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May 2016

Weekly Currency Insight

Published: Monday 09 May 2016

  • Brexit uncertainty hangs over the UK
  • Chinese data boosts AUD, CAD, NZD and others 
  • US employment data weakens USD
US employment data released on Friday disappointed the markets so much that many are now lowering their expectations for interest rate hikes. The markets had, until Friday, factored in two 25 basis point hikes in 2016 but that may be back to just one as we stand. The Dollar weakened initially but recovered its composure in early trade.
 
The Sterling – USD rate would have been a little higher but for the Brexit debate moving to the matter of security and some odd arguments that the EU might disrupt anti-terror and crime pursuance if the UK were no longer a member of the EU. I am still trying to see what anyone would gain by that but such are the scare tactics being utilised by either side in this muddled debate. Nonetheless, Sterling is weaker on most fronts this morning and the lack of data this week will perhaps allow for more of the same. We do have the Bank of England's interest rate decision on Thursday and whilst no change is likely at this stage, one of the other reasons the Pound has slipped is due to the expectation that further interest rate cuts would inevitably follow a decision to leave the EU.
 
China trade balance was published over the weekend and the headline of a $45.6 billion surplus looks, on the face of it to be rather attractive but the detail is where the devil can be found. Exports fell by 1.8% on the year; much worse than the 'unchanged' forecasts and imports were down by a whopping 10.9%, when the forecasters were expecting just 4.0% of decline. That's the 18th consecutive month of declines by the way. That had a negative impact on the countries that supply China and which supply commodities because China's imports are dominated by raw material products.
 
Hence the Aussie, Kiwi and Canadian Dollar are a little weaker this morning. Speaking of Canada, the terrible forest fires around Fort McMurray may finally be starting to ebb but the problem is not over and the impact on Canada's economy and exports is, as yet unknown. Nonetheless, it is entirely predictable that the Canadian Dollar would slip on this event.
 
The rest of the week is not a major one for key data. In addition to the items mentioned above, we will also see UK manufacturing data, a smattering of inflation reports from across the Eurozone as well as EU industrial production data. We will get the final assessment of Eurozone economic growth for Q1 and US retail sales too. So there is enough to keep traders busy and to keep volatility bubbling away but the non-data influences are perhaps more impactful. The Brexit campaign will continue to dominate the Pound, interest rate talk will affect the USD and Euro and commodity markets will tweak all other rates, so there will be no sneaking off to sit in a pub garden, more's the pity.
 
In other news, I am not sure how you say 'gert orf my laand' in Mandarin but a farmer in China, incensed by an illegally parked car, chose to use his tractor to haul the car through the village and smash it into a tree. The video on the internet is rather good; if you are a fan of carnage and destruction but I would love to see a translation of the insurance forms.
 

Examination

 
A woman brings a baby into the doctor's surgery for her 2 monthly check-up. The doctor examines the baby thoroughly and says, "She's a little underweight. Is she bottle or breast fed?"
 
"Breast fed", says the woman.
 
"OK, would you strip your top off please?" says the doc.
 
The woman does so and the doctor examines her fully before asking her to get dressed again. As she does so, he says, "Well it's obvious why she is underweight; you're not producing any milk at all."
 
"That's not surprising," says the woman. "I'm her grandmother, but I am so glad I bought her."

 

AUD

Having been in a downtrend since September 2015, the Sterling – Australian Dollar exchange rate has gained pace since the announcement of the EU Referendum. The pair is finally looking as though it might break out of the downtrend. The Pound has had a great start to the week and is now back over A$1.88. It is thought that Barack Obama's forcefully statement for the “Remain EU” has also urged young people to vote and support EU membership. This was also coupled with ill-judged comments from London Mayor Boris Johnson which saw momentum shift in favour of the ‘remain’ campaign. The Bookies now have the ‘remain’ campaign ahead and this has seen the Pound reverse its fortunes somewhat. We would expect the opinion polls to sway the markets as they move but for now they are strengthening the Pound.

Ideally, to confirm the break from the down channel, the Pound would need to move over the 1.9200 mark by the close of the week.  Crucially the key level of support for the Pound at 1.8388 held last week. It was the Fibonacci line between the lows at 1.53 and highs of 2.24. The fact this marker held should support the Pound moving forward.

Australian inflation figures are released overnight – they are expected in at 0.2%. It is expected that the RBA will leave rates as they are if the reading come in at 0.2%, as unemployment is falling and the economy generally appears to be on the up. Keep an eye out tonight and tomorrow morning on the inflation figures as any readings weaker than expected should have an impact.


CAD

It’s been a good week for the Pound as the Sterling – Canadian Dollar exchange rate pushed over 3 cents higher in as many trading days. This was partly down to the US President who spoke on Friday about the importance of the UK remaining in the EU if a successful trading relationship between the two countries was to stay in place. The leave campaign accused the US of interfering, which dampened the positive influence on the stay campaign a little.

In spite of last week’s somewhat positive Canadian inflation results, the ‘Loonie’ has remained down against the Pound and its other peers so far this week. This is in part due to the price of crude oil which remains subdued an undoubtedly influenced by the dreadful fires surrounding Fort McMurray, an oil producing area.

The general outlook for the GBPCAD rate is a downtrend between now and the referendum and this could be good opportunity to take advantage of any spike sin the rate if they arrive and if you are able to. An automated order is your best bet in these uncertain circumstances.
 
 


EUR


Sterling Euro slid to the lowest level in close to two years in April, before staging an aggressive rebound. The pair surged close to six and half cents in the past two weeks, effortlessly breaking above the 50 day moving average and forming a minor uptrend.  Appetite appears to be waning at the one month high, with momentum indicators turning negative from their overbought levels, resulting in the minor uptrend been broken.

Data from the UK has been overall disappointing; the Pound however has taken much of the weak data in its stride. It is becoming clear that data will be viewed as a side show for now, as the markets only preoccupation is with the Brexit vote. The UK trade deficit hit its highest level since records began in 1948 at over 32 billion, as foreign investors showed their reluctance to buy UK assets. This was reflected in the manufacturing PMI which contracted to a 3 and a half year low. Retail sales also dropped by 1.3%, showing an unwillingness amongst consumers to spend as confidence has further eroded. Surprisingly it wasn’t all bad news; inflation posted a 16 Month high in March, which could resurrect some of the hawks at the Bank of England. With weak employment figures and wage pressure moderating we doubt that. This is a sign that any increase in inflation will not be permanent and the shadow of a ‘Brexit’ could slow the recovery further even after June 23rd.

The chances of a Brexit have receded recently, as the opinion polls indicate a widening gap between remaining and exiting. The remain campaign has been backed by President Obama and he’s expressed that it may take as long as 10 years to negotiate bilateral trade terms with the US. The Remain campaign appears to have instilled enough of an economic fear to win some of those undecided voters. We must remember these polls are not always accurate and one only has to look back to the Scottish referendum, where those polled and the end result were well out of sync, especially when 20% of participants polled still claimed to be undecided. Therefore the risk of a Brexit may have diminished, but has not fully disappeared and the recent rally in the Pound could quickly change course if market senses any shift towards the Leave camp.

There were no real surprises from the European Central Bank in April, as they left their policy mix unchanged. ECB President Draghi however reaffirmed his dovish stance but surprisingly reopened the door to further interest rate cuts, as he accepted inflation could turn negative again before picking up in the second half of 2016. The focus had been on delivering monetary easing through the bank credit channel rather than through further cuts and a weaker Euro. The Euro however has already lost 6 cents since the last ECB meeting which could curtail the regions recovery, so some investors are starting to believe that Draghi could be forced to change tactics by attempting to directly influence a devaluation of the Euro once more. Britain’s referendum also poses a major risk for all of Europe and if Britain were to leave this could result in full facture for the Eurozone. There may also be new elections in Europe as Spanish leaders fail to resolve a political stalemate and a migrant crisis which has fuelled nationalism across the continent as it begins to reshape the region. So the Euro which saw strong gains between early March and late April may be in for a natural correction in May.


 

NZD

A key few days for the GBPNZD rate as the Pound outperformed all major currencies. It was oversold admittedly weighed down by fear of Brexit. Obama throwing his hat into the ring at the weekend in support of the ‘Stay’ vote along with Boris Johnson’s offhand comment may have helped to nudge the ‘Vote Remain’ camp ahead of the ‘Vote Leave’ troupe. GBPNZD managed to hold onto the 2.05 support that we mentioned at the start of the month and has now broken out of the downtrend that been in place since September. I think we’ll see GBPNZD rate target 2.1450-2.15 level and then pause for thought. Tomorrow’s RBNZ meeting may come and go without an interest rate cut but with 40% traders betting on one, you can see why the Kiwi Dollar has weakened ahead of the decision. If they elect to maintain rate at 2.25 to protect against further overheating the housing market, the GBPNZD may run out of steam. If they do cut interest rates, initially the Dollar will weaken but the accompanying statement could allude to the central bank cutting rates for the last time in which case the Kiwi will gain momentum. 
 




USD


Sterling continued to power higher from a low of 1.4000 seen in early April to closing at almost 1.4700 by the end of the month. The exchange rate had been whipped around by various polls on a potential Brexit and had been mainly supported throughout April particularly after US President Obama weighted into the campaign and gave a brief blip to the ‘Remain’ camp. Growth in the first quarter came in slightly below expectations at only 0.4%. However this was largely ignored as traders chose to concentrate on the impending referendum and the prospects of the UK remaining part of the EU.
 
The Bank of England acknowledged that the EU referendum risk was weighing on the economy with businesses likely to postpone investment decisions and households holding back on spending. This clearly had a negative impact on the growth figures in the first quarter and it is probably best to look through the current data until we have some clarity around the issue of Brexit.
 
Over in the States, the data continues to disappoint with weaker housing numbers, lower retail sales and poor jobs releases. GDP also printed at a lacklustre 0.5% reflecting the overarching weakness in the economy. The Dollar has struggled to make any gains against a basket of currencies and in the current environment it is difficult to see the Dollar sustaining any meaningful rallies particularly as the likelihood of interest rate hikes from the Federal Reserve continue to be pushed back. That being said the recent Fed minutes were ever so slightly more hawkish as they stated that the current global issues were not as large as many perceived and that they were edging closer to a rate hike. Time will tell if the markets have been a little over zealous in only pricing in a rate hike at the beginning of 2017.
 
A weaker employment report last week allowed space for the US Dollar to strengthen but it failed to do so against the Pound. Sterling's weakness in light of the hints from the Bank of England f lower interest rates kept the GBPUSD rate moving downward. Sterling traders can't take their eyes off the Brexit debate because it is throwing out more twists and turns than anything Alton towers has on offer. That volatility is where forex traders make their money and there will be plenty of it in the next 6 weeks.  


 



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