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January 2016

Weekly Currency Insight

Published: Friday 08 January 2016

  • China shares cause another shock
  • USD reaching resistance level
The global markets were once again shocked by the slump in Chinese share prices yesterday. The Asian, European, UK and US markets all followed the Shanghai index decline like little lambs but we have seen a little more stability overnight. The Japanese Yen is considered an Asian safe haven and it strengthened as the Yuan declined but the Yen weakened a little overnight.

Weakness in the Chinese economy generally translates into weakness in the currencies of China's suppliers and that includes the Australian and New Zealand Dollars. It also tends to weaken commodity markets which, in turn weakens the big commodity exporters like Canada, South Africa and the Latin Americas.  
 
Two pieces of data helped the Euro yesterday. Unemployment fell to its lowest in 4 years although 1.05% is still dire. However, that plus the fact that German factory orders were surprisingly strong helped the Euro to strengthen again.  The Sterling – Euro exchange rate has fallen to this 1.3320 level three times since the start of 2015 and each time the Pound has recovered. The chart and details below explain it a tad better but there is nothing on the UK data front to boost Sterling today. If Sterling is to get a boost, it'll have to wait until next week. 
 
Today's big data is the US employment report. The question on everyone's lips is whether the Federal Reserve moved too soon to raise interest rates in December. If the change in Non-Farm Payrolls is less than impressive, the naysayers will be out in force berating the Fed for jeopardising the fragile recovery. If the payroll count has grown by 220,000 or more, I suspect we will see further USD strength. Be prepared.
 
We will also get Canadian employment data and that is still a big worry for the Canadian authorities. At 7.1%, the unemployment rate is uncomfortably high and the slump in the value of Canada's exports will not have helped the mood amongst employers. Any deterioration in the labour market will be bad news for the Canadian Dollar.
 
And on this day in 1935, Elvis Presley was born. What is quite interesting is that David Bowie was also born on this day in 1947. Two men who transformed the world of popular music in their own very unique ways sharing the same birth day; now that's an interesting fact.
 
I'll leave you to ponder that and to have a great weekend. Can you believe it's the 8th already!
  

AUD

 

Fear over the slowdown in Chinese manufacturing caused a slump in the Asian share markets. Such was the collapse that the markets were suspended twice in the same week to allow traders time to cool their heads.
 
That sent shivers through the suppliers of goods to China and Australia is a case in point. The drop in the value of the Australian Dollar this week has been notable but it is only within recent ranges. The Sterling – Aussie Dollar rate, as shown in this chart, has bounced to within a stone's throw of A$2.10 and it looks pretty clear it will take a heft shove in the back to get it through that level. That doesn't mean it won't happen but if we do see this pair trading in the A$2.12 area, there is highly likely to be a much larger upward swing. If A$2.10 isn't breached, a test of A$2.00 is on the cards.


 

CAD

 
The fall in the Sterling – Canadian Dollar rate that started in 2007 and ended in 2010 is being matched in pace and vigour by the rise we saw start in 2013. We are back up to 2008 levels now but further gains are proving to be tough to make. The reason for the recent weakness in the Canadian Dollar is largely due to a fall in commodity prices and a slump in energy prices. Canada is a large scale exporter of a number of raw materials and energy products and these paltry prices are harming Canada's export income. At this stage, it is difficult to see what can save the CAD from further weakness. Oil prices are unlikely to improve in the short term and unless China's demand picks up (not likely); the level of commodity prices is likely to remain subdued. An upturn in US demand would do the trick but, despite the Federal Reserve being confident enough to start raising interest rates, US data is still very mixed. If the Pound can make headway above C$2.10there is every chance we will see 2.15 in a very short space of time.



 

EUR

 
AS mentioned above, the improved EU unemployment data and generally more upbeat tone of Eurozone data has allowed the Euro to mount a sort of recovery in the past few weeks. However, the GBP-EUR rate is only back to the low we saw in 2015. This level of 1.3320 provided a springboard for the Pound to recover against the Euro twice in 2015 and the trend-line support of a trend that started in mid-2013 is providing further incentive for traders to buy the Pound at this level.
 
Consequently, it will take a lot of selling pressure for the Pound to fall below here; especially as the UK economy is ahead of the curve in its recovery compared to the EU. If €1.33 does break, we may well see a rapid decline to €1.2750. There is likely to be a bounce back to €1.33 before the Pound capitulates completely so all would not be lost for GBP sellers. However, if €1.33 holds, the range top remains in the lofty €1.40+ areas.




 
 

USD

 
There is no doubt the US Dollar is the main beneficiary of all the nervousness in Asia and Europe. The Dollar has gained 14 cents against the Pound in the last 7 months. However, whilst the shorter term fall looks shocking, the longer term charts shows this as no more than a repeated pattern. Since 2009, this $1.45 level has proven to be a significant support level for the Pound and the point at which the US Dollar buyers run out of enthusiasm. There was a dip through this level in 2010 but it lasted less than a month and this current fall looks rather overdone. I would not be at all surprised if we saw another bounce from here or hereabouts. However, if the Pound falls to $1.40 or lower, the 2009 low of $1.35 beckons.




The delivery

 
During a power cut, a redneck's wife goes into labour. The Doctor is called because there is no time to get her to hospital. He gets the redneck to hold up a storm lamp so he can assist the wife. After a short while, a baby is born and yells her way into the world. "Congratulations, you have a daughter," says the Doctor. "But", he adds, "keep the lamp there. I think there is another baby".
 
Sure enough, a few minutes later, he holds a second baby in his arms. "You also have a boy", he says to the redneck. "But please keep the lamp up, it looks like there may be another".
 
"No sir. I ain't doin' that", says the redneck. "I think the light's attracting 'em."

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