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July 2016

Weekly Currency Insight

Published: Monday 25 July 2016

  • Sterling drops on poor PMI indices
  • Canadian retail sales give healthy rise
  • Canadian inflation steady
     

AUD

CAD

EUR

NZD

USD


It was all about bottles at the weekend. Champers for the amazing Chris Froome in his 3rd Tour de France win, champers for Lewis Hamilton who now leads the F1 drivers' championship after his 5th win in Hungary, I hope Joe Root opened a bottle of something fizzy after a batting masterclass at Old Trafford and as for the International Olympic Committee; well they just plain bottled it.

 
Last week was more commiseration for the Pound than celebration. Sterling dropped on a poor set of purchasing managers indices. Surely no one was surprised that orders were tougher to come by in the wake of the Brexit vote and all the uncertainty that brought. However, the fall in the value of the Pound may be the trigger that redresses that balance. It makes UK exports more attractive after all. Any news that suggests the UK is getting its trade negotiations with the rest of the world in place will help Sterling but we can't rule out further dips either.
 
This week brings more forward looking data from the UK. It starts with today's CBI industrial trends survey and, as that is also based on orders, it should be down a little. Sterling is likely to weaken on that news. The rest of the week brings lending data for credit cards loans and mortgages (likely weaker) and the first estimate of Q2 economic growth but the forecasts on this are very mixed. Anything between an annualised 1.4% and 2.1% are being touted as the likely outcome, so there is plenty of scope for volatility around that data's release on Wednesday. 
 
We will see GDP growth data from the EU, US and Canada this week. The EU one is expected to be poor, the US one positive and the Canadian one is forecast to be very poor. As you might expect, the currencies of these countries will track the data, so be prepared.
 
This week is also awash with consumer and business sentiment indices. This will be some of the first post-Brexit data that reflects sentiment after the vote, so there is room for surprises and we should expect the unexpected.
 
Wednesday brings Australian inflation data and that is expected to be rather upbeat, maybe delaying RBA interest rate cuts and strengthening the Australian Dollar.
 
Overnight tonight will bring the release of New Zealand's trade balance data. Most analysts expect a minimal trade surplus but, such is the volatility in internationals trade right now that they could be wildly wrong. This is a good day to have automated orders in the market overnight if you have NZD requirements.
 
Throw into this melee that this is the last week of the month and therefore traders will be settling some of their speculative trades and the scene is set for a bumpy old ride. Hang on tight.
 

English

 
Definitive proof that English is a tough language to master. Take the GH from Enough, the O from Women and the TI from Nation and you have the letters GHOTI. However, if you pronounce them as they were in the words you extracted them from, you have the word 'FISH'.
 

AUD

Will they – won't they. That is the sentiment towards the reserve Bank of Australia right now when people think of interest rate cuts. The slowdown in China and the fears of a global impact from the UK's decision to leave the EU are being cited as reasons for there to be weaker currencies outside the USD and JPY. However, the reluctance of commodity prices to rally and the strength of the Australian Dollar which is harming Aussie exports are both causing concern for the RBA. An interest rate cut from their current 1.75% base rate is still a strong possibility but the RBA has played it quite cool, cutting their base on 3rd May but not committing to further cuts just yet. Aussie exporters would like a cut because it would weaken the Australian Dollar but will they get it? No one knows at this stage but what we do know is that the AUD is trading in a band against the GBP of A$1.701 to A$1.78 and little seems ready to change that unless the RBA acts when they meet on 2nd August. 


CAD

Canada's main export market is the USA but even strength in America's growth and manufacturing (relative to other nations) isn't managing to lift the Canadian economy. The Canadian Dollar is a neat reflection of that. Against the Pound, for example, the CAD strengthened from C$1.93 pre-Brexit vote to C$1.67 just after. The bounce from this over-done situation has taken this pair back to C$1.72 where it is languishing right now. However, The first release of Canada's Q2 economic growth data is expected to show a contraction of up to 0.5% in the economy and that would weaken the Canadian Dollar; maybe significantly. If the employment report, due to be published the following Friday reflects that slowdown, there is scope for further CAD weakness. In essence, if you need to sell CAD and are risk averse, you may want to manage that risk now. 
 


 

EUR

The Euro is still not reacting to the damage that Brexit would mean for the EU. That is unless of course, traders and analysts are convinced some kind of EU-light arrangement can be reached where Britain maintains its trading arrangements with the EU but is exempt from some other aspects of membership. You can place your bets on that because I am making no predictions. That aside, it is pretty clear that the markets have seen the UK as the major loser in this deal and yet UK shares are still riding high and, although the first pieces of post-vote data are starting to filter through, they are not of the Armageddon magnitude that many had predicted before the vote. This is a big week for UK data and for EU data as well. Hence, there is plenty of scope for volatility but the direction of travel for this pair is still an unknowable. Technically speaking the long terms support for the GBPEUR rate is exactly where the market currently sits. €1.1950 is a pivot point between the trend and the range of the last 8 ½ years and an entirely new range below that. If we see €1.1880 and below, then I suspect we are heading much lower but as long as Sterling sits around this level, there is scope for further gains and €1.26 would be my target if we get any upward momentum. 


 

NZD

The Sterling – NZ Dollar rate has, like most other GBP related exchange rates, dropped sharply from the highs we saw just before the UK's EU membership vote. Very significantly this fall found support at the same low that we saw in 2013. That NZ$1.77 level marked a turning point for the Pound after the 2007/2008 credit crunch and it may prove to be a similar bottom marker after the Brexit vote. It is too early to make that call but Sterling has recovered a little as UK share markets have remained buoyant and the weaker Pound has brought either inward investment or a raft of speculators or just profit takers from the 'sell GBP' trades they did in the wake of the Brexit vote. Whatever the reason, Sterling is holding up well, the threat of a New Zealand interest rate cut is keeping the NZD on the back foot and, if the Pound can find a few more buyers, it could accelerate up to NZ$1.92 without too much drama. 
 



USD

Sterling fell after the vote to leave the EU and it fell hardest against the US Dollar. That is inevitable; the dollar is a safe haven in times of global turmoil and it was already strong; driven by weak oil and commodity prices. Not since the oil price slump of the early 1980s has the Sterling – US Dollar rate been so low. However, then, as now, the Pound did find some buying interest but the relatively stronger state of the UK economy meant the market bottomed out at $1.28 this time and not the $1.04 we saw in 1985. Of course, we don't know if this Sterling crisis is over or not but the fact that Sterling only fell to 2 and 3 year lows against other currencies would suggest the crisis isn't as dire as previously. Sterling's support line this time was on a trendline that has supported the Pound since 1987 and as long as the Pound stays above $1.29, we ought to see further gains for the poor Pound. If that happens, $1.39 is the first target. 


 

Weekly Currency Insight by David Johnson

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