Daily Currency update for SF members courtesy of Halo Financial

(Catharine Higginson) #1

The markets are extremely nervous at the moment as can be seen from this morning’s sell off in the London FTSE. The markets are pondering over how bad the situation in the Eurozone could get. The US dollar is the main benefactor as it’s seen as a safe haven destination from the crisis in Europe. The pound has now joined the Euro in this sell-off as budget cuts by the new coalition are seen as an impediment to growth. The Bank of England Governor Mervyn King’s comments that interest rates will stay on hold in 2010 and will only be raised 0.25% each quarter of 2011, has also weighed on sterling. Unfortunately for the pound the mayhem in Europe has directed investor capital flows toward the US, but it has also directed them away from the currencies of heavily indebted nations like the UK.

The pound is therefore on the back-foot and sentiment has turned negative and this will make any progress higher difficult for now. When sentiment changes, traders pick and chose what data they decide is important and what is “noise” or irrelevant. Earlier in the week the pound strengthened on the back of the Conservative led coalition government being formed. Unlike Labour (Labour stated cuts to government spending would not occur in 2010) the coalition grasped the importance of immediate debt reduction and stated their intentions without delay. The market and rating agencies applauded their prudence and the pound held up above $1.47 support against the US dollar. The probability of a sovereign ratings downgrade from AAA was reduced considerably.

Now however the sentiment has turned ugly and the pound is being sold as traders feel the austerity measures planned by the government will stifle growth. This is a massive U-turn in sentiment and ironically is exactly the message Gordon Brown relayed from the start of his campaign. Irrational markets or nervous markets - either way expect significant volatility stemming from the Eurozone crisis for a considerable time to come. If it were a movie it would be called Financial Crisis 2.

There was an interesting article in Spanish newspaper El Pais this morning which states that French President Nicolas Sarkozy threatened to pull out of the Euro unless Germany agreed to bail-out Greece. Aren’t you glad we aren’t in the Euro?

The fall in sterling has pushed the pound against the Kiwi, Aussie and Canadian dollars down to fresh generation lows. GBPNZD would concern me greatly if it broke below NZ$2.00. This is not because I am a Kiwi and my sterling savings have been decimated but more that I understand the significance of this massive round number 2.00 for the markets. In Australasia GBPNZD is traded as NZDGBP and therefore the round number of 0.50 is equally as important to traders down under. Fortunately for NZ bound migrants and ex-pats, NZ March retail data was poor overnight at +0.5% versus an expectation of +1.1%. April NZ REINZ house sales were also released weaker than expected falling -0.4% compared with +1.7% in March. There is still hope, but the pound is swimming against the tide.

Clients with a GBPCAD exposure can read my thoughts in last night’s research paper which is now available from your Halo FX Consultant.
There are a handful of US data releases this afternoon, but by far the most important number will be US retail sales at 13:30pm. The market is expecting an increase of +0.3% after a very impressive +1.9% rise in March.
And a lovely story to end off on. Broken-hearted Andriej Ivanov, 26, was planning to throw himself off a bridge in Ufa, central Russia, after his fiancee died. But he found love again - after stopping Maria Petrova, 21, from jumping off the same bridge because she had fallen pregnant. The couple are to marry.

Have a great weekend.