- Pound still suffering from the uncertainty over the Brexit vote
- BoE's new bond buying plan hits a early snag
- RBNZ cuts interest rates to a record low of 2%
Overnight the biggest mover was the New Zealand dollar as the Reserve bank of New Zealand cut rates by 25 basis points to 2%. Despite the cut and the RBNZ indicating that there would be more to come, the Kiwi rallied by 2% in the immediate aftermath although some of those gains have now been reversed. With markets chasing yield it seems that the New Zealand Dollar is still fairly attractive in a world where negative rates are in vogue and being considered by major central banks.
The RICS survey fell to +5 in July from +15 a month earlier as property transactions declined, marking the weakest 2 months since June 2008. Last week Bank of England Governor Mark Carney highlighted signs that the housing market was weakening after the BOE cut interest rates to a new record low. In light of this news, it is not surprising that the Pound is continuing to depreciate. The Pound traded in a tight trading range overnight and is now testing the one month lows around 1.2950. Any rally looks likely to be short lived and 1.3100 is now a decent level of resistance.
The data calendar is fairly light today with only inflation figures due from France and Ireland this morning. Jobless claims from the US will be announced this afternoon and may garner more attention after the stellar Non-Farms last week. With little of note due to be released, current trends and ranges should prevail as traders position themselves ahead of the release of US Retail sales tomorrow.
John wrote to his son Mark in jail. Mark was serving a lengthy prison sentence for a bank robbery. John’s letter was a lengthy message about the family and what had been happening. He mentioned that he was planning to dig over the old rubbish patch at the far end of the garden to plant tomatoes. He also moaned about how bad his back was and how he was really not looking forward to starting the task but needed to do so.
Three days later a team of police officers arrived. They set about digging the ground over to a depth of about 3 feet. They examined and tested every inch of the soil and when they found nothing and left, John’s tomato patch just needed a little compost and it was ready for planting.
John wrote back to his son and asked what had happened. The letter he got back said, ‘All I did was write back to you telling you that you should never dig up that ground whatever happens. I’m guessing that was intercepted.’
The Australian rate cut and the comments from the Reserve Bank of Australia’s governor have had an impact on the Australian Dollar. The RBA governor said that low inflation with positive economic growth was probably the least bad option for now and that pretty much rules out any kind of interest rate hike to the foreseeable future. In normal times that would probably weaken the Australian Dollar but, even at 1.5%, the Australian base rate is still very attractive in comparison with the US’s 0.5% and Japan’s 0.0%. In fact, other than the South African base rate, it is one of the most attractive yields available. So the GBPAUD exchange rate is understandably down at a low we haven’t seen since 2013 and, whilst the Aussie Dollar is heavily over-bought at this 1.69 level, that doesn’t mean it cannot strengthen further. A push to 1.65 is perfectly feasible and, unless the Pound can recover to 1.78 or above, there is no upward momentum at this stage.
The oil market has seen a minor recovery of late. Crude prices are once again above $40 a barrel and that is good for Canada’s exporters. However, with poor employment data and a slowing housing market, the Canadian economy has some work to do if it is to recover from the hit it took from the Alberta forest fires earlier this year. US data has been better of late and that is good news because the USA is the recipient of 70% of Canada’s exports but the value of the commodities Canada ships south is still suffering from very poor commodity prices. In fact, China’s slowing economy is probably more influential on the commodity markets and therefore on Canada’s export income than the US. The GBPCAD exchange rate has been in a downward trend all year as Sterling has declined in the Brexit melee. At this stage the C$1.654 level is the technical support for this pair and C$1.75 marks the top of the short term trading range. Any move either side of that would be significant but we can use this band as our short term upper and lower trading range.
The battered Pound is still suffering from the uncertainty over the Brexit vote. Data showing a fall in confidence belies the improved retail data and positive housing data we have seen of late. Nonetheless, ‘uncertainty’ is the key word du jour
. That uncertainty is aided and abetted by the Bank of England’s apparent inability to meet its bond buying target but I am sure they will sort that out. GBP weakness is also assisted by suggestions from on Monetary Policy Committee member that further quantitative easing is almost inevitable. That’s a currency-weakener if ever there was one. Meanwhile, the Euro seems, at this stage, to be unruffled by the fallout that Britain’s exit would cause to the wider EU and not just the Eurozone states. Seeing the EU’s 2nd
largest contributor walk away will be damaging but maybe the markets are still hoping a deal can be struck to keep Britain in the club. EU data has been a tad better of late but starting from a very low base. And it cannot be forgotten that unemployment across the Eurozone is still excruciatingly high; especially in the Mediterranean states. For now, though €1.1650 is clearly a support level and there is major resistance at the €1.20 level. Use these as your parameters for now, pending further change. There is no uncertainty that we will see further volatility in the weeks ahead.
There is every chance the Reserve Bank of New Zealand will cut their base rate when they meet in the late hours tonight (10th August UK time). Whilst this is ostensibly to assist the slowing NZ economy, there is no doubt it is also seen as a means to weaken the overbought NZ Dollar. It won’t have much impact though. At 2.25% the base rate is very attractive to international investors and at 2.0% it would be almost as attractive because there is so little opportunity for any kind of yield anywhere else in the developed economies of the world. And if investors can borrow at virtually 0% elsewhere as well as use that cash to trade on margin in the NZ bond market and get such an attractive yield, they will continue to do so. It is unlikely the NZD will weaken by much if the RBNZ does as we expect them to do. However, it may be a good opportunity for those who need to buy NZD in the short term. An automated order is the weapon of choice in such a situation.
Much has been made in the press of the Pound slumping to 30 year lows but it is really only against the US Dollar that this is true. Having said that, having Sterling at levels we haven’t seen since the sterling crisis of the mid 1980s is a disconcerting sight. It is obviously great for exporters whose goods look increasingly attractive to overseas buyers and it makes investing in the UK or buying into UK companies a pain-free experience but the UK is a largely importing economy, so a weak Pound increases costs. Technically this currency pair is at the bottom of a 30+ year trading range and has found support. If $1.28 holds, then a bounce to $1.34 is highly likely and perhaps a full on rally to $1.40 is on the cards. If $1.28 gives way though, we could see the Pound slide $1.20 and maybe even $1.10 although that would look unlikely at this stage.
Weekly Currency Insight by David Johnson
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