The Euro took a breather from being chased lower by the US Dollar yesterday; it consolidated its position around $1.1950 as the markets awaited more news on how quickly Hungary’s economy would falter and whether the measures agreed by the Eurozone would be enough to stabilise the various economies of the single currency region. The International Monetary Fund; a partner in the €750 billion Euro support plan, is urging the EU states to complete the currency convergence and centralise more financial control in Brussels or risk further problems ahead. I am sure the political will is there for this to happen but whether it will be matched by popular support amongst the general public is an entirely different matter. This is especially so in Germany and France where the general consensus is that their taxpayers are paying for Greece’s past profligacy.
While this debate rages on, the Euro remains weak and remains below some technically significant levels against the US Dollar and Sterling. It is also at record levels of weakness against the safe haven Swiss Franc and at its lowest level against the Japanese Yen in eight years.
The Pound, for its part, remains quite strong against most currencies in spite of Prime Minister David Cameron warning of spending cuts which will be large and sustained and which will affect everyone. He didn’t give details; we will have to wait for the budget on the 22nd June for that, but the markets were sort of encouraged that the debt nettle is being grasped firmly in contrast to the watered down policies many expected from a coalition of the Conservatives and Liberal Democrats. Sterling was also encouraged by a report showing manufacturing output rose to its highest level since 1995. The report published by EEF also showed exports and new orders up significantly; terrific news if the UK is to manufacture its way out of recession.
Elsewhere, the US Dollar is still the currency of choice for risk-averse investors, although there is some concern that things are getting a little overheated. It must be remembered that America is still indebted in a way that no US government has been since the Second World War and that unemployment is still up at around 9.7 percent. Neither of these things would normally entice investors to buy the currency but the security of US Treasury certificates have a certain allure when all around are fading fast and most investors are seeking the least-worse place to lodge their funds right now. The USD was helped by comments from President Obama who sees the US economy growing moderately. It is hard to imagine the word ‘moderate’ being seen as a positive in normal conditions but in this environment, that’s a blessing.
In Australasia things are a little different; the Australian economy in particular has been a beacon of success during a global melt down but the slowing Chinese economy is weighing on Aussie output and the main driving factor in the strength of the Australian Dollar - high interest rates - has lost some of its lustre as the currency has slipped from its path of strength; diminishing the return for overseas investors buying into the Aussie Dollar in so called carry trades.
The New Zealand Dollar is maintaining a little more strength than that as we near the decision by the Reserve Bank of New Zealand tomorrow. Most analysts are forecasting a 25 basis point interest rate hike and that is largely factored into the value of the currency. Obviously, if they don’t raise their base rates, then we may well see a sharp drop in the value of the Kiwi Dollar. It may be a very short lived spike though it will either take nimble telephone trading to capture the highest points of any move or the use of automated orders instead. I would suggest the latter as the decision will be made at 21.00 GMT; outside UK trading hours.
Today’s data diary is a little more full than yesterday’s with German industrial production and trade balance figures dominating the news. We will also have a number of speeches from Federal Reserve faces and a stream of Japanese data overnight.
Enjoy Tuesday; I’m sorry to say that most of the UK is entering a monsoon season judging by the weather reports but I actually heard my lawn sucking up the water this morning. I think I even heard it saying thank you. I really must invest in a sprinkler at some stage. There are probably laws against cruelty to flora.