron’s little boy has set out his stall to protect Britain’s interests; let’s hope he delivers. That 'inconclusive result' scenario is certainly what German government officials are expecting and were very happy to speak about yesterday.
With such an uncertain outcome, it is little surprise that the markets have taken the eminently sensible decision to sell the euro and await the outcome. There is another factor at play here as well; it is likely the European Central Bank will cut its base rate by 25 basis points when they meet today. The new man in charge has already shown himself to be rather dovish on interest rates when he cut the base rate at their last meeting and it would seem odd for the EU leaders to be striving to boost the economy and secure it against debt default if the central bank was not playing its part.
The Pound took strength from that euro sell off and gained against the Euro in spite of poor UK industrial output compared to stronger equivalent data from Germany. Hard economic facts have become the casualty of rhetoric and spin and the hopes and fears over the EU summit. However, the Bank of England will also make its interest rate announcement today and we are expecting no change to the 0.5% base rate. So in relative terms, sterling becomes a tad more desirable in comparison to the euro if both central banks do what is expected of them. Perhaps the Pound can finally clear the €1.1730 hurdle...or maybe not. Sterling is also trapped below $1.57 and unless we see some more encouraging UK data we are likely to see that cap remain in place as well.
We heard overnight that the Reserve Bank of New Zealand left their base rate on hold and signalled that there was little chance of a change for some time to come. They did downgrade their growth expectations for trading partners and steered a fairly cautious line in their statement but, unlike their Australian counterparts, they see no reason to cut the base rate now. The Kiwi Dollar lost some ground on this news and as a sign that investors are unwinding their riskier trades in high yielding but exchange rate affected trades.
For its part, the Australian Dollar weakened a little after a poor Australian employment report showed the country shed 40,000 jobs last month, pushing the unemployment level to 5.3%. The Reserve Bank’s interest rate cut was perhaps a pre-emptive strike to try to redress this balance.
Don’t be afraid of being bored today, apart from the two central banks and the EU summit, there will be other economic data to keep us busy. US wholesale inventories are used by the Federal Reserve as a sign of pent up demand. I predict long periods of inactivity interspersed with bouts of frantic volatility and there are opportunities within that to buy and sell currencies at attractive levels.
So whilst we await fireworks in the financial markets, explosions in San Francisco have come from a different source. During the filming of a ‘Mythbusters’ TV show, a cannon was fired on a bomb range but rather than harmlessly hitting the banking and coming to rest, the cannon ball ricocheted off into the distance, smashing a car and crashing into a house. I am not sure which myth they were trying to bust but I hope it wasn’t anything to do with cannon balls being harmless.