Brrrrrrr it is still very cold across the UK and it looks like Siberia across large parts of the North of England and Scotland. Wrapping up warm has never been more universal. In spite of the chill breeze sweeping across Britain, Sterling had a very good day yesterday after much stronger than expected industrial and manufacturing output data. However, the Pound still failed to break out of its recent ranges; it just visited the top end of those ranges for the time being. That was still enough for most Sterling sellers to make gains before the Pound settled back a tad overnight. The British Retail Consortium reported that widespread discounting has forced average shop prices t rise by just 2.0% per annum; down from the previous month’s 2.2%. That bodes well for Christmas shoppers but perhaps not for retail sector employment. However, retailers are hoping for a last minute flurry as consumers rush to beat January’s VAT hike.
Across the Channel and across the Irish Sea, the debate still rumbles on over the fate of the Euro. An article in today’s FT puts the case for Ireland leaving the Euro and many have made the same point but that probably won’t happen. However, the problems of the Eurozone haven’t gone away; Portugal’s need for Irish and Greek style support is seen as inevitably and the International Monetary Fund is not alone is pressing the European Union to increase its provision for further demands on its support fund. The Euro remains weak as this debate rages but there is a strong chance that today’s release of German industrial production data will warm the hearts of Euro traders; the data is forecast to be very upbeat indeed. The Euro also benefitted from agreement in the Irish Parliament to implement spending cuts of € 5 billion or so. This is in line with the caveats on the support package from the EU and IMF.
Meanwhile, the US Dollar is having a bit of a revival and this is for both good and bad news reasons. The expected raising of tensions between North and South Korea is driving a flow of funds into the safety of the US Treasury market and that was reflected in bond prices. Also, the agreement by President Obama to extend for an extra two years, tax breaks introduced by George Bush, is seen as likely to boost US economic activity. The lack of US data today may well mean we see a continuation of the last 48 hours worth of US Dollar strength.
The Bank of Canada did as expected yesterday and left the Canadian Base interest rate on hold at 1%. The
Canadian Dollar was largely unmoved by the widely forecast decision because the BOC has little option other than to sit on its hands in light of the turmoil elsewhere and the uncertainty over Canada’s major export market, America.
News that China is planning further interest rate hikes to slow domestic growth was seen as a negative for the Australian and New Zealand Dollars; both large scale exporters to China. The tensions in Korea also caused a flow of investor funds away from the ‘carry trade’ investments in the high yielding Australian and New Zealand Dollars. As mentioned above, we saw that money arriving in the US treasury market. We get the interest rate decision from the Reserve Bank of New Zealand tonight; no change is expected as the Governor has made it clear he sees no reason to move the base rate for the time being but we, like every interested analyst and commentator will watch for any change in his stance.
And finally, ‘Rudolf with your nose so bright, won’t you guide my sleigh tonight’ rang a bit hollow in Richmond ,VA when a giant inflatable Rudolf in a Christmas parade caught its nose on a traffic light and deflated in front of thousands of traumatised children. It kind of spoils the magic when the world’s favourite reindeer dies in front of you; a ‘Bambi’s mum’ moment for sure but let’s hope they still leave carrots out for the red nosed one on Christmas Eve.
Written by David Johnson, Director at Halo Financial