FX Market Overview

Don’t panic everyone - huge relief all round - problem solved. The Italian Prime Minister Mario Monti has announced that “The euro is not in crisis” and Italy’s "banking system is not under threat”. Phew; so that’s alright then. I must admit, I thought they did have problems for a few months but it’s good to know my fears were groundless. Hang on a minute though; that doesn’t quite explain why Italy is being forced to pay over 7% on its bonds or why the euro is at an 18 month low against the Pound, a 16 month low against the US Dollar and an 11 year low against the Japanese Yen or why the rest of the world is making plans for a Eurozone collapse but I am sure Mr Monti knows best. Perhaps his insight will calm the fears of Germany’s Angela Merkel and France’s Nicolas Sarkozy as they arrange to meet today to discuss the Eurozone debt CRISIS. The French plan for a financial transaction tax is looking less likely after Britain vetoed it and Germany showed signs f caution. Italy is also unenthusiastic about it unless it includes Britain because Britain would contribute roughly half of such a tax’s yield.
Perhaps Mr Monti is right; we are expecting an improvement in Europe’s economic growth when that data is released on Wednesday, so perhaps the euro’s weakness is more to do with the American employment data improving. A drop to 8.5% in the US unemployment rate and growth of 200,000 jobs was very welcome and resulted in further US Dollar strength; particularly against the Euro. Imagine how bad that would be if the Eurozone was in crisis. This is not a big week for US data but we do get the release of the Federal Reserve’s Beige Book on Wednesday; an insight into the regional economy within the US and a part of the next Fed Open Market Committee agenda. We will also see December retail sales data which should be positive. But these are little more than a mere sideshow to the influence that investor sentiment is having on the value of the US Dollar.
The UK data diary is a biggie though; aside from the Bank of England interest rate decision which will not reflect any change in interest rates nor the level of quantitative easing, we also get a number of retail data releases relating to the crucial retail month of December. A British Retail Consortium report and the official retail data will both be watched for clues to the depth of the dip in UK high street activity. However, like the US Dollar, the Pound is largely being driven by the fear or greed emanating from the Eurozone so swings in the value of the euro will be influential on the value of the Pound.
All these goings on are directly impacting other currencies; the Canadian Dollar is weaker as fear of a slowdown in Europe drags on demand expectations. Demand expectations directly influence the Canadian Dollar because of Canada’s reliance on exports of commodities and raw materials. However, I have seen a number of reports this morning written for speculative traders which suggest the Canadian Dollar is a good buy at the current levels so we may see some level of recovery as the day progresses.
That same reliance on commodity markets has an effect on the Australian and New Zealand Dollars. Both are at the stronger end of their current trading ranges though because the demand they enjoy from Asian and particularly Chinese buyers, is enough to keep these currencies in demand; that and the fact that Australia’s base rate is 4.25% and NZ’s is at 2.5%. Both very attractive compared to elsewhere.
And finally, after various racism stories in the British oppress this last week, we can all still be astounded by Beaver Ridge Elementary school in Norcross, Georgia, USA which sent 8 year olds home with maths homework including the following questions A)Each tree had 56 oranges. If 8 slaves pick then equally, then how much would each slave pick? B) 'If Frederick got two beatings per day, how many beatings did he get in one week?' These questions were set last week; not, as you may have assumed, 150 years ago. It is rare in life that words fail me but this is one of those moments.