Wednesday, January 19, 2011

Canadian interest rates kept on hold

!! Today\'s Highlights !!
US Dollar weaker in thin public holiday trading
Canadian interest rates kept on hold
Sterling boosted on inflation data

!! FX Market Overview !!
So Ricky Gervais has won again; his acerbic taunts towards the primped
and preened stars at the Golden Globes clearly ruffled a few feathers
and there can be no doubt they upset a few of the glitterati but
everyone is talking about it; probably as much as the Colin Firth win,
and that, as far as I can tell, is all Ricky Gervais ever wants.

A quiet day for data and a closed session for the US public holiday
meant the markets were generally quite muted yesterday. However, the
devil finds work for idle hands as they say and traders were
definitely idle. The work they found to do was to sell the US Dollar
which retreated against the Pound to the highest level we have seen in
two months.

The Pound's advance had a lot to do with this morning's release of
the UK inflation data. After a series of commodity price rises and
higher producer price inflation, we expected the inflation number to
have risen to 3.6% or thereabouts and we were not disappointed. A 3.7%
CPI figure was above expectations but while the Bank of England can't
raise interest rates, Sterling had to weaken a tad. This figure
ceratinly has reignited the debate over just what the Bank of
England's monetary policy is based on, because it cannot still be an
'inflation only' remit when their task is supposed to be about
maintaining inflation at or near 2%; they are consistently failing in
that endeavour. However no one is expecting any hike in UK interest
rates before May. Nevertheless, if the BOE is expected to raise rates
before the US Fed and the ECB, then Sterling could well strengthen

Sterling also gained ground against the Euro in spite of a growing
feeling that the Eurozone Finance Ministers will agree measures to
expand their financial support package and allay fears over the
default of any of the peripheral economies of the Eurozone. Having
said that, this morning's rumour mill suggests the agreement is less
comprehensive than that and that we may see a euro sell off because
traders will be disappointed by the result. We also got the German ZEW
survey of business confidence today and that just served to highlight
the two-speed nature of the Eurozone.

There is plenty going on in Canada this week as well though with the
Bank of Canada's interest rate decision today (more of that below)
and their monetary policy report tomorrow. No change was forecast on
interest rates and many traders largely ignored today's event as
they wait for the more detailed assessment of the Canadian economy due
tomorrow. In the meantime, oil prices are very volatile and the US
Dollar likewise so the Canadian Dollar is being buffeted a tad.
And finally two stories seemed to arrive with a certain degree of
synergy; Mrs Trabelsi, the wife of the former Tunisian President is
reported to have made a withdrawal of £38 million in gold bars from
Tunisia's central bank before fleeing the country. No one seems at
all surprised by the event after years of avarice and showy wealth at
the country's expense but it is a salutary tale. Thankfully though,
just as this story broke, we also heard that a former Swiss bank
employee has passed CDs to wikileaks detailing all manner of tax
evasion by customers of the Swiss bank. Perhaps Mrs Trabelsi's
stolen gold will be found after all.

!! Currency - GBP/Australian Dollar!!
It isn't hard to see the main influence on the Australian Dollar
right now. There are billions of gallons of it all over Queensland in
places that just should not be wet. Estimates of A$13 billion cost to
the economy, of a drop in economic growth of as much as 1% and of
months and perhaps years of clearing up are not good for anyone.

Sadly, such bad news was bound to have a negative impact on the
Australian Dollar and that is precisely what we have seen. Short term,
I think we have seen the high in the Sterling - Australian Dollar rate
but in the longer term, I do believe we will see another test of A$
1.60 and perhaps a break above that level. If you need to buy
Australian Dollars, I guess it just depends on your time frames and
your attitude to risk as to whether you wait for the hoped for rally
or you cut the risk and trade here.

!! Currency - GBP/Canadian Dollar !!
The Bank of Canada decided to leave the Canadian Base rate alone at
1.0% when their monetary policy committee met today. In the statement
they issued, they commented on the improving tone of the economy but
warned that the strength of the Canadian Dollar was undoing all the
positive effects of increasing exports and rising commodity revenues.

You could perhaps say that their commentary was less negative than
previous reports but it certainly wasn't positive and still had the
foreboding air of a central bank that is not yet convinced the economy
is out of the woods. The Canadian Dollar weakened on the announcement
and remains a tad weaker at the close of business in the UK. Wednesday
brings the more detailed Monetary Policy report from the BOC so we
will be expecting a little more volatility in the next 48 hours.

Obviously, events in America will also have an effect and the floods
in Australia are directly impacting on the value of commodities, so
eye sin the back side and top of your head would be very useful.
Alternatively, let us know what you need to achieve and we will do the
watching for you.

!! Currency - GBP/Euro !!
The reports I have been writing on the Euro are a bit like stuck
records because all the same influences are still in play. Debt
ratings, fears over the peripheral Eurozone states, pressure on the
European Central Bank to tighten monetary policy and the disparity
between outstanding German economic performance and the more laggardly
performance of the rest of the Eurozone are all factors in the minds
of traders. Nevertheless, the fact that China and Japan have both
supported recent bond auctions within the EZ does lend the Euro an air
of solidity which it probably doesn't deserve. The Euro is at the
weaker end of its range against the Pound but doing rather better
against the struggling US Dollar and that is a situation that could
continue if we fail to see the claims of an improved EU cohesion over
debt management followed through into solid action. The fact that UK
inflation pushed to 3.7% on the CPI measure failed to boost Sterling
because the Bank of England cannot afford to hike interest rates as
they perhaps should and would do if inflation were this high in a
normal market environment.

!! Currency - GBP/New Zealand Dollar !!
Queensland's plight and China's slowdown are the major themes for
the New Zealand Dollar because NZ exports heavily to both countries.
Any drop in demand is bad news for the Kiwi economy. So it is not
perhaps so surprising that the NZ Dollar has, at long last, finally
stepped back from a pattern of unabated strength. Weakness in the US
Dollar is generally a sign of strength in the Australasian currencies
and, you have to consider that, were it not for the fall in the value
of the US Dollar, the Sterling - NZ Dollar rate would be higher.

Sadly, I think we have to view this bounce in the Sterling - NZ dollar
rate as a short term correction rather than a permanent change of
direction. The poor demand issues are now factored in and yet the
GBP-NZD exchange rate has still not managed more than a 7 cent rise
from the December low. Quite what it is going to take to change the
direction f this pair is very uncertain but for the short term, taking
advantage at NZ4 2.05 and above is the obvious choice.

!! Currency - GBP/US Dollar!!
Positive reaction to the EU bond auctions and nervousness over the
disparity between consumer and manufacturing recovery in the US are
the major themes in the Sterling - USD exchange rate. From a UK
perspective, we are seeing constrained support for the Pound without
the follow through that an exuberant market would deliver. From a US
Dollar perspective, we are seeing improving manufacturing and
industrial numbers but nothing anywhere near as positive from the
labour market or retail end. Unless US consumers start to feel
confident again, the US economy is always going to struggle to
recover. Nevertheless, the US Dollar is the most liquid currency in
the world and it takes a lot to persuade traders to sell the US Dollar
for any sustained period. Sterling struggles to make any gains above
$1.60 and the Euro struggles above $1.34. While those resistance
levels cap these exchange rates, we have to respect then as market
toppers and trade accordingly.

!! Quotes !!
"It's the one thing I actively don't like: just being recognized."
*Ricky Gervais*
"She said, 'I'm your biggest fan,' and I said, 'Who are you?' She
said, 'Paris Hilton.'" *Ricky Gervais*

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