Daily Currency Insight courtesy of Halo Financial - 16/11/2010

(Helen Fox) #1

Foreign Exchange and Currency Rates

Today's Highlights

• Fed comments weaken US Dollar

• Euro hampered by Irish debt debate

• Aussie interest rates likely to rise again

FX Market Overview

The US says it is not manipulating its currency, it urges China to follow its lead in allowing the currency markets to determine exchange rates and then we get two comments from two Federal Reserve members which are designed specifically to weaken the US Dollar. I am sure China will follow that lead. Janet Yellen, the Vice Chair of the Fed says the US economy will recover slowly, will see low inflation for an extended period and will need a lengthy period of financial stimulus to keep the ball rolling. Her views were echoed by New York Fed President William Dudley who said an exit from stimulus policies could be “years away”. The Dollar did weaken on these comments but not perhaps as much as the US authorities would like.

The US Dollar is being driven to a stronger position by the weight of funds flowing away from the beleaguered Euro. You can’t miss the debate over whether Ireland should seek financial support from the EU. Oddly enough, Ireland is saying it doesn’t want the money and that they are fully funded through 2011 but members of the EU are pressing them to do so in order to add some credibility and perhaps an air of stability to the Eurozone as a whole. That is a ‘big ask’ when Spain, Portugal and Greece remain in a precarious position. The fear of debt collapse contagion is palpable and the Euro remains vulnerable to weakness in the days and weeks ahead. It dropped back to just below technical support against the US Dollar yesterday so we watch today’s events with real interest.

Sadly that weakness against the US Dollar is less visible against the pound. Sterling did manage to press up to €1.18 yesterday and is marginally below that level as I write but there wasn’t the follow through to test €1.20 that we had perhaps hoped for. Sterling traders may be sitting on their hands ahead of this morning’s UK inflation data before pressing ahead. Bank of England warnings that inflation may rise again are ringing in everyone’s ears as we await the release of the October data. The previous 3.1% CPI figure could well be exceeded and that would offer up some Sterling strength. However, we have EU inflation data out at 10.00 GMT and US inflation data tomorrow, so it may be that the reaction to today’s data is muted.

The Canadian Dollar gained strength from a report showing US retail sales grew at their fastest pace in 7 months. The fact that America imports 75% of Canadian exports understandably makes the Canadian Dollar susceptible to movement in the US economy. The CAD gained ground against the USD, Sterling and the Euro on the news. This is clearly not what the Bank of Canada wants to see; as with every other exporting nation, a weaker currency is better for the economy so don’t be surprised if we see some verbal intervention to weaken the Canadian Dollar in the days ahead.

Farther afield, the Australian and New Zealand Dollars were also a tad weaker as all this nervousness over Europe and the comments from the Federal Reserve undermined investors confidence. That tends to cause a flow away from the attractive interest rates on offer in Australasia because those investors risk losing any gains through exchange rate fluctuations. They unwind these purchases and take their money to less lucrative but less vulnerable assets and the Australian and New Zealand Dollars weaken as a result. The minutes from the last Reserve Bank of Australia meeting were released overnight and they are very interesting. It appears the option to leave interest rate on hold was not only a surprise to the market but also a finely balanced decision. That and the rest of the rhetoric in the minutes suggest we may well see another interest rate hike in the very near future so the every present strength in the Aussie Dollar does appear to be unavoidable.

So today’s main events happen early in UK trading hours and that will give traders the rest of the day to absorb the news or slip down the local pub for a nice mulled cider which seems to be the preferred tipple all over London at the moment.

Whilst they sup the warm amber stuff they can contemplate the rest of the week’s data; consumer and producer inflation stats from the US, various retail and manufacturing releases and plenty of home price information in between. I mentioned it would be a volatile week in previous reports and it is proving to be that way at the moment.

Finally, you know those electronic road signs that blight our motorways. ‘Delays ahead’ they say or ‘Average speed check area’ and those sorts of messages. Well drivers in Tucson Arizona were a tad alarmed when theirs said "Caution Zombies ahead!" Someone had accessed the control box and added their own message. It’s quite good but I can’t help thinking you could really have confused motorists. In the UK you could have had one saying “Actual workers working on site” although no one would believe it or you could have been really outrageous and had one saying “No Road works for 200 miles” but I guess that is getting too farfetched. Any suggestions you may have will be gratefully received and could well be published.

The Chairman's challenge

The Chairman of a massive company is throwing a party for his top executives. He decides to take them on a tour of his mansion. At the back of the property, overlooking magnificent gardens, the Chairman has the largest swimming pool any of them has ever seen. The huge pool, however, is filled with rather angry looking alligators. The Chairman says to his executives "I think an executive should be measured by courage. Courage is what got me to where I am and all the beautiful things I own so this is my challenge to each of you. If anyone has enough courage to dive into the pool, swim through those alligators, and make it to the other side, I will give that person anything they desire. My job, my money, my house, anything!"

Everyone laughs at the outrageous offer and proceeds to follow the Chairman on the tour of the estate. Suddenly, they hear a loud splash. Everyone turns around to see the Finance Director in the pool, swimming frantically across the pool heading for the steps. He dodges the alligators left and right and makes it to the edge of the pool with seconds to spare. He pulls himself out just as a huge alligator snaps at his shoes. The flabbergasted Chairman approaches the FD and says, "You are amazing. I've never seen anything like it in my life. You are brave beyond measure and anything I own is yours. Tell me what I can do for you."

The FD, panting for breath, looks up and says, "You can sack the raving lunatic who pushed me in"

Halo Financial - request a live currency price