Yesterday brought a lot of ‘to be expected’ news. Labour retained their safe seat in Oldham East, the Bank of England and the European Central Bank did what was expected of them and left their base interest rates on hold at 0.5% and 1.0% respectively and neither added anything to their fiscal stimulus packages. I guess that would generally mean status quo is maintained so leave the exchange rates alone but you may have noticed, the Pound is weaker this morning and the Euro a little stronger but Sterling has gained ground against the US Dollar.

The reasons for this have little to do with these central bank decisions. Sterling’s weakness even happened after the UK manufacturing sector was shown to have grown above expectation; a factor that should certainly have buoyed the Pound. However, the day started with a fair amount of trepidation ahead of a Spanish government bond auction. As soon though as the auction was shown to be oversubscribed, the relief was palpable and the Euro strengthened. There is every chance this rally could be short lived though as it is largely based rhetoric. Those with Euros to sell may want to make the most of this dip because one good auction does not a recovery make. That probably sounded like a better misquote in my head than it looks on paper; it reads like Yoda has taken over the report writing but I am sure you get the point. Nonetheless, the ECB’s statement is most notable for the tone of impending change. They suggest things are ‘still’ on track and interest rates are ‘still’ appropriate which would perhaps suggest there may be room for change in a shortening time frame. We know we are entering a period of flux and that brings volatility so tin hats at the ready.

The Bank of England is still taking flak for its apparent lack of concern over inflation even though it has remained above their 2% target for the last three years and has been above their target for pretty much the whole life of the BOE’s independence. They obviously don’t issue any kind of statement on the day of their decision unless they change something so we will get their views in a fortnight’s time. BOE Governor, Mervyn King is infamous as a weakener of the Pound every time he speaks so allowing people to assume the bank is sanguine about inflation serves his purpose admirably but there comes a time when even the most dovish central banker has to better manage expectations and this is starting t be the situation for Mr King.

As for the rest of the world; US employment data showed an expected rise in weekly jobless claims. The early part of the New Year is generally a bad time for job losses. Also, America’s trade gap with the rest of the word narrowed. The only trading relationship that bucked the trend was the one with China but we all know how rapid Chinese output is; it’s enough to make the Chinese authorities attempt to slow things down and that has a whole range of repercussions. Nevertheless, traders sort of ignored this upbeat data and the US Dollar lost a lot of ground against the Euro in particular as the European Central Bank started to mention inflation and the crowd went wild. The correction in the Euro-US Dollar rate took us back to the top of the existing trading range but no further. So in spite of the reporting in some papers which looks like it was written someone who breakfasted on skittles and cola, the move was not that earth moving.

Weakness in the US Dollar also had a knock on effect on the Canadian Dollar which lost a little ground. Had the Pound been better supported we may well have seen a rally in the Sterling - Canadian Dollar exchange rate but the effect was a tad muted.

Today’s main news releases are the UK Producer Price Inflation figures and then it is all about the US data with Consumer Price Inflation, December Retail Sales, Industrial Production and the business confidence survey from the University of Michigan. It’s plenty to be getting on with so I will let you go and do just that.

Have a great weekend. I’ll leave you with a story that proves just how wily foxes can be. A hunter in Belarus had shot and injured a fox; he approached the animal and tried to finish him off with the butt of his rifle but the foxed wriggled free and in the ensuing struggle, managed to pull the trigger of the hunter’s rifle, wounding him in the leg before making good his escape. Boom boom is I think a fitting end to that story.


Currency - GBP / Australian Dollar
As well as suffering the worst floods in centuries with all the financial, personal and social repercussions that entails, Australia is suffering on the economic front as well. China’s clear plan to slow their economy is having an effect as shown in their import figures. The fact that China is Australia’s largest export market makes this a major issue for Australian exporters and the fact that Australia’s trade surplus shrank more than expected would suggest the pinch is being felt already. So after nearly two and a half years of almost unhindered Australian Dollar strength, could this be the turning point? Well we have to put this into context. The Australian Dollar has gained from A$ 2.70 in September 2008 to barely A$ 1.50 as we saw just two weeks ago. The bounce we have seen has taken us 8 cents higher and even if we saw a push up to A$ 1.66, we would still be in the same downward trend channel we have been in for over two years. That might make depressing reading but it does serve to let us know that in spite of all the hype, the Australian Dollar is still much stronger than Sterling and, as yet, hasn’t changed direction. Those who need to buy Australian Dollars and are hankering after the good old days of A$ 1.70, A$ 1.80 or more are a very long way from those figures and sadly have to contend with a more narrow range and lower expectations. The only slim caveat to that last comment is that estimates vary but there is a feeling that these dreadful floods could knock 1% off the Australian economic growth (GDP) data and that is a massive figure if it is true.


Currency - GBP / Canadian Dollar
The damage being done to Australian mining and agriculture by the devastating floods is manifesting itself in higher coal and agricultural produce prices in the commodities markets and in demand for output of these products from the countries which can still produce; hence the advance and stubborn strength in the Canadian Dollar. That is compounded by a more upbeat feeling about Canada’s major export market, the USA which is also causing a stronger US Dollar and therefore further strength in the Canadian Dollar which does tend to edgily shadow the USD. You can see from the chart above that the downtrend see in November and December is still intact and the Sterling - Canadian Dollar exchange rate remains near the bottom of its trading range. In fact this pair is still at levels not seen since 1985 and well below the important C$1.60 level which marks the support that has been seen in this exchange rate for the last 30 years or more. It’s not pretty reading for those needing to buy Canadian Dollars and unless Sterling can break free from these narrow and depressed levels, there is still a chance we will get to the low last seen in the first quarter of 1985 and that is C$1.36. Gulp. Managing the risk of such a move is not as complicated as you might think though so please speak with your Halo Financial Consultant about a plan that will suit you particular needs.

Currency - GBP / Euro
Sterling has failed to make substantial headway against the Euro in spite of all manner of poor news and data from the Eurozone. The Euro has failed to fall off a cliff in spite of good news coming from the US and weak data from all but Germany within the Eurozone itself. What is supporting the shared currency? Well Japanese and Chinese central banks are buying Euro bonds and it seems traders and investors are just a little scared of being too short of the 2nd most liquid currency on the planet. So the Pound is testing but failing to breach the all important €1.20 level and may just fail again at this trend line resistance as it did back in September and twice in December. As you can see from the lower portion of the chart above, the pound is certainly overbought and the trend line support for Sterling is all the way back down at €1.15 so I have a warning to those who see this move and immediately ask whether it can make it to €1.25. The last time we were answering that question; those who didn’t manage the risk of a decline were looking at 1.15 levels within two weeks. If you have enough time on your hands, there is always the possibility that this rally will continue but we are overdue a correction and that could be costly for those with a short term requirement.

Currency - GBP / New Zealand Dollar
The Pound has finally made a little headway against the New Zealand Dollar. That is a pretty hollow victory though when you consider what New Zealand is having to contend with. Their major export markets are Australia and China. Australia is suffering the worst flood in over 120 years across Queensland; some of the most important mining and agriculture regions in the country. Estimates vary but it is felt that this could cost the Australian economy something like A$13 billion. At the same time, China is slowing its growth and that slows the pace of Chinese imports. No wonder NZ output is in light demand and no wonder traders are wary of the Kiwi Dollar. However, Sterling is also still very poorly supported. To put it into context, the recent rally from NZ$ 1.98 at the end of December to NZ$2.05 as I write is barely 6 percent of the fall we saw over the previous 2 years. It’s a start but it may prove to be yet another false dawn after umpteen previous false dawns in the past 18 months or so. A push above NZ$ 2.10 would be significant and would open the chance of a push to NZ$ 2.16 but until that barrier breaks, we have to assume the worst and prepare for yet another push to fresh 30 year lows. That may sound pessimistic but if you cover the risk and the best outcome occurs, you’ve lost nothing. Do nothing and you could lose everything.

Currency - GBP / South African Rand
The chart above shows what we technical analysts would call a V bottom. The Sterling - South African rand exchange rate dived from R10.96 or thereabouts and hit R10.197 before bouncing just as sharply to the current level. A push up to R10.80 is very likely as is a recovery all the way back to R10.96 but this pair has become pretty overbought in the interim so don’t be surprised if we get a sudden pull back when traders decide to take profit on the move. Fundamentally, Sterling is recovering as we can see in other Sterling related charts and the Rand, which had been riding high on commodity prices and gold in particular is slipping as those precious metals and safe haven assets like gold start to slip. South African business confidence has also slipped and the South African Reserve Bank has apparently been selling the Rand in order to buy other currencies for its reserves in an attempt to weaken their own currency which they say is too strong. Certainly a strong Rand does damage exports incomes but whether the SARB has sufficient funds to be able to weaken the rand in the medium term is open to debate. In the meantime, we will continue to look to R10.96 as a target and await any further developments from South Africa.

Currency - GBP / US Dollar
Sterling has been trading in a relatively tight pattern against the US Dollar but that changed yesterday when the Pound finally pushed above the downward trend that has dominated this pair since the beginning of November. The Pound’s advance is in keeping with Sterling strength against other currencies but it was helped by the uncertain nature of US data and the fear that the US Federal Reserve’s upbeat mood was not reflective of the real state of play. US data has been very mixed. We have seen positive manufacturing and production data, commodity prices and therefore raw material prices have been quite inflationary but consumer data and US housing market news has been far less encouraging. As consumers account for the vast majority of US economic activity, a recovery without consumer confidence is rather hollow. What should happen now is a push to $1.5825 and either before or after that is achieved, we should see a fall back to $1.56; the top of the previous trading range which now forms the bottom of this one. If $1.56 hold this pair up, then we could well see a push to $1.59 and onwards but not yet.

Quote

"I was walking down fifth avenue today and I found a wallet, and I was gonna keep it, rather than return it, but I thought: well, if I lost a hundred and fifty dollars, how would I feel? And I realized I would want to be taught a lesson."
Emo Philips.