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February 2016

Weekly Currency Insight

Published: Friday 12 February 2016

  • Australian Dollar remains under pressure
  • Eurozone data continues to be pretty dire
  • Weakness in commodity markets hampers CAD
When the head of the US central bank still ruing the rate rise she oversaw in December and the Bank of England still hinting at rate cuts rather than rate hikes, you know the world is in a tight spot. The repercussions of the Chinese slowdown are being slightly offset by the very affordable price of energy and commodity products but none of that is promoting growth and that is the problem.
 
Stock markets have continued to fall overnight. The Euro continued to strengthen but I guess the European Central Bank has already pulled out all the stops to try to stimulate the economy and perhaps doesn't have a lot more room to manoeuvre.
 
Unlike other days this week, we do actually have some data to focus on today. Hurrah! We have already had German economic growth data this morning and that was a bit ho-hum because it was bang on the market expectations at 0.3% growth in Q4 of last year. That will be followed at 10.00am UK time by the Eurozone GDP data which, oddly enough should also show a 0.3% growth rate. Unless the actual data is far removed from the forecasts, that won't make the earth move for the Euro; external influences are far more compelling.
 
This afternoon brings US Retail Sales data which ought to be marginally positive but the activities – or lack thereof – of the Federal Reserve are more pressing factors in the US Dollar's volatility. As we ease into the weekend, traders will be looking to the central banks for further guidance and to the equities traders for cues. As such, we are set for further volatility and uncertainty. This is a very good time to use limit orders to try to achieve advantageous exchange rates. Have a chat with your Halo Financial consultant if you would like to explore that opportunity.
 
In the meantime, have a great weekend. It is St Valentine's Day on Sunday as indicated by the huge rise in romantic trips to Rome. Oh and there is a certain rugby match on there this weekend as well. How very convenient. Oh and keeping with all things romantic, Andy May is a very happy man. He lost his wedding ring in 2013 when it slipped off his finger while he was fishing at Cudmore Fisheries in Newcastle-under-Lyme. He obviously though it would be the last he saw of the ring but the lake was drained for maintenance and the owners allowed Andy to take a metal detector down to search. Low and behold, he found his missing ring and after a wash it is as good as new. All together... Ahhhh. 
 

Valentine's Day

 
Mike says, "Hey Bob, I know you aren't into all that lovey-dovey stuff but have you bought Jane anything for Valentine's Day?"
"Yes I have," says Bob. "I bought her a bag and a belt."
"Wow," says Mike. "I am really impressed Bob. That's thoughtful and a real turn up for the books. Jane will be delighted I'm sure."
"Yup," says Bob, looking very pleases with himself.  "Once she's fitted 'em, that vacuum cleaner will be right as rain."
 

AUD

Despite an unexpectedly positive result from the Australian Consumer Confidence index which rose 4.2% in February, the Australian Dollar remains under pressure. To be fair, fears over job security are lurking in the background and confidence in the property market is also uncertain. Add in the falls in commodity markets and the consequential pressure that puts on Australian employers and we can't be surprised that the Australian Dollar is finding it hard to make gains. The Sterling – Australian Dollar exchange rate is trading at the top of its current range but that range is a reasonably pronounced downward one. This pair has been trending towards lower levels since August last year and shows no real sign of reversing at this stage. Anything above A$2.03 is attractive for AUD buyers and anything below A$2.00 is a very attractive GBP buying opportunity. This is one of the narrowest ranges have seen in a long time and that just says to me that something has to give. The tricky part is deciphering whether this exchange rate will break to higher levels or continue to decline in the medium term. No one can confidently answer that question so using the current range makes perfect sense. 


CAD

Weakness in commodity markets and an uncertain set of US data have contrived to let the Sterling - Canadian Dollar exchange rate slide to the highest levels in 8 years. However, since the middle of 2015, the range has narrowed and we now have significant GBP buying interest at C$2.00 but GBP sellers seeming delighted to buy Canadian Dollars at C$2.08-2.10. For the time being, this is the operating range for this pair. There is still scope for the Pound to slip back to C$1.94 and it would still be in an upward trend at that point but, unless commodity markets recover or the US economy starts to look like the interest rate cut was not a mistake after all, this pair looks set to stay in this restricted trading range for some time to come. 




EUR

Eurozone data is pretty dire. There is every reason to sell the Euro and very few reasons to buy it. And yet the Euro is holding its own to some degree. Having rallied to €1.45 in the middle of 2.15, the Sterling – Euro exchange rate has slumped back to €1.27. As you can see from the chart below, this level resisted the rise of the Pound all the way through 2008 and in 2012. Once it had been broken in 2.14 and early 2015, it seemed inevitable that it would, at some stage, be tested as a support level for the Pound and that is precisely where we find ourselves today. Sterling is looking decidedly oversold at this level and it would be brave to bet against a rebound of some description. The only argument against that is that the UK referendum on EU membership is approaching and a British exit (Brexit) seems like it could actually be an outcome. If it is, we can expect safe haven flows away from the Pound and into other currencies. Sterling; at least in the early phases of a Brexit, would weaken and that is where many traders have positioned themselves at this stage.  Obviously the reverse is also true; a No vote to exiting the EU would strengthen Sterling and any hints that this is the likely outcome would start that process. It will be volatile but the GBPEUR rate is also quite predictable in some respects.



NZD


Turbulence in New Zealand's major export markets is a concern but the very attractive base rate that NZ boats is helping to keep some strength in the NZ Dollar. Hence, despite testing down to the NZ$2.15 level on several occasions, the Sterling – NZ Dollar rate is still on the high side of this support line. This pair has been in a downward channel since last September and weakness in the Pound has helped that slide. However, this NZ$2.15 level appears to offer some form of Impasse. In essence, the most widely quoted saying in foreign exchange planning is ' let the trend be your friend' and a lot of money has been made and lost on that premise. The contrarian speculators would argue that you can't make big money by following the trend but to those of you who have an underlying need to exchange funds which doesn't allow you to simply seek activity in alternative exchange rates. The trend in the GBP-NZD rate is offering a broad trading range (NZ$2.15 to NZ$2.24) at the moment and there are excellent buying and selling opportunities within a clearly identifiable range. 



 

USD

In the overall scheme of things, the US Dollar is relatively strong. Ten thousand pounds would buy you approximately $14,400 today whereas that same Pound would have yielded up to £15,800 in September 2015. That $1,400 or nearly 10% of variation in just 5 months is a salutary reminder that volatility is king in foreign exchange markets. The GBP-USD rate is in a narrowing band and sooner or later the market will break out of this range. Until it does, use $1.46 as your upper target and $1.45 as the lower range and you won’t go far wrong. 



Weekly Currency Insight by David Johnson

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