FX Market Overview

Aside from the Scottish debate, last week’s major news involved Europe. I know that comes as no surprise but the repercussions of that news may be very extensive. The good news for Europe was that Spain, Italy and others had their debt auctions oversubscribed and the interest rates they ended up paying to their lenders were much lower than had been feared. It has to be said that most of the money loaned to the various countries by banks and institutions would probably have been borrowed from the European Central Bank by those banks and institutions at even lower interest rates. So in spit of Germany’s abhorrence of the ECB loaning money directly to countries within Europe, they are doing so through these filtering means. It also means that the cheap loans being shunted into the markets by the ECB are going nowhere near businesses and individuals who need the assistance but as long as the Eurozone is OK, that is all that seems to matter to the powers in Europe; no EU leader wants to preside over the collapse of the Euro project.
The bad news for the Euro came on Friday afternoon when credit ratings agency, Standard and Poor’s chose to downgrade France from its triple A credit rating and also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia as well. This had been mooted on a number of occasions so it was generally expected by everyone other than president Sarkozy apparently. Nevertheless, it could be very damaging to Europe’s plans to rescue the Eurozone. France has a debt auction today; the first since the downgrade obviously so we expect their interest rates to rise or even to ‘soar’ in true tabloid style. That cheap ECB money will be very valuable to banks who plan to lend to France but none of it benefits the European economy nor does it promote growth and that is a big issue. And the bad news just kept on coming as unexpectedly, Greece’s talks with its creditors collapsed n Friday before agreement had been reached on plans to roll over a substantial portion of Greece’s debt. Talks will resume today but this is perhaps the worst crisis Greece has faced since the end of the 2nd World War. As you might expect, the Euro weakened after Friday’s news and we see the Euro- US Dollar rate at the bottom of its 18 month low and the Sterling - Euro rate at another 16 month high today.
For its part, aside from the weakness of the euro, Sterling is in nervous territory ahead of this week’s release of the 1st estimate of Britain’s quarter 4 economic growth. The debate is raging over whether this will reflect a step into recession with contraction rather than growth or whether we will skim contraction with a small but very welcome plus figure. We estimate the growth will be between 0.3% and 0.5% which will be enough to keep the wolves from the door.

US data was rather upbeat last week and Europe’s problems clearly flatter the US economy and US Dollar by comparison. This is also a big week for US Data with both business and consumer inflation data due alongside capacity utilisation and industrial production numbers. However, as long as this data isn’t dire, the main driver for the US Dollar is likely to be strength derived from fear of a Eurozone collapse. Nervous investors are likely to run for cover after Friday’s news and that will mean buying US treasuries and other assets.
The big news for Australasia this week will be the release of China’s 4th quarter economic growth data. It is widely forecast this will show a fairly marked slowdown in China’s business activity and that is a negative for the countries which export to China; countries like Australia and New Zealand. After a few weeks of rampant Aussie and Kiwi Dollar strength, a few days of weakness would be welcome and it would be worth preparing for that with automated orders.
Canadian Dollar traders will be awaiting this week’s interest rate decision from the Bank of Canada. No change in interest rates is forecast but their view of the economy and the effects of an apparent disparity between US recovery and European dilemmas will be interesting to hear.
In fact this will be an enormous week for data from all parts of the world and we are expecting a highly volatile week in the foreign exchange market. In true Boy Scout fashion, being prepared is the key to taking advantage and making your own preparations is most successfully done if you speak with you Halo Financial Consultant and get the lowdown on how the markets might affect your funds.
I’ll leave you with news that US politics is all so centre ground these days that prospective presidential candidates are running out of differences to exploit in their campaigns. A new advertising campaign derides Mitt Romney for ....you won’t believe this ... it’s almost too awful to write but I must let you know; he’s been pilloried by his opponents for.... for... speaking French. There I’ve said it. Shock Horror. The chap is portrayed as elitist for being able to speak another language. I suppose the fact that he can walk and talk at the same time is also a problem and the vile elitist man probably knows which fork and knife to use in a fancy restaurant. The despicable swine.