Daily currency update courtesy of Halo financial

(Catharine Higginson) #1

Monday was devoid of meaningful data so traders were left to trade the existing exchange rate ranges and await the major events later in the week. The first of these comes today as the final figure is released for UK economic growth in Quarter 2. On an annualised basis, the 2nd estimate of 1.7% was sharply higher than the 0.2% contraction in Q1 but that has already been absorbed by the market movement. What we are expecting is little or no revision to the 2nd estimate but that does mean that even a small adjustment could cause significant volatility. Those with Sterling to buy or sell may want to act before the release at 09:30 UK time.

Sterling comes into Tuesday with praise ringing in its ears from the International Monetary Fund for the way the government has set about tackling Britain’s monstrous debt problem. The IMF did not stint in its praise for the way the coalition had started to control costs and had kick started the recovery which they consider is already underway. They added forecasts that Britain would avoid a second bout of recession; the so called ‘double dip’ and that inflation would settle back to the BOE’s target in 2012. That has put the cat amongst the Darlings and Millibands, particularly on a day when the former chancellor claimed that all was well when he left office.

The only thing the IMF said that kept Sterling from rallying was to slightly lower their growth expectations for the UK and suggest the Bank of England expands its quantitative easing program. Threats of higher levels of liquidity tend to weaken the currency involved as we saw in the US Dollar after the Federal Reserve suggested just such an eventuality.

As for the US Dollar, well it remains on the back foot as we await this afternoon’s data releases. We will get the Case Shiller home price index along with a number of other indices dealing with both consumers and manufacturers and these could have a direct effect on sentiment towards the US Dollar but it has rebounded a little; gaining strength on rumours that the Bank of Japan may add liquidity to its own market in order to weaken the Yen. The Japanese Yen has been a safe haven currency for a while now and if investors sell out of the Yen, there is a natural flow towards the US Dollar.

The Euro would also tend to pick up some of that investment flow but traders are wary that the Euro is looking ‘toppy’ to use a very non technical term. Overbought or excessively strong would suffice as expressions to explain the Euro’s position but it has stabilised at just below USD 1.35 and around € 1.17 against the Pound. There is little data to move it today so it is likely to be swept along by US, UK and Japanese data.

Other currencies which tend to move with investor sentiment are the Australian and New Zealand Dollars and there is a significant debate raging over where these will go in the months ahead. The Australian Dollar is, like the Euro, looking overbought against most currencies but while Australia offers such a healthy interest rate return and is exporting ‘in demand’ commodities that is unlikely to change. However, a downturn in expectations for higher Australian interest rates could well knock the Aussie Dollar off its pedestal. Most traders are forecasting an interest rate hike when the Reserve Bank meets next week. Any hint that they are wrong could be just what Aussie Dollar buyers have been waiting for.

The New Zealand Dollar offers less interest rate return but has, until now, moved largely with the Australian Dollar. However, poor recent data and the likelihood of static interest rates have uncoupled that link to some degree and the NZ Dollar is far more affordable than its Australian counterpart right now. Tonight’s NZ trade balance figures could add to that weakness if they are in line with last week’s NZ figures.

But none of that will bother the bureaucrats of the EU who are locked in a fierce battle over whether English should become the language of the EU. A Flemish speaking Belgian MP has called for the European Union to adopt English as the common language for EU business. HE describes English as the “most important language in the world”. I am sure you can already hear complaints coming from France which, 3 years ago, lost a bid to have all EU documents printed only in French. As we all know, if you speak English clearly and loudly enough, everyone in the world understands you; especially if you accompany the loud exaggerated pronunciation with suitable hand signals. Perhaps that should be the common language of the EU; loud English accompanied by mime. The debate continues.