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.

Misunderstanding

My wife was taken into hospital this morning with two black eyes and a broken nose. It seems we were on different wavelengths when she said she wanted decking on the patio.

wonder what will happen if it turns out that Julian Assange is not in fact the messiah but just a very naughty boy. The lauding of the publisher of stolen documents when he won the right to ‘mansion arrest’ instead of incarceration was, I thought, a little nauseating. I am deeply concerned over the blurring of the lines between free speech and utter irresponsibility and I am not entirely sure which side of that line Assange is on.

As for the markets, well Sterling was on the strengthening side of the line for most of yesterday after a positive retail sales report from the Confederation of British Industry but the poor employment data continued to weigh on the Pound in comparison to the US Dollar. One member of the Bank of England’s interest rate setting committee, Adam Posen, sees the rate of inflation falling back to below 1% in the years ahead but he is a lone voice in the dark so the Pound barely reacted to his views which are already well known and widely reported.

The Dollar was boosted by weakness elsewhere and there will be some adjustment in exchange rates in the days ahead as traders start to unwind existing trades and to wind down for the Christmas break. Beware tough that, as volumes decline, there is always a potential for volatility to rise in thinly traded markets and almost every year we get excitement around the Christmas holidays.

The Euro, which has been on the back foot of late, gained a little courage overnight after European union agreed a package of measures to support the Euro on an ongoing basis and the International Monetary Fund agreed on a €22.5 billion package to support Ireland. That is all good news and the markets gave the positive report a nod by buying Euros but the debate still rages over whether these are merely sticking plasters when radical surgery or amputation are the real requirements. Only time will tell but if Spanish bonds continue to be sold heavily and Irish credit ratings continue to plummet, then further action may well be necessary. This morning’s German Ifo business sentiment index was better than expected so further Euro weakness may well be postponed.

Today’s data diary has fewer reasons to trade than yesterday’s; with no more than the EU construction output and trade balance figures to watch. We do have a triple witching day though with warrants and futures expiring which will always hold the potential for fluctuations and next week though brings UK government debt and economic growth data so, in thinner markets, the potential exists for massive volatility around those numbers.

In the meantime, have a great weekend. I hope the snow doesn’t destroy your plans and that your boiler doesn’t break down like mine did yesterday. It is so hard to type with frostbite.

The Cowboy RIP

A cowboy appeared before St. Peter at the Pearly Gates.

'Have you ever done anything of particular merit?' St. Peter asked.

'Well, I can think of one thing,' the cowboy offered.

'On a trip to the Black Hills out in South Dakota, I came upon a gang of bikers who were threatening a young woman. I called out and told them to leave her alone, but they wouldn't listen. So, I approached the largest and most tattooed biker and smacked him in the face, kicked his bike over, ripped out his nose ring, and threw it on the ground. I yelled, 'Now, back off or I'll kick the living hell out of all of you!'

St. Peter was impressed, 'When did this happen?'

'Couple of minutes ago.'

It was sad to see the RAF’s Harriers landing for the last time yesterday. There can be few Brits who wouldn’t love to have a go in a Harrier, a piece of kit that ranks up there with the Spitfire and Concorde as amazing technology which has yet to be surpassed. I remember driving along the A47 through Rutland and having a Harrier shadow my car before the pilot nodded the nose, waved to me and turned skyward. It happened more than 25 years ago and I am sure health and safety would prevent that today but it was an awesome sight I will never forget.

Things were a little less dramatic in the financial markets yesterday but them there traders didn’t like that there Pound yesterday. Very poor unemployment data should probably have been expected but the headline figure showed more than 2.5 million people out of work and the unemployment rate hit 7.9%; all bad news. There is no positive spin that can be put on people losing their jobs and Sterling suffered from the news. There were also rumours of major banks selling Sterling in favour of the Euro and that didn’t help the poor old Pound.

The US Dollar had a good day yesterday after solid gains in manufacturing output in spite of poor car production. That was backed up by an improvement if business sentiment as measured by the University of Michigan and an ‘as forecast’ result in US inflation data. Such a swathe of positive outcomes would, until recently, have resulted in a day of US Dollar selling as investors sallied forth to take advantage of higher risk/higher reward investments, encouraged by the underlying positiveness of the US condition but things are changing. The US Dollar itself is bought as US equities markets attract investors and the US Dollar strengthens.

That also has something to do with the continuing nervousness over the potential for problems in the Eurozone and elsewhere. Yesterday EU data diary was a very light one but that didn’t stop the speculators pulling the currency from pillar to post. Today’s German manufacturing price inflation data and the Eurozone inflation numbers will give them a better excuse to trade and we expect these to reflect the slightly higher inflation seen elsewhere, especially as the Euro has weaken a little over the last few months. That weakness was helped yesterday by news that Moody’s credit ratings agency may downgrade Spanish sovereign debt and it took the Euro to its weakest ever level against the Swiss Franc; the world’s favourite safe haven. The Swiss National Bank has its quarterly meeting today but no change in interest rates is forecast.

The debate rages over whether a new bond should be issued on a Eurozone wide basis. That would suit the smaller, less buoyant economies which are currently paying exorbitant interest rates in order to attract investors but it would mean Germany in particular paying much higher levels than it currently does. What is the incentive from Germany’s perspective and why would Angela Merkel even consider the plan? Well she has, and she has rejected it so, without Germany’s support it looks like a non starter. In the meantime, the Euro remains within current ranges but it is threatening to break out of recent ranges if the Euro manages to attract any more buyers. E leasers meet over the next few days and the Eurozone economic crisis is bound to be high on the agenda. Expect reassuring tones in a joint communiqué and confident rejection of any suggestion that the Euro could fall apart.

Elsewhere, a drought in New Zealand, the world’s largest milk powder producer, has caused prices to rise. That goes some way to offsetting the effects of the fall in production but not far enough and the NZ Dollar remains weak. Sadly, the NZD isn’t so weak that it will let the Pound push it above NZ$ 2.11 but we remain near the top of that range.

And finally, if we needed proof that prisoners in jail have too much time and too much access to legal aid, then I present the case of an ex postman who is serving time for stabbing a woman to death. He is now suing the Post office for sacking him. Quite how he thought he could continue to work from his jail cell and quite is not clear but it does beg the question, why did anyone think it was a case worth pursuing other than to generate legal fees?


Christmas Joke

The parrot

A young man named John received a parrot as a gift. The parrot had a bad attitude and an even worse vocabulary.

Every word out of the bird's' mouth was rude, obnoxious and laced with profanity. John tried and tried to change the bird's attitude by consistently saying only polite words, playing soft music and anything else he could think of to 'clean up' the bird's vocabulary.

Finally, John was fed up and he yelled at the parrot. The parrot yelled back. John shook the parrot and the parrot got angrier and even more rude. John, in desperation, threw up his hand, grabbed the bird and put him in the freezer. For a few minutes the parrot squawked and
kicked and screamed. Then suddenly there was total quiet. Not a peep was heard for over a minute.

Fearing that he'd killed the parrot, John quickly opened the door to the freezer. The parrot calmly stepped out onto John's outstretched arms and said "I believe I may have offended you with my rude language and actions. I'm sincerely remorseful for my inappropriate transgressions and I fully intend to do everything I can to correct my rude and unforgivable behaviour."

John was stunned at the change in the bird's attitude. As he was about to ask the parrot what had made such a dramatic change in his behaviour, the bird spoke-up, very softly, "May I ask what did the turkey do wrong?"

Funnymentals - post 1

Please remember i'm only passing this information on, feel free to add your own funnymetals too.

UK inflation picked up in November to 3.3% on the annualised Consumer Price Index measure. That is above most analysts forecasts and prompted yet more debate over why the Bank of England is so sanguine about inflation overshooting their 2% target when, officially, keeping inflation above 1% and below 3% is their only remit. The uptick in inflation certainly pulled the rug from under any plans the BOE had to expand the money supply and that, in turn, pulled the rug out from beneath the Pound which fell against all other currencies after the news. The Pound bounced back a little later in the day but whether today’s unemployment numbers will improve or compound the Pounds problems is open to debate. The consensus forecast is for a small fall in the unemployment numbers but beware of a nasty surprise in these figures because news of fresh hiring is slim. Sterling sellers may want to do so early in the day.

Yesterday’s other big news was the UK Federal Reserve’s interest rate and money supply decisions. In the event, they chose to keep both the base rate and the level of money supply on hold at current levels and warned the markets to expect little change in either aspect for some considerable time; the Dollar reaction was understandably muted. However, the Dollar did receive some good news in the form of the fifth straight month of retail sales growth. That caused a flurry of forecast rewriting as analysts upped their US growth forecasts for the 4th quarter.

That improvement in America’s fortunes was also felt in the value of the Canadian Dollar which strengthened through the day. The Canadian Dollar does have some correlation with commodity markets and silver rallied overnight on rumours that JP Morgan was unwinding some of its ‘short silver’ positions. In essence, having allegedly set themselves up for a fall in the value of silver, JP Morgan’s traders are now reversing that trade as they see silver advancing. This is all rumour and speculation but it could be true and would certainly explain the rise in the silver price. Whatever the facts behind it, rising commodity prices will tend to boost the value of the Canadian Dollar as well as the Australian and New Zealand Dollars and the South African Rand.

In Europe, apart from the continued debate over the Euro’s potential collapse and all manner of views on the ability of the European Union and International Monetary Fund to maintain stability in the Eurozone, the data was pretty uneventful. Eurozone industrial production rose 0.7%, largely in line with forecasts and certainly not enough to cause any wild gyrations in the value of the Euro. We are expecting a small decline in EU employment to be announced today so the Euro could weaken this morning after having a rather good spell in the last few days. That spell was cut short by credit ratings agency, Moody’s which suggested they were undecided whether to downgrade Spanish debt. None of the Euro movement appears to have anything to do with the Italian Prime Minister keeping his job although I am sure Italian escort agencies will be relieved along with the Italian press who would have very little to write about if Mr Berlusconi wasn’t around.

We heard overnight that the well respected and widely followed Japanese Tankan survey showed the first drop in business confidence in 7 quarters. Clearly the very strong Yen was bound to have an effect on exporters and Japan survives through export sales so the markets shouldn’t be too surprised by the report but the fact that the future expectations element of the report shows that Japanese businesses expect conditions to worsen should worry the Japanese authorities.
Today’s data diary overfloweth with treats. As well as those already mentioned, we also get US inflation data, US industrial production and the NAHB housing market index. Plenty to keep US dollar traders busy. It will be another volatile day; good news all round.

While we await the first data release of the day, it is worth noting that the resurgence in the share markets and a recovery in bank profits mean it looks like British taxpayers will get back all the money sunk into RBS and Lloyds at the height of the credit crunch. That may not be a funny story to end on but it is good news.

I'll finish with the story of a chap who faked his own death in order for his wife to claim £1.25 million in life insurance but who was caught out when fingerprints on the forged death certificate were found to be his own. His wife who apparently helped in the scam has been arrested but the chap; Alfredo Sanchez, is still on the run with his children. poor planning Alfredo. Next time you die, don't touch the death certificate after the event eh!