I hope everyone in the UK and US enjoyed their long weekend. While you were away, things were very busy. Lewis Hamilton won his first Grand Prix if the year, Ospreys beat Leinster in the Celtic league final, BP failed to cap the oil spewing out into the gulf of Mexico, Israeli commandos were sent to attack aid workers on a ship in international waters, one government minister has already resigned over expenses violations and England beat the Barbarians after a solid 1st half and a shaky 2nd half. If they could only string two solid halves together, England’s rugby team would be formidable.
As for the currency market, well the themes remain the same; the Eurozone is being avoided by investors as fears remain over whether the EU has the will, the firepower and the unity to tackle the current debt crisis; the UK is emerging from recession in staccato fashion, China is still hinting that it will slow its economy and the general air of impending menace is causing investors to shy away from the higher yielding Australasian currencies in favour of safer more robust assets like the Swiss Franc, gold and the US Treasury certificate.
There have been a number of reports from economists looking for the silver lining in the Euro debt cloud. German exporters are clearly going to benefit from the weakening currency and I am sure the Mediterranean countries will be hoping it will boost tourism in the months ahead but the turmoil within Germany has claimed another victim. President Horst Kohler shocked the nation with his resignation over comments he made about Germany’s involvement in Afghanistan. It is the first time a president has resigned and not gone full term and it follows the resignation of a senior member of Angela Merkel’s team last week. Whilst the two are not directly related, they are being seen as further erosion of Angela Merkel’s authority to govern and polls suggest German voters are very unhappy about the events of the last two years and in particular the last three months. In the light of these affairs and the general nervousness over whether Europe is going to slide back into recession, it is no surprise that the Euro is on the back foot as we start this week.
And that nervousness over the Euro was heightened by the European Central Bank which warned that European banks may have to write off another wave of bad debt running to approximately €195 billion in the year ahead. That is a lot of loss on its own, but add it to the €230 odd billion which has already been written off and the hole in bank balance is astronomical. The fear is that whilst American and British banks have faced the troubles of the last two years head on, EU banks may have been less keen to grasp the nettle and are now likely to face the consequences of that, more tentative approach.
The Canadian Dollar has a very good chance of strengthening after Canada reported 6.1 percent growth in the 1st three months of 2010; above expectation and in stark contrast to the pitiful growth figures from the UK, EU and US. The Bank of Canada meets today to decide what to do about interest rates and there is an outside chance of a 25 basis points interest rate hike. The most likely scenario is for a ‘no change’ decision so traders are likely to be positioned for this and would be quick to buy into the CAD if rates were to rise or the BOC were to point to a rise in their next meeting.
However, Canada’s reliance on commodity exports could be a hindrance as commodity markets slowed markedly last week. Whilst the Organisation for Economic Cooperation and Development upgraded its global growth forecasts, most analysts are warning that the sharp drop in commodity prices in May, the fastest fall since Lehman Brothers collapsed, suggests the recent economic recovery is in jeopardy. Countries with a large commodity export element to their economy are likely to see their currencies weaken is this slide continues.
Sterling remains rather better placed than it has been for many months. The resignation of the Chief Secretary to the Treasury over his expenses was a blow to the new coalition and the fact that his replacement, Danny Alexander is facing questions over his tax bills won’t help but the plans they have outlined to address the black hole in the government’s finances have been well received by the markets and Sterling has behaved as you would expect amidst that generally positive mood. However, the fall in service sector activity is a worrying development so Sterling will not be rallying at an ever increasing pace until the positive data reigns supreme and these intermittent poor reports start to reduce in number and significance.
The week ahead brings a plethora of data from Australian economic growth data to UK money supply numbers and from US mortgage data to EU retail sales; too many to list in fact. It is also the start of a short trading week as far as UK and US traders are concerned so volatility is almost guaranteed. The start of the day sees the Pound testing its highest level against the Euro in months and the Canadian Dollar looking set to make further gains. It is all happening so I had better go and do some work.
Have a great week and Pinch punch the first day of the month...before I forget. How on earth did we get to June so quickly???