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.

Currency - GBP / Australian Dollar

The Pound has remained relatively stable against the Australian Dollar for the past 6 months or so. There is very clear technical support at A$1.48 which came into play when the Pound fell below the previous support at A$1.49 a few days ago. As you can see, A$ 1.48 provided support through July and August and, considering the Pound is oversold, as shown by the RSI measure at the bottom of this chart, we may well see this support level hold again. Sterling, as mentioned elsewhere in this report, is struggling due to the UK’s relationship with Europe and that will continue to be the case until we start to see stronger UK data and perhaps until Europe starts to sort its problems out. If anyone knows when that might happen, please let the rest of us know. For now, those who need to buy the Aussie Dollar may want to protect themselves against a fall below A$1.47 but look to take advantage on any bounce to A$ 1.53. Aussie Dollar sellers may be looking a gift horse in the mouth if they don’t protect some of their requirements at this level or cover the risk of a reversal with a Stop Loss Order.

Currency - GBP / Canadian Dollar

The strength in the US Dollar hasn’t directly translated into Canadian Dollar strength but there is no doubt that, against the Pound at least, the CAD is doing rather well. The Sterling - Canadian Dollar exchange rate is at the lowest level it has been since September 2011 and , if it breaks this C$1.56 level there is a chance the loonie (as the Canadian Dollar is known) could sprint through to the July low of C$ 1.52. That then would match the low of July 2010 which makes it a very significant and pretty pivotal exchange rate. Commodity markets are very mixed with oil prices higher on the threat of a Nigerian oil workers strike and yet the slowing Chinese economy is weighing on other raw materials. However, the confidence exuding from the US (relative to other economies) is keeping confidence in Canada’s ability to earn from exports at a very elevated level. For that reason, and for the reasons of Sterling weakness, unless something significant changes, it looks like we will test that low of C$1.52 in the days ahead.

Currency - GBP / Euro

For months we have been impressed by how well the Euro has maintained its strength and mightily surprised that it hasn’t weakened to a greater extent. Oddly though, we were all a little taken aback when it did finally dive and we saw the Pound rally from €1.16 to €1.21 in a matter of 3 weeks. That rally was clearly overextended at that level and a period of correction was inevitable. So when the Pound started to give up some of those gains on Wednesday and continued to do so into Friday, we shouldn’t have been at all surprised. However, there was undoubtedly more bad news to come from the beleaguered Eurozone and another punch up to €1.21 was highly likely. That move finally happened on Friday; triggered by the credit ratings downgrades as mentioned in the main section above. I won't bore you by going over it again but you can see the effect in today's rates. Euro buyers who don’t like risk should be buying anywhere around €1.20 or above if you can get it but protect against a proper decline. Euro sellers may want to protect against a break of €1.21 and take advantage if there is a drop to €1.18.

Currency - GBP / New Zealand Dollar

Sterling’s weakness is the driving factor in the Sterling - NZ Dollar exchange rate. The Kiwi Dollar is being buoyed by Asian market confidence and by the lure of New Zealand’s 2.5% base rate. Investor confidence, whilst relatively buoyant in America and Asia, is at rock bottom as far as Europe is concerned and the Pound is suffering from that malaise. You can see that pattern very clearly in the dive from NZ$2.08 to the Pound in mid December to just NZ$ 1.92 today. This decline has been relatively orderly, within a fairly obvious trading channel but it is a decline nonetheless. From a technical perspective, there is little to stop this pair hitting NZ$ 1.91 in the days ahead and it may even get to the same low that we saw in September and October around NZ$ 1.89. If however, we do finally see the Pound rediscover its backbone, the top of this channel at NZ$ 1.97 is the obvious target.

Currency - GBP / US Dollar

The overall downward trend in the Sterling - US Dollar exchange rate is clear but we are seeing some Sterling buying interest - or more likely USD profit taking - at the October low of 1.53. Sterling bounced off this rate today and may well find a bit of buying interest from here. There is every reason for the US Dollar to be strong though; positive employment data, improving manufacturing and industrial data, growing business and consumer confidence. However, the US housing market is still dire and that is a drag on the US Dollar. Sterling, on the other hand, is being battered due to our close trading links with Europe and uncertainty over how well the UK economy is really doing. There are constant reports suggesting the UK economy barely grew in the 4th quarter of 2011 and until we see anything to suggest this is not the case, the Pound will continue to find it tough. Many analysts are pointing to $1.50 as an obvious psychological target although there are no particular technical reasons why that should happen. If we do manage to stay above $1.52, then a bounce to $1.56 is perfectly possible in the short term.