Tuesday, January 25, 2011

Sterling strong against all but EUR

!! Today\'s Highlights !!
Central Banks to dominate the week
Sterling strong against all but EUR

!! FX Market Overview !!
Last week's data was lively enough to cause significant volatility.
The surprisingly strong UK inflation combined with lacklustre jobs
growth and a snow blighted December retail report to keep Sterling
traders on their toes. Whilst we are starting to see earlier interest
rate hikes factored in for the Pound, the poor employment data may
make that happen later than May as so many forecasters have predicted.
Sterling ended the week in a better position against the US Dollar and
the Australasian Dollars but lost ground against the Euro. This
week's major highlights are the release of the Bank of England
minutes and the Quarter 4 economic growth data. Both are potentially
trend altering.

The Euro's strength came after a record high in the German business
sentiment report and another bout of well received bond auctions.
Traders are also expecting today's industrial orders data to be
strong. Even the European Central Bank's monthly bulletin was more
upbeat than many had expected. The result was a recovery in the Euro
which picked itself up off the floor but barely made it above the
skirting board before sellers came back into the fray. We start this
week with the Euro at the top of its recent ranges against the Pound
and US Dollar but not managing to break out of those established
constraints. Other than business and consumer confidence indices,
there isn't a lot on the Eurozone data diary this week so the
influences on the Euro are likely to be external.

The diary does though include the release of the minutes from the last
Bank of England meeting which will be minutely examined for signs that
their resolve to keep interest rates at record lows may be slipping.
We will get the US interest rate decision; no change is forecast here
but there may be a bit of coded warning that the loose monetary
environment cannot continue forever; in plain speak, interest rates
will have to rise and/or the expansion of the money supply will have
to be reined in.

Overnight news that Australian producer prices rose slower than
expected and a warning from the Australian Treasury Minister, Wayne
Swan, that the country faces an enormous impact from the floods,
combined to weaken the Australian Dollar this morning. We saw the NZ
Dollar follow suit and push above NZ$ 2.10 at the interbank level for
the first time in 5 weeks. The Interest rate decision from the Reserve
Bank of New Zealand is this week's major release as far as the Kiwi
Dollar is concerned. We don't expect the RBNZ to move interest rates
at this point but they may start to shift in that direction so don't
be surprised if this morning's top of the range for the Sterling -
NZ Dollar exchange rate is the best of the week.

In an interesting aside to the Irish political storm, an online
article by a chap called Mike Shedlock suggests Ireland has printed an
extra €51 billion backed by so called 'other assets' in order to
fund support and expansion programs. The problem Ireland's
government faces is that it really doesn't have other assets worth
€51 billion so this money is pure cash expansion. At a time when
Irish banks are crying out for further funds but lack the collateral
to support such funding, this may well prove to be the undoing of the
Irish economy and - dare I say it - another nail in the coffin of the
Euro. I suspect the story will grow.

And finally, ex Prime Minister Gordon Brown is now wondering whether
his phone calls were also hacked by the News of the World in the
scandal that brought down Andy Coulson the first time. It may be an
opportune time to stick another knife into the former Tory party head
of communications but I don't think the press needed to hack G Brown
did they. Just leave a mike on him when he departs a press conference
and he will do all the work for you. Or am I being bigoted?

!! Currency - GBP / Australian Dollar !!
When the Treasury Minister tells you to expect bad data, it probably
makes sense to listen. That is precisely what happened this weekend
when Australia's Treasurer, Wayne Swan, said Australia's economy
would feel an enormous impact from the Queensland floods. It entirely
overshadowed the softer than expected producer price data which was
released overnight and it pretty well guarantees we will see no policy
change from the reserve Bank of Australia when they meet next week. In
fact it probably puts the mockers on any chance of another interest
rate hike for quite some time despite some analysts saying that the
floods will have an inflationary impact and that could force the RBA
to act. The fact that any inflation would be identifiable as
extraordinary and likely to work its way out of the figures in the
months ahead would, I would guess, make it less likely for the RBA to
act in a knee-jerk way but I am not an economist. However, I still
think these recent events could well cause a continuation of the
weakness that we saw in the Australian Dollar last week. As long as
the Pound manages to maintain this exchange rate above A$ 1.5950, then
a push to A$ 1.63 is a real possibility.

!! Currency - GBP / Canadian Dollar !!
Throughout December, the Pound fell from roughly C$ 1.60 to C$ 1.53.
Through January, that fall has completely reversed as Sterling
recovers. There was no doubt that the Pound was oversold in the latter
part of December but there is more to this recovery than just profit
taking amongst Sterling sellers. The Canadian Dollar has been weakened
by flattening commodity prices, by slower data from America and by a
slowdown in Canadian economic performance as well. Sterling has been
boosted by 'not being the Euro', by better than forecast
employment figures and output data and by a sharp increase in
inflation, prompting increasing calls for an early Bank of England
interest rate hike. I think the possibilities of an early change in
BOE policy is being overplayed but I don't control the markets and
the general consensus is that investors are buying into the Pound
because they think UK interest rates will rise as soon as May and that
will bring further Sterling strength. So if Sterling can force its way
above C$ 1.60, then there is a real chance of a drive up to C$ 1.63, a
point which marks the top of the larger trading range and a level that
marked the top of this pair for the whole of the 2nd half of 2010.
However, if we fall back below C$ 1.58, then another dive to C$ 1.53
is the most likely scenario.

!! Currency - GBP / Euro !!
The good news for those who need to buy Euros, is that the Sterling -
Euro exchange rate is in an upward trend. The bad news is that we are
rapidly heading for the bottom of that trend channel and there is a
degree of trepidation amongst traders who aren't entirely convinced
this pair will stay in the uptrend. I mentioned last week that the
Euro was at the weaker end of its range and it has behaved impeccably,
strengthening to prove the point. That is bringing this exchange rate
down to the lower end of its range; the Sterling weakness end. We will
almost certainly see a test of €1.1690 and perhaps even a drop to
€1.1560 and the real question is whether the Pound has the strength
to remain supported at these levels or whether it will capitulate and
fall back to €1.14 or below.

!! Currency - GBP / US Dollar !!
The mixed pattern of US Data is making it hard for traders in the
Sterling - US Dollar exchange rate. This pair has long been referred
to as 'Cable' after the massive cable that was laid to link the
tickertape machines on either side of the Atlantic in the early days
of financial market trading. It appears to be more of a string these
days; stringing traders along as they assume we will see further US
Dollar weakness but fail to see it materialise. The inability of the
Pound to get above $1.6050 and the evident demand for US Dollars at
that level give us all pause for thought. In an environment where
interest rates are kind of irrelevant and growth is so unconvincing,
the only driving factor appears to be a fear factor; fear of further
US economic problems and fear of what may happen in the UK when the
full effects of the VAT hike, government spending cuts and slower
retail activity start to manifest themselves in the economic growth
data. The Pound is looking a little overbought at current levels so a
drop back to $1.57 wouldn't be at all surprising. This week's US
interest rate decision and the accompanying statement will be the key
to whether this happens or not.

!! Currency - GBP / New Zealand Dollar !!
I may read like a stuck record but the major themes in the NZ Dollar
exchange rate are the effects of the Australian floods and the
decisions being made within China to slow their economy and therefore
their demand for imports. There is another factor though and that is
the debate over whether the Reserve Bank of New Zealand has any need
to hike interest rates from the current base of 3.0%. I can't
imagine that, while all these negative factors are weighing in the NZ
economy, the RBNZ would deem it essential to make things tougher still
but there is an outside chance they may act to stem pent up
inflationary pressure. Either way, we don't envisage the Reserve
Bank of New Zealand changing its base rate when it meets on Thursday
and we believe they will continue to tread a cautious path in the
months ahead. However, having managed to push the NZ Dollar up to NZ$
2.10 again, there is the possibility that Sterling could break to
slightly higher levels if (and it is a big IF) we can get above NZ$
2.11. There is a trend line which has been in place since October 2010
which caps this pair and until it breaks, we have to assume the Pound
will dip back again; perhaps as low as NZ$ 2.05.

!! Currency - GBP / South African Rand !!
The markets liked the fact that the South Africa reserve Bank left its
base rate on hold at 5.5% when it last met. True, exports of gold,
diamonds and other metals and minerals are fetching good prices on the
international market but the recent strength of the South African rand
has made SA exporters a tad uncompetitive. The fall in the strength of
the Rand we have witnessed since the turn of the year have eased that
pressure and the relatively low interest rates will help. So, as
perverse as it may seem, the weaker currency may well cause a bit more
confidence amongst SA business and that will strengthen the Rand.
Foreign exchange trading is as near as you can get to yo-yoing but
without a string and spinner. However, as the Sterling - Rand exchange
rate was topped by a trend line which started in November 2009 and was
only broken a week ago, we would have to assume that when Sterling
does step backward - and it will at some stage - the drop will make it
as far as that trend line. R11.00 is essentially where that line is
now situated and that, I suggest, will be the support for this pair.
If the Pound can find sufficient support at that level, then we are
set for a proper rally in this pair. If not, then there is little to
stop us heading for R10.20 again.
Source: Fxstreet.com

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