Friday, January 14, 2011

US Fed offers caution and little else

!! Today\'s Highlights !!
EU presses UK to support Eurozone
UK and EU interest rates left on hold
US Fed offers caution and little else

!! FX Market Overview !!
Isn't it bizarre how news channels prioritise things. The Australian
floods are desperately sad to see and the news is quite rightly all
over the press; front page stories on most websites and newswires.

However more than 250 people died in floods and landslides in Brazil
yesterday after a month's worth of rain fell in one day and yet that
barely made the third or fourth page in most newspapers. I don't
have a clever quip to add to this; it just seems to be a peculiarity
of the way the press views the world through eyes that they think we

Away from the sad stories of lives lost or irrevocably changed, the
news doesn't get a lot more light hearted I can tell you. Estimates
vary but the Australian floods could cause a drop of as much as 1% in
Australia's economic growth and could cost A$13 billion in lost
economic activity. Oddly, the Australian Dollar is still relatively
strong. It may seem odd to wish for the currency to be sold off at a
time like this; kind of kicking a country when it is down, but a
weaker Aussie Dollar would be very welcome to Australian exporters and
would help boost the economy so bring it on.

Australia's problems ought also to be negative for the New Zealand
Dollar; Australia is, after all, New Zealand's largest export
market. However both Australia and New Zealand offer very high
interest rate yields and that is still supporting their currencies.

However, this morning's poor Australian employment data may well
keep the Aussie Dollar on the back foot through the next few days.
Elsewhere, the positive data came from Germany where economic growth
was up 3.6% on the year; the fast growth rate since East and West
Germany reunited. However, we do have to remember this is a year on
year figure and 2009/2010 was a period of dark days for most of Europe
in the aftermath of the credit crunch. That perhaps explains why the
Euro reaction was muted. Against the Pound and US Dollar, the Euro
remains in the same tight ranges it has been in all week. Today brings
the interest rate decision from the European Central Bank although no
change is forecast in either the base rate or the level of cash
expansion in the Eurozone economy. Traders were on tenterhooks
yesterday ahead of a Portuguese bond auction but in the end, despite
having to pay upwards of 6.7%, the Portuguese authorities will be
happy with the take up, especially amongst overseas buyers. Spain was
in a similar position today but that same nervousness gave way to
relief when the Spanish Auction was oversubscribed.

What is interesting is the pressure being demonstrated by EU leaders
towards the UK to help support the Eurozone as it tries to emerge from
recession and as it tries to sand bag the holes in its disparate
economies. In a speech delivered by French Prime Minister Francois
Fillon (I know what you are thinking but Sarkozy is the President.
It's easy to forget the French have a PM as well) the French PM
suggested that it is in Britain's interests to ensure stability in
the Euro or it would have repercussions for the UK economy. 'Nice
economy you've got here Mr Cameron. It would be a shame if summink
was to 'appen to it or if it was to collapse or suchlike. For the
right ...consideration.... shall we and in
Europe can make sure it doesn't 'appen. Do we understand
eachuvver?' Or words to that effect.

But the UK has enough of its own problems; figures released on
Wednesday showed the UK trade deficit hit a record high in November
and the Bank of England is under a lot of pressure as they met to set
UK interest rates. Their apparent abandonment of inflation concerns in
favour of growth focus is the subject of much debate. It was
inevitable that they would continue with their policy of 0.5% interest
rates today and make no moves to change budget of £200 billion
involved in monetary expansion. In fact, it would seem implausible
that the BOE would change its emphasis to controlling inflation in
this mid-stream environment. Perhaps we will see interest rate hikes
in the middle to late period of 2011 but not yet. Sterling though is
being supported and should remain quite well sought after for the time
being. I just can't see any particular reason why the Pound would s
rally significantly from here when there are so many uncertainties in
the economy; both domestic and international.

Yesterday finished with the release of the US Federal Reserve's
Beige Book; a report from the regional Federal Reserve Banks which
forms part of the next Federal Open Market Committee meeting agenda.
The tone was quite subdued but vaguely positive. Given recent positive
manufacturing data but poor consumer and housing numbers, the tone was
probably about right. The US Dollar hasn't moved much which is
probably a reflection of the markets expectation of a report very much
in line with the one they received.

Let's be careful out there. I'll leave you with a joke for
everyone in IT departments around everywhere.
There are 10 types of people in the world, those who like binary and
those who don't.

!! Currency - GBP/Australian Dollar !!
As well as suffering the worst floods in centuries with all the
financial, personal and social repercussions that entails, Australia
is suffering on the economic front as well. China's clear plan to
slow their economy is having an effect as shown in their import
figures. The fact that China is Australia's largest export market
makes this a major issue for Australian exporters and the fact that
Australia's trade surplus shrank more than expected would suggest
the pinch is being felt already. So after nearly two and a half years
of almost unhindered Australian Dollar strength, could this be the
turning point? Well we have to put this into context. The Australian
Dollar has gained from A$ 2.70 in September 2008 to barely A$ 1.50 as
we saw just two weeks ago. The bounce we have seen has taken us 8
cents higher and even if we saw a push up to A$ 1.66, we would still
be in the same downward trend channel we have been in for over two
years. That might make depressing reading but it does serve to let us
know that in spite of all the hype, the Australian Dollar is still
much stronger than Sterling and, as yet, hasn't changed direction.

Those who need to buy Australian Dollars and are hankering after the
good old days of A$ 1.70, A$ 1.80 or more are a very long way from
those figures and sadly have to contend with a more narrow range and
lower expectations. The only slim caveat to that last comment is that
estimates vary but there is a feeling that these dreadful floods could
knock 1% off the Australian economic growth (GDP) data and that is a
massive figure if it is true.

!! Currency - GBP/Canadian Dollar !!
The damage being done to Australian mining and agriculture by the
devastating floods is manifesting itself in higher coal and
agricultural produce prices in the commodities markets and in demand
for output of these products from the countries which can still
produce; hence the advance and stubborn strength in the Canadian
Dollar. That is compounded by a more upbeat feeling about Canada's
major export market, the USA which is also causing a stronger US
Dollar and therefore further strength in the Canadian Dollar which
does tend to edgily shadow the USD. You can see from the chart above
that the downtrend see in November and December is still intact and
the Sterling - Canadian Dollar exchange rate remains near the bottom
of its trading range. In fact this pair is still at levels not seen
since 1985 and well below the important C$1.60 level which marks the
support that has been seen in this exchange rate for the last 30 years
or more. It's not pretty reading for those needing to buy Canadian
Dollars and unless Sterling can break free from these narrow and
depressed levels, there is still a chance we will get to the low last
seen in the first quarter of 1985 and that is C$1.36. Gulp. Managing
the risk of such a move is not as complicated as you might think
though so please speak with your Halo Financial Consultant about a
plan that will suit you particular needs.

!! Currency - GBP/Euro !!
Sterling has failed to make substantial headway against the Euro in
spite of all manner of poor news and data from the Eurozone. The Euro
has failed to fall off a cliff in spite of good news coming from the
US and weak data from all but Germany within the Eurozone itself. What
is supporting the shared currency? Well Japanese and Chinese central
banks are buying Euro bonds and it seems traders and investors are
just a little scared of being too short of the 2nd most liquid
currency on the planet. So the Pound is testing but failing to breach
the all important €1.20 level and may just fail again at this trend
line resistance as it did back in September and twice in December. As
you can see from the lower portion of the chart above, the pound is
certainly overbought and the trend line support for Sterling is all
the way back down at €1.15 so I have a warning to those who see this
move and immediately ask whether it can make it to €1.25. The last
time we were answering that question; those who didn't manage the
risk of a decline were looking at 1.15 levels within two weeks. If you
have enough time on your hands, there is always the possibility that
this rally will continue but we are overdue a correction and that
could be costly for those with a short term requirement.

!! Currency - GBP/New Zealand Dollar !!
The Pound has finally made a little headway against the New Zealand
Dollar. That is a pretty hollow victory though when you consider what
New Zealand is having to contend with. Their major export markets are
Australia and China. Australia is suffering the worst flood in over
120 years across Queensland; some of the most important mining and
agriculture regions in the country. Estimates vary but it is felt that
this could cost the Australian economy something like A$13 billion. At
the same time, China is slowing its growth and that slows the pace of
Chinese imports. No wonder NZ output is in light demand and no wonder
traders are wary of the Kiwi Dollar. However, Sterling is also still
very poorly supported. To put it into context, the recent rally from
NZ$ 1.98 at the end of December to NZ$2.05 as I write is barely 6
percent of the fall we saw over the previous 2 years. It's a start
but it may prove to be yet another false dawn after umpteen previous
false dawns in the past 18 months or so. A push above NZ$ 2.10 would
be significant and would open the chance of a push to NZ$ 2.16 but
until that barrier breaks, we have to assume the worst and prepare for
yet another push to fresh 30 year lows. That may sound pessimistic but
if you cover the risk and the best outcome occurs, you've lost
nothing. Do nothing and you could lose everything.

!! Currency - GBP/South African Rand !!
The chart above shows what we technical analysts would call a V
bottom. The Sterling - South African rand exchange rate dived from
R10.96 or thereabouts and hit R10.197 before bouncing just as sharply
to the current level. A push up to R10.80 is very likely as is a
recovery all the way back to R10.96 but this pair has become pretty
overbought in the interim so don't be surprised if we get a sudden
pull back when traders decide to take profit on the move.

Fundamentally, Sterling is recovering as we can see in other Sterling
related charts and the Rand, which had been riding high on commodity
prices and gold in particular is slipping as those precious metals and
safe haven assets like gold start to slip. South African business
confidence has also slipped and the South African Reserve Bank has
apparently been selling the Rand in order to buy other currencies for
its reserves in an attempt to weaken their own currency which they say
is too strong. Certainly a strong Rand does damage exports incomes but
whether the SARB has sufficient funds to be able to weaken the rand in
the medium term is open to debate. In the meantime, we will continue
to look to R10.96 as a target and await any further developments from
South Africa.

!! Currency - GBP/US Dollar !!
Sterling has been trading in a relatively tight pattern against the US
Dollar but that changed yesterday when the Pound finally pushed above
the downward trend that has dominated this pair since the beginning of
November. The Pound's advance is in keeping with Sterling strength
against other currencies but it was helped by the uncertain nature of
US data and the fear that the US Federal Reserve's upbeat mood was
not reflective of the real state of play. US data has been very mixed.

We have seen positive manufacturing and production data, commodity
prices and therefore raw material prices have been quite inflationary
but consumer data and US housing market news has been far less
encouraging. As consumers account for the vast majority of US economic
activity, a recovery without consumer confidence is rather hollow.

What should happen now is a push to $1.5825 and either before or after
that is achieved, we should see a fall back to $1.56; the top of the
previous trading range which now forms the bottom of this one. If
$1.56 hold this pair up, then we could well see a push to $1.59 and
onwards but not yet.

!! Quote !!
"As fighting in Iraq intensified, President Bush delivered his
supplemental war budget to Congress. The money will cover 30 days of
fighting, then we'll be sent one war every other month until we cancel
our subscription."
*Craig Kilborn*

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