Daily Currency Insight from Halo Financial

(Clare Allen) #1

At last; Katie is no longer waity, has reverted to Catherine and is going to wed Prince William. That good news story led some newspapers to start pondering the costs of a Royal wedding in the midst of a recession. Shame on them; just because money is tight, do we think weddings should no longer happen! And besides, think of all the income from visitors coming to see a regal wedding done with full pomp and ceremony. Britain is rather good at that. Nice touch using your mother’s engagement ring by the way William; that’ll certainly get the Express and Mail readers onside.

In the financial markets, it wasn’t future Queen Catherine who held centre stage, it was Ireland. The EU and International Monetary Fund are pressing Ireland to accept financial support but the Irish authorities say they are fully funded through to mid 2011. Quite understandably, the EU and IMF have ignored the ‘everything’s alright’ declaration from a politician and want to look at the books themselves because the whole of the EU economy may be at stake. Irish banks took loans from the ECB in October equivalent to 80% of Ireland’s GDP so something is clearly not alright. The IMF and EU teams are flying to Dublin today to discuss the matter further. They do so while Greece is struggling with the EU’s revised 2009 deficit calculations and while rumours are rife that Ireland may be joined by Portugal in the poor house at any stage. ‘Please Sir, I want some more’ just won’t cut it. And there is a debate to be had about whether consolidation loans are the right way to go for Ireland. ‘One affordable monthly payment’ might be a problem if the economy cannot afford the payments. Remember that your country may be at risk if you do not keep up the repayments.

Europe’s problems were discussed at length by many Ministers and spokespeople but I loved the comment from Rainer Bruederle, the German Economy Minister who said “You can't just throw money from helicopters. You have to create confidence in institutions, in the state, in public authorities.” He’s probably right but if you did, let’s just suppose, hypothetically... throw a load of money from helicopters, the public would scoop it up, spend it in shops, create demand, boost supply and grow the economy. I’m not saying it is the only answer but I don’t think we should totally rule it out yet Rainer. Let’s discuss the logistics and locations and dates eh!

All of this melee (not the last bit; that was just me fantasising) caused further weakness in the Euro which dropped back to its support level against the US Dollar and looks like it may fall through $1.35 in the days ahead. There is a lot on the newswires about how large chunks of the US Federal Reserve’s $1.7 trillion of quantitative easing is being invested by US companies in plants and manufacturing facilities outside the US. That can’t have helped the US Dollar as it weakens and I wonder if the Fed will look at tightening up on their policy in the year ahead.

Sterling wasn’t as well supported as the US Dollar so it remains tightly range bound against the Euro. And increase in the inflation rate to 3.2% was in line with the Bank of England’s warnings of higher inflation but that is unlikely to lead to higher interest rates in the medium term so the usual reaction of strength in the currency was not evident. And, as expected, the Governor of the Bank of England, Mervyn King was actively weakening the Pound yesterday. But we are not trying to manipulate the exchange rate ...Nooooooo, of course you aren’t. We believe you Mervyn. This morning’s release of the minutes from the last Bank of England meeting held no real surprises so Sterling stabilised but the unemployment data was rather better than expected so a little Sterling strength through the morning is likely.

If all of that isn’t enough to keep us all busy then this afternoon brings US inflation data and a couple of housing market releases. We may also get smidgeons of news from Ireland so the day may be a busy and intriguing one.

If you aren’t bothered about the state of Europe or the US or the UK, well you are probably reading the wrong report but you may be interested in the news that Renault has won a case in a French court allowing them to name their new model, Zoe. The case was brought by parents of two girls called Zoe arguing that if a car was named after them, it would lead to a lifetime of teasing. Well what about all the Clios in the world, and the Sylvias and Cedrics (Nissan went through a funny phase) and I am sure there must be someone out there called A4 or Virago. Panda’s haven’t sued Fiat and if we ban car makers from using real names there will never be a Ford Dave and that would be a dreadful loss to the World.

Currency - GBP / Australian Dollar

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As mentioned in the main section above. The reserve Bank of Australia appears to have been quite divided when they decided to hike interest rates at the beginning of the month. The minutes of that meeting show they could easily have left rates on hold but the nervousness over inflation pressures are clearly sufficient that further interest rate hikes could well be on the cards in Australia. In contrast to that; UK interest rates look set to remain very low for a very long time in spite of the Bank of England’s clear view that inflation will remain high for an extended period. This morning’s news that inflation ticked up in October was to be expected but that is a short term move and central banks always tell us they take a 12 to 24 month view of inflation. If we take a similarly long term view of the Sterling - Australian Dollar exchange rate we would have to be wishful of the support at A$ 1.57 holding and a push back up towards the A$ 1.70 levels in the months ahead. However, we cannot rule out further Sterling weakness as the VAT rise looms and the spending cuts start to bite so the glimmer at the end of the tunnel is no more than a tea light at the moment. When it starts to resemble a 40 watt bulb I will be happier to start targeting more attractive levels for those in need of Aussie Dollars.

Currency - GBP / Canadian Dollar

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Nervousness is the only mood in the financial markets and that is weakening the Canadian Dollar. In spite of positive US retail sales data the fears over a default in Ireland and rumours that the Peoples Bank of China is about to hike interest rates are enough to keep traders and investors on the back foot. That, in turn, is keeping the pressure on the Canadian Dollar. However, from a technical standpoint, nothing much has changed since July and arguably, not much has changed since May. The Sterling - Canadian Dollar exchange rate is still in a slight upward trend but it is being capped by a solid resistance line at C$ 1.63. The support brings the Sterling buyers out of the woodwork at around C$ 1.60. So the narrowing range is very tight indeed. But we are getting to a point at which something will have to give. Whether Sterling will have the gumption to break the top of this range or not, is the question. It must be remembered that we are still near the bottom of the long term range and. Other than the last few months, the last time the Pound was as weak as this against the Canadian Dollar was 1985. When a currency gets to its weakest in a quarter of a century, you would expect a recovery of some sort but the pound’s rebound has been rather unconvincing to date. Let’s hope, for the sake of the Canada bound migrants that this gentle uptrend continues.

Currency - GBP / Euro

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All the current news regarding the Euro revolves around the Irish debt problems. The EU is pressing Ireland to accept financial support, Ireland says it is fully funded through to at least the middle of 2011 and yet the markets somehow don’t believe them. Hence the FTSE share indices fell at their fastest pace in 3 months and the Pound, which may have fallout from any Irish problems, is weaker as well. However, against the US Dollar for example, the Euro has fallen through a significant support level at $1.35 and against the Pound; the Euro remains weaker than €1.17 (that make €1 worth around 85.5 pence). The improvement in German business sentiment and the upturn in EU inflation have helped keep the Euro in reasonable form. Sterling, on the other hand was damaged by yet another series of comments from the governor of the Bank of England which were designed to undermine Sterling Strength. There is a whole heap of data due from both sides of the Channel later this week so the volatility will undoubtedly continue.

Currency - GBP / New Zealand Dollar

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The problem with the Sterling - New Zealand Dollar exchange rate is that it keeps giving us false hope of a turnaround. We got to NZ$ 2.03 back in May and then the Pound mounted an encouraging recovery back to NZ$ 2.20. That high was seen in August. Since then Sterling has been pushed by the NZ Dollar down to 2.03 again and this revisiting of the lowest exchange rate since 1979 doesn’t bode well for the future. On a fundamental basis, the strength of the NZ economy, the fact that NZ interest rates are rising and the robustness of the NZ banking sector don’t look like good reasons to sell the NZ Dollar so it may take a very long time before the Pound makes any proper headway. In fact, there is nothing to say we couldn’t see further declines in this pair before the real recovery takes place. I know that look depressing but there is a saying in trading circles that ‘the trend is your friend’. In other words, we have to assume the current trend will continue until it proves us wrong. This trend has been in pace for a decade now so it is fairly well established. However, within that downward trend, we could still see a bounce to NZ$ 2.40 and still be in the same downward pattern. I know there are many clients who would love to shift some funds into NZ Dollars at NZ$ 2.40 to the Pound so I hope this is not just wishful thinking but I would certainly advocate some form of protection against a further deterioration in the value of the pound.

Currency - GBP / US Dollar

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Nervous investors tend to favour the security of the US Dollar, the Swiss Franc, the Japanese Yen and, until recently, the Euro could count itself in that number. However, the current uncertainty over whether the Eurozone is ready for another bout of debt problems has prompted a flow of funds away from the euro and into these other currencies. The US Dollar is therefore, the currency of choice and that has pushed the Sterling - US Dollar exchange rate back down to the bottom of its trading range. That bottom level is around $1.58 and we saw that tested today. However, this is a trend line which has underpinned this pair since mid May and it has been tested on numerous occasions since then so this may well be the turning Point that sees the Sterling - US Dollar exchange rate bounce to $1.6350 and that is the clear top of the current trading range. This is a big week for US data and we still have a fair smattering of UK data as well so anything could happen.