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April 2016

Weekly Currency Insight

Published: Monday 04 April 2016

  • Sterling continue to remain under pressure
  • US monetary policy boosted demand for AUD
  • GBPEUR stuck around 1.25
Friday was an odd day; very little tier one data other than the US employment and wages reports. The data was to the positive side in general though.  America created 215,000 jobs in March, which was better than expected and average earnings also beat the forecasts; a 2.3% year on year rise than the forecast 2.2%. To add to the party, the ISM Manufacturing Index was up to 51.8 from a poor 49.5 last month. The US Dollar, as you might have expected, had a decent day; gaining on most fronts.
 
So as those with dodgy tax affairs run through Panama scramble to restructure their money laundering plans, all we in the foreign exchange market know is that this week begins with a little more data than last week. We have already seen Australian retail sales and building approvals data. The retail sales data showed no growth in February but there was a solid rise of 3.1% in building approvals after a shockingly bad 7.5% decline in January. The Aussie Dollar was largely unchanged on the news but traders remain a tad subdued ahead of tomorrow's interest rate decision from the Reserve Bank of Australia. No change is forecast but there are uncertain times and anything could happen.
 
The Sterling – Euro exchange rate has slipped again as the effects of Brexit and slowing growth weigh on Sterling. The very important 80p level (€1.25 to the Pound) proved to be a big support level through the 2nd half of 2015 and may well be the support level now; although we are slightly below that as I write. This morning brings Eurozone unemployment data and producer prices. Both could be influential on the Euro and so could all the service sector Purchasing Managers’ Indices due tomorrow. Lively trading is guarantees and volatility generally emanates from that.
 
This afternoon belongs to the US data; factory orders and durable goods orders will dominate. The factory orders data is expected to show a significant decline and that could damage the US Dollar. The Sterling – USD rate is currently at the lower end of its range, so there is plenty of space for a bounce. The Euro - US Dollar rate is similarly placed.
 
And if you have had your dodgy tax arrangements foiled by the Mossack Fonseca leaks, and you have £20 million or so to spare, you could buy your own village. The whole village of West Heslerton in North Yorkshire is going to auction and the estimate is in that £20 million area. For that you get a mansion, plus 42 houses, a pub and a sports pavilion. The only caveat – apart from the purchase price – is that you must commit to keeping the village way of life. Happy bidding.
 

Medical terms

 
The man told his doctor that he wasn't able to do all the things around the house that he used to do. He asked the Doctor to check him over to see what was wrong.
 
When the Doctor had done a number of tests, the patient said, "Now give it to me straight Doctor. Tell me in plain English what is wrong with me."
 
"Well, in plain English," the Doctor replied, "you're just plain lazy."
 
"Okay," said the man. "Now give me the medical term so I can tell my wife."
 

AUD
 

The uptrend in GBPAUD gave way in February and there was always the risk that if it did, it would be followed by a sizeable fall which is where it finds itself in through March. The Pound is struggling against all currencies other than the USD (which has weakened on dovish US monetary policy) and looking at the GBPAUD chart it is heading down towards 1.8400 which is a 50% retracement of the whole rally from the 2013 low (1.44) to the 2015 high (2.24). With the EU referendum vote still 3 months away (June 23rd) and the polls still indicating a chance of the UK leaving the EU, in this environment it’s not unreasonable to expect the Pound to remain under pressure. 

So the short term target on GBPAUD is 1.84 – the fact is the 50% retracement may provide some support so stop loss orders below there may be wise. Whilst GBPAUD is oversold on the daily chart, it’s not on the longer term weekly and monthly charts – consequently I would suggest there’s more downside to come. With the outcome of the EU Referendum so uncertain, I think it’s fair to say the Pound will be subject to further weakness against all currencies until the vote (and thereafter if we vote to leave the EU).



 

CAD


Overall, the Canadian Dollar has continued to strengthen as it rides the coat tails of recent USD strength. However, the Dollar struggled a little after the first Federal budget of Canadian Finance Minister Bill Morneau was relatively downbeat. While the new finance minister pledged a significant raft of investment and stimulus measures to support the domestic economy, some economists were unimpressed.

While oil prices have stabilised a little over the last month, they dropped below $40 a barrel today after Saudi Arabia said it would freeze production only, if other major producers followed suit. If recent progress collapses, this could weigh on the Canadian Dollar and as a result the GBPCAD rate would push back towards 1.90 again.



 

NZD

 
Diary issues unsettled investors last week as New Zealand exchange fared poorly in response. The biggest blow came when diary giants, Fonterra announced it would be raising dividends of dairy farmers, used to support agricultural workers, but was curbed by the major decline in diary prices. Currently the GBPNZD recovered at around 2.11 last week as NZD is set to have a quiet week due to the lack of Tier one data. On the present front, we have commodity prices at 00:00 GMT tomorrow, expected at 0.4 as well as house prices y/y expected at 11.6 on Wednesday. 


 

USD


The Sterling Dollar exchange rate has traded in a relatively narrow band between 1.4000 and 1.4500 over the course of 2016 although it did dip below 1.4000 very briefly in February when Boris Johnson decided to join the campaign for the UK to leave the European Union. Sterling is still on fairly shaky ground in the months leading up to the referendum in June and the price action would suggest that the Pound will struggle to sustain any meaningful rallies. 1.4550 is now a decent level of resistance as it has been tested 4 times and not looked likely to break on any occasion.

In the UK, the data has been fairly mixed of late with unemployment still falling. The forward looking PMI's still above the 50 level that is the dividing line between contraction, expansion and growth estimates being revised higher. The budget deficit continues to rise however and credit is becoming harder to obtain. The market focus though is clearly on the upcoming referendum and the Pound is being whipped around by rhetoric and opinion polls that are within the margin of error. For now, the market is trading on the uncertainty and the Pound is unlikely to make gains until we know what the landscape will look like after June 23rd.


 

Weekly Currency Insight by David Johnson

 

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