There was a subtle change in the mood of the market last week. The riots and attempts of political change in Egypt and elsewhere following the seemingly successful civil action in Tunisia have unsettled things. So whilst the data was pretty good from everywhere except the UK and US, the market mood seemed to turn towards less risk and more safe-haven trading.

As a consequence, we saw the US Dollar regain some stability, the Australasian Dollars lose some of their early gains and the likes of the Japanese Yen and Swiss Franc strengthen in fairly regimented fashion. Neither the Japanese nor the Swiss authorities will be pleased with that result; a strong currency damages export prospects and increases demand for overseas goods, unsettling the trade balance with the rest of the world.

In this melee, the various arguments over whether the Eurozone is in a good state or not were kind of lost. I have covered this in more detail below. But suffice to say, this is a big week for the Euro.

Sterling was weaker this morning than it was a week ago. The Pound was hit quite hard by last week’s very poor economy contraction data and harsh rises in inflation. Traders will focus very closely on this week’s released of the Purchasing Managers reports but, with the service sector being the larger part of the economy and last week’s GDP data showing a sharp downturn in the service sector, guess where most attention will be centred! A poor reading on this report could well see another couple of percentage points shaved off any Sterling related exchange rate.

The big US data this week will be the Employment report due for release, as it traditional, on the first Friday of the month. An improved figure is forecast and that may well calm some nerves but recent data from all point of the compass has held significant surprises so don’t go counting those chickens just yet. Today’s personal income and expenditure data may well rock the boat ahead of Friday’s data.

The move towards more risk-averse trading styles has had a detrimental effect on the Australian and New Zealand Dollars. Both are in demand when optimism rules the roost but the fear of sharp exchange rate correction means investment funds tend to abandon the high Australasian interest rates when traders get nervous. Last week’s Euro debate and the problems in Egypt have caused just such a nervous mood and both the Aussie and Kiwi Dollars are a tad weaker this morning. However, against the Pound, neither is exceptionally weak because the Pound is not exceptionally strong.

In addition to all the hard data, this is also an end of month day and, according to a group of psychologists, this is the happiest day of the year. They call it happy Monday because people have had their 1st payday of the year and many have looked at booking a holiday so we are all supposed to be really really happy. So cheer up and enjoy yourself. That’s an order.

Finally, satellite navigation systems should come with all manner of health warnings in these health and safety conscious times. The main warning should be “Don’t believe the satnav if your eyes tell you different”. People seem to override any common sense they might have when they switch the TomTom on. A 70 something couple in Germany were on a back road near the Austrian border when the satnav in their hire care suggested then need to turn left... so they did....straight into the side of a Church. You would think a church was a large enough object and that common sense would have been put ahead of blind subservience to the satnav but No. The hire car was written off and the church needed tens of thousands of Euros spent on resetting the foundations. “Attention, you have reached the end of your hire car’s life and your IQ. Please call the RAC at your earliest convenience.”


Currency - GBP / Euro Christine Lagarde, the French Economy Minister claimed that the success of Tuesday's € 5 billion five-year bond auction had boosted confidence in the 17 member Eurozone. The funds were being raised to support Ireland and to settle nerves in the market and it has to be said that they were oversubscribed with 9 times as many bids as there were funds but her Mme Lagarde’s claim that this was “an indication that on the market, confidence, the Eurozone has turned the corner," may be perhaps overstating the matter. When the whole of the EU, including Germany as well s the International Monetary Fund are standing four square behind a bond, I can’t help thinking it isn’t the Eurozone that is being supported; more a case that the guaranteed return that is being taken advantage of.

Today we get the first estimate of December inflation from the Eurozone and, if the German data is to be seen as a guide, we may well get a slight dip compared to expectations. That would be negative for the Euro, especially if, when they have their press conference on Thursday the European Central Bank remains sanguine about the prospects of interest rate rises. No change in rates is expected this month but traders are desperately trying to assess when interest rate hikes will commence. It has to be said though that even if the ECB hiked interest rates in May, which appears to be the earliest expectation, the amount of liquid cash washing around the system means banks would not need to go to the ECB for funds and would find their money cheaper elsewhere. The effect would be almost imperceptible. Reducing the amount of fiscal support first would appear to be the most likely scenario. And that would certainly strengthen the Euro if done well. The problem is that the last thing the ECB wants to be seen to do is strengthen the Euro, so they have a very interesting high wire act to perform.


Quote

The man that sets out to carry a cat by its tail learns something that will always be useful and which will never grow dim or doubtful.”
Mark Twain