Against the Euro, everything looks quite strong

FX Market Overview

So this is Christmas and what have you done? Well if you are a currency trader, you probably bought back some US Dollars and sold a little bit of Euro in the last few days. As we head into the last full week of the year, the markets will start to prepare for the holiday period and position themselves for the New Year. There is a bit of data to negotiate before we can completely write 2010 off but nothing we can’t handle.

As traders arrive at their desks this morning fresh from the end of the show with Sir Alan Sugar and all those loud mouths and the dance one with the ex MP who can’t dance, Oh and AP McCoy winning the Sports Personality of the Year with 42% of the vote (I suspect there will be a steward’s enquiry on that) they will find that the data diary is light for the week ahead but that there are some juicy bits to ponder before we all head off and scoff turkey.

The highlights from a UK perspective are tomorrow’s UK public sector debt figures and Wednesday’s release of the minutes from the last Bank of England Monetary Policy Committee meeting. No changes were made at that meeting and the voting pattern was probably 8 to 1 with the dissented being Adam Posen. However, the detailed conversation is likely to make interesting reading as we try to assess whether the ultra-low base rate is set to stay for an extended period. Last week’s positive data may change the discussion a tad. Meanwhile Sterling is still trapped in the same ranges it has occupied against most currencies for the last few weeks but we are at the positive end of the range as far as Sterling sellers are concerned.

The US data diary is far more replete with the economic growth data taking centre stage plus a supporting cast of durable goods orders and personal income and expenditure figures. All have the potential to move the US Dollar in these more thinly traded markets so all are worth watching but the potential for an upward revision in the pace of economic growth is the most widely anticipated move and that would probably be Dollar positive . The Dollar is having a positive period as we near the year’s end and there is still potential for further strength before we sing Auld Lang Syne. One of the other factors boosting the US Dollar is safe haven buying of US assets while tensions rise between North and South Korea.

Against the Euro, everything looks quite strong. The debt crisis across the Eurozone is still the major talking point and bond yields are being watched very closely for signs of further Eurozone damage. Last week’s further downgrading of Irish Sovereign debt was just another nail in the coffin of the Euro in some analysts’ eyes. Their argument was boosted by the fact that the Euro failed to strengthen in spite of the IMF approving the Irish rescue fund and a large ongoing fund being agreed to support the Euro in the future. This news alongside further call by Greece on financial support and improving German retail and manufacturing data just served to highlight the growing disparity between the northern and southern Eurozone economies. These are testing times for EU politicians.

Elsewhere, the Canadian Dollar and Australasian Dollars weakened a tad as the nervousness over Europe created a flow of funds to safer havens and away from these currencies which, due to their link to the value of commodities, tend to be more volatile and therefore riskier.

All in all, whilst this will be an odd week, as the last week before Christmas always is, current themes will tend to continue and volatility is pretty much assured. So don’t touch that mulled wine just yet, you may miss something.

And finally; some people’s private lives are anything but private but certainly very complicated. Shane Warne is reported to have had a dalliance with Liz Hurley who was cheating on her husband but now Liz has heard that Shane was tweeting that he wanted to be cheating on her with another woman whose husband warned Warne off. So Liz is splitting from Shane even before she and Shane got together properly and Liz is reportedly leaving her husband whilst Shane’s pervious extra marital encounters have already caused his own divorce. It’s exhausting even when you aren’t trying to hear about this stuff. I’ve just emailed ‘Unsubscribe’ to all the news reports with Warne or Hurley in the title. I am going for a little lie down.

Currency - GBP/Australian Dollar

As investors become a tad bolder and venture out from the safety of the US treasury certificate in search of something a little more lucrative, the 4.75% Australian base rate acts like a siren in the night to a sailor in trouble. The Australian economy is remarkably robust; their major export markets are America and China; both are showing healthy signs for the future and Australia’s exports of ore, base metals, coal and gold are all in demand. Why wouldn’t the Aussie Dollar lure you in? Sadly, there are few reasons not to do so other than if the Australian Dollar looked set to weaken; whipping out your interest rate gains. If the Aussie Dollar can end this year below A$ 1.61 against the Pound, then there is a far greater chance of strength in the early part of 2011 than weakness. That A$ 1.61 level marks the break point between a support line which underpinned the Sterling - Aussie Dollar exchange rate in 1976, 1985 and earlier this year. We broke below that line in September (the end of the 3rd quarter) and we have remained below there ever since. If we can end this quarter above that level, then we can confidently say it was a ‘false break’ and look forward to the Pound making gains but if not; then the first target is A$ 1.55, the second is the 1985 low of A$ 1.36 and the third is the low we saw way back in 1976 and that is A$ 1.27. Ouch!

Currency - GBP/Canadian Dollar

The Canadian Dollar was described this week as the US Dollar without the baggage and I can see that logic but it does kind of ignore the benefits that the Canadian economy has in its own right. There is no doubt that investors and central banks are happy to hold Canadian Dollars either as a reserve currency or as a speculative hedge against weaker currencies elsewhere. Canada’s wealth of natural resources and their readymade export market in America are both good reasons for the Canadian Dollar to be strong and we can see the strength of this currency against the Pound in the chart above. However, there is a potential downside to the reliance of Canada on American buyers. If the US economy slows again, and many believe it will, then Canada’s exports will slow and the Canadian economy will suffer. That isn’t happening at the moment though and this week’s US data has been rather upbeat, so further strength in the Canadian Dollar is almost assured in the short term. However, in the Sterling - Canadian Dollar rate, the upbeat Pound is stopping the rot to some degree. The proximity of 25 year lows is helping traders set the parameters but if they get a whiff of profit in a stronger Canadian Dollar, then be certain the Pound will suffer at the hands of the CAD and we may well see fresh 30 year lows.

Currency - GBP/Euro

With so much If But and Maybe surrounding the Eurozone, it is a wonder the Euro itself hasn’t been destroyed through little more than excessive selling. Oddly though, the EU, International Monetary Fund and European Central Bank have managed to apply sufficient band aids to keep the speculators at bay. The Sterling - Euro exchange rate is stuck below €1.20 and above €1.16 while everyone takes stock and assesses whether the EU authorities have done enough to keep the Euro intact or whether the much vaunted collapse of the Eurozone is a real possibility. Personally, I believe there are too many vested interests, especially political ones, for the Euro to fall apart but that doesn’t mean it won’t come under much more pressure in the months ahead. In the short term, I believe that anything near €1.19 is a good buying level for Euro buyers but in the medium term, I suspect that €1.20 resistance will give way and we will see a test of €1.24 or thereabouts.

Currency - GBP/New Zealand Dollar

A sharp rise in the value of NZ’s dairy exports is a good thing for the NZ economy but the drought that caused the price hike is a major negative. The 3.0% base rate is a negative for the domestic economy relative to other countries but it is a very attractive lure for international investors seeking higher yields and that is keeping the NZ Dollar relatively strong. Having said all that, the fact that NZ interest rates are unlikely to rise for quite some time and the attempts by China (NZ’s 2nd largest export market) to slow their economy are weighing on the NZ Dollar. The Pound has managed to shunt the NZ Dollar as far as NZ$ 2.11 but not above and we are all awaiting either a break above that level or another dive in the value of the Pound. You can place your bets on the outcome but I would suggest that, in the short term, these are great levels to be buying Kiwi Dollars just in case Sterling gives up the ghost.

Currency - GBP/US Dollar

This has been a mixed week for the US economy and the US Dollar’s volatility reflects that. Solid gains in manufacturing and business sentiment and an above forecast rise in US inflation were enough to give the US Dollar a real boost but the Federal Reserve was keen to point out that there is a long way to go before the US economy is clear of the mire of recessionary hangover. Nonetheless, the US Dollar has had a good week against the Pound; pushing Sterling down to the bottom of its recent range. The Euro has confounded the USD though, pushing the Dollar right back up to $1.33 and hinting that there may be more to come. I tend to feel that the Euro flurry is little more than a flash in the pan and that we will see weakness in the Euro against the US Dollar and Sterling in the weeks ahead. The Pound though looks set to stay below $1.60 for the time being but as long as it stays above $1.52, then I think there is hope for the Pound yet.

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