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April 2016

Weekly Currency Insight

Published: Friday 15 April 2016

  • Brexit uncertainty hangs over the UK
  • Chinese data boosts AUD, CAD, NZD and others 

In fact, in the Aussie and Canadian Dollars, the Pound has dropped to a very significant technical support level and may well mount a short term recovery – although the size of the bounce is a big unknown.
 
We heard this morning that Chinese retail sales increased 10.5% in the year to March and that Chinese industrial production for February up by 6.8% on the year. The economic growth for the 1st quarter of the year was at 6.7%. All of these figures were in line with or slightly better than expectations, so the Yuan benefited and the currencies of China's supplier nations also improved along with commodity exporters as well. That includes the Australasian Dollars and the Canadian Dollar and South African Rand.
 
The day ahead brings the Eurozone trade balance which is expected to show a small improvement. That would be positive for the Euro and a pain for anyone trying to buy Euros. After yesterday’s bounce in the GBP-EUR rate, this morning might be your best short term opportunity. Contact your Halo Financial Consultant for more information.
 
This afternoon brings the Empire State manufacturing index from America; as well as industrial production and the University of Michigan consumer sentiment index. These are all closely followed by the Federal Reserve. So, at a time when there is a lot of uncertainty over the Fed's stance on interest rate hikes and the timing thereof, this all has the potential to cause end-of-week volatility. The Sterling – US Dollar rate is at the lower end of a small upward trend channel. So there is scope for higher levels if this data misses the mark.
 
And then we have a weekend. Yay! Mind you, the world is about to end...again. Dutch stargazer, Frank Hoogerbeets, apparently predicted the earthquakes that struck Japan over the last couple of days and has predicted much worse disasters to come. So maybe it is worth getting your weekend activity over on Saturday to avoid the apocalypse to come.
 
If we are all still here on Monday, let's catch up then. Have a good one.


Two liners

  1. I told my girlfriend she was drawing her eyebrows too high on her head. She seemed surprised.
  2. My wife said I was immature. I told her to put down my light sabre and get out of my sofa cushion fort.
  3. How do you find Will Smith in the snow? Look for the Fresh Prints.
  4. I feel bad for the homeless man on the street corner but I feel worse for his dog. He must be wondering if this walkies will ever end.
  5. Someone stole my mood ring. I am not sure how I feel about that.
  6. You know what they say about cliff-hangers....

 

AUD

China's economic growth rate has slowed to the lowest since before the mid-noughties financial crash. That sends chills down the spines of Australia's exporters and that worries the Reserve Bank of Australia as well. Interestingly though, the lure of high interest rates is still dragging international investors into the Aussie economy and that is keeping the AUD buoyant. Sadly, the Pound is helping to depress the GBP-AUD because it is being shunned by investors during the heated and very negative Brexit debate. In purely technical terms, the GBPAUD rate has fallen to the level I mentioned as a target last week. The half way point between the 2013 low and the 2015 high can be seen at A$1.8385 or thereabouts and the Pound managed to bounce off that level this morning. Sterling is still significantly oversold at these levels, so there is technical scope for a recovery but sentiment is against the Pound, so any higher levels would be an uphill struggle. Without wishing to be a merchant of doom, I still have to note that, if the Pound does fall below A$1.82, there is a slide coated with oil between there and the next support level is at A$1.75. Beware.  


CAD

After several weeks of improvement in the strength of the Canadian Dollar aided and abetted by weakness in the Pound, we saw this pair bounce this afternoon. A slump in Canada's factory output bashed the loonie.  A 2.3% growth in January turned to a 3.3% contraction in February and that, plus the lack of gains in the commodity markets has damaged the Canadian Dollar. Sterling has also benefitted from the Bank of England's confirmation that the next interest rate movement would be a hike.  However, let's not get ahead of ourselves. The UK vote on an EU exit is still a problem for the Pound and the International Monetary Fund's very negative conclusion on a 'Brexit' hasn't helped Sterling. This is especially so, considering the apparent progress of the 'Out' campaign. The GBPCAD rate has fallen half way back from the rally it mounted between 2013 and 2015. That is a significant figure for chartists and the forex market is awash with chartists (myself included). Sterling did bounce from that 1.81 level but it remains hugely oversold and there is still a real threat of further weakness in Sterling. If C$1.81 holds, then there is room for a rally to C$1.8750 but, if the Pound cannot capitalise on these short term gains, there is every chance we will see a fall to C$1.74. Bad news for CAD buyers but a fantastic opportunity for GBP buyers. 


EUR

There is a real pattern in the markets in that, against most other currencies, the Pound has fallen half way back from the rally it managed between 2013 and 2015. The Sterling – Euro exchange rate is no exception. The positive vibe from the Bank of England managed to shift Sterling upward from that €1.23 level but it was only a couple of cents of advance as compared to the 20 cent fall we have seen since this time last year. The oversold state of the Pound looks like it will continue all the time as the Brexit uncertainty hangs over the UK. That means there is every chance we will see this rate fall to €1.23 again and perhaps the trend line support at €1.20. If that level fails to halt the slide, then this pair could fall to €1.18 in no time at all. That would be painful for those planning to buy Euros but Euro sellers would be seen whistling and kicking their heels in the air.



 

NZD

The Sterling – NZ Dollar rate has been on a very obvious downward trajectory since the spike high we saw in August 2015. It has reached a clear level of GBP buying interest at or around the NZ$2.05 level. Before the rally that started in May 2015, this level had been a target level for NZD buyers and now it is the target for NZD sellers. Sterling is still being battered as the debate rages over whether Britain should exit the EU and that won't be resolved for a couple of months. So there is definitely scope for further weakness in the Pound and that would flatter the NZ Dollar. If NZ$2.05 and NZ$2.00 fail to support the Pound, then NZ$1.94 is a clear target. That may kibosh emigration and import plans but it is possible to plan ahead of that eventuality with forward contracts or market orders. Ask your  Halo Financial Consultant on how you can use risk management techniques to your advantage. 




USD

The fact that the Federal Reserve has scaled back its interest rate hiking plans has allowed the US Dollar to weaken a tad. We are not talking about a collapse; just a bit of consolidation within the current ranges. Sadly for Sterling sellers, the advent of a vote to potentially divorce from Europe is hampering the Pound. The uncertainty that this vote evokes was always going to cause weakness in the Pound but Sterling hasn't completely capitulated. Support for the Pound can be seen in the $1.4050 area and there are levels of resistance to Sterling's advance in the $1.43, 1.44 and 1.47 areas. These coincide with the short and long term trend lines. The Sterling – US Dollar rate is quite finely balanced though; neither oversold nor overbought. So there is scope for movement in either direction but, with the Brexit vote hanging over the Pound, you would have to favour a downward movement next.



Weekly Currency Insight by David Johnson



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