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November 2016

Weekly Currency Insights from Halo Financial

Published: Friday 18 November 2016

  • US rate hike looms larger on strong labour market
  • Sterling strong after retail data but awaits Autumn statement
  • CAD may benefit from Canadian inflation uptick
 

AUD

CAD

EUR

EURUSD

NZD

USD

 

Federal Reserve Chairwoman, Janet Yellen, voiced her concerns about the strength of the US employment market and warned that rising wages could force the Federal Reserve to start raising the US base interest rates very soon. The US Dollar, which is already strong in the post-election glow, is strengthening across the board.
 
The Euro remains weak this morning after the President of the European Central Bank warned that loose monetary policy is set to remain for an extended period. The Sterling – Euro rate is teasing €1.17 and the Euro-US Dollar rate has slipped to $1.06.
 
After yesterday’s report of UK retail sales growing at the fastest pace in 14 years, Sterling has no data to drive its value today, so traders will sit tight ahead of next week’s Autumn Statement from the Chancellor of the Exchequer. Speculation is rife about what Phillip Hammond will do in his first Statement as Chancellor, but fear of further slowdown in the UK economy will most likely leave him little room for manoeuvre. A bit of tinkering is likely, although, as the new man in the job, he may want to make some more interesting announcements just to mark his territory. 
 
This afternoon brings Canadian inflation data and it is likely we will see some sort of rise in the figure from September’s 1.3% annualised growth.  The Sterling-Canadian Dollar rate has been trapped below C$1.70 and it is likely to drop from there is the forecasters have got their sums right.
 
And here’s an interesting thought. Dietmar Exler, chief executive of Mercedes-Benz USA, believes that human drivers will ‘bully’ driverless cars if they spare the same road space. The fact that automated cars will be programmed to avoid collisions means that human drivers who pull out in front of the automated ones or push into traffic ahead of automated ones are likely to get away with their rash actions. I guess the tricky bit would be deciding which cars are automated and which are humans. If two human drivers try to out-bully each other, we’ll be…..well no different to the way things are at the moment in London.  
 

Death Bed

 
On his death bed, Jack turns to his wife and says, “Sarah, remember when our house burned down and we lost everything, you were right by my side.”
Hi wife smiles and says, “Yes Jack, I was.”
“And you remember when we had that bad car crash? When that lorry pulled out from nowhere, you were there with me.”
“Yes,” says Sarah. “I remember very well. It makes me shudder.”
“And Sarah, when those guys mugged us in Brazil. They held guns to our faces and they took my mother’s wedding ring. You were right by my side.”
“I remember Jack. It was very frightening.”
“And here we are Sarah. I am about to meet my maker and you are right by my side again.”
“Of course I am Jack.”
“Sarah, I am starting to think you are bad luck.”

 

AUD

This last week has seen a sea change in the Sterling linked exchange rates. The pound has found favour amongst market participants who seem to have run out of bad things to say about the UK economy. Their problem is that, for all the post Brexit gloom, UK PLC is performing rather well. This week brought a slight dip in inflation but the fastest Retail sales growth in the UK for 14 years. Hence Sterling is up on most exchange rates and the GBPAUD rate is no exception. That said, this pair has hit a brick wall at the A$1.68 level. That, as you can see on the chart above, was an important support level for the Pound in 2013 and provided similar support earlier this year. It is to be expected that it would now provide resistance to further GBP strength. IF and when that resistance fades, then we could easily see the Pound push to A$1.70 and maybe even as high as the trend line at A$1.75. The UK Chancellor of the Exchequer could pull the rug from beneath that buoyancy in his autumn statement but, even if Sterling does dip, I suspect that will be short lived. GBP buyers beware and AUD buyers, you have weathered the pain, now you can protect against another dive and ride the Pound higher….barring any upsets of course.



CAD

This afternoon’s Canadian inflation data may well give the Canadian Dollar a boost. There is a view that the stuttering recovery in the prices of oil and other commodities is adding strength to the Canadian economy and that’ll boost the CAD. That boost depends to some extent on the recovery of the US economy which appears to have weathered the Trump election without too much drama. On the other side of the equation, the Pound is recovering rather well after a week of positive UK data. The Pound will hit selling pressure if it nears C$1.75. That has proven to be a heavy level of resistance in the GBPCAD exchange rate through the past few months. It was previously support for the Pound through 2014/2015. If Sterling slips against the CAD, C$1.65 is the pivotal level. Below there is an open field all the way down to C$1.58.


 

EUR

Hearing ECB president Draghi speak of extended loose monetary policy left the markets with few options other than to sell the Euro. I remain amazed that, with so much disparity between member states of the Eurozone, the Euro remains quite strong. However, the GBPEUR rate is back to something like normality at its current €1.17. In fact, we are back to levels last seen in September but the Pound will hit resistance before it gets to 1.1750 and it is looking overbought in the short term, so don’t be surprised if Sterling corrects back to €1.14 or thereabouts before making further gains. As we approach next week’s autumn statement, a degree of profit taking could see that happen. If the Pound does power ahead into the high €1.17s, there is little to stop it testing €1.20 and a break above here would mark a solid reversal of the downward trend seen through the last year. 




 

EURUSD

The Euro – US Dollar rate looks like it is out of place at 1.06 but, as you can see from the chart above, this is just the bottom of its trading range over the last two years. Strength in the US economy and the likely December interest rate hike in America balanced against the ECB’s expectation of an extended period of low EU interest rates and high levels of quantitative easing can only push this exchange rate lower. If, as has happened before, the Euro finds buyers at this 1.06 level, then we could easily see this pair trending back up to the top of this range at 1.13-ish. A break below $1.06 would change that expectation and could heralds a drive down to the low seen in March 2015, around $1.04. Below there is territory we haven’t entered since 2003 and the all-time low for this pair is US$0.82 to one euro. So when forecasters suggest Parity between the Euro and US Dollar is on the cards, it isn’t such a dramatic statement really. 





 

NZD

The Euro – US Dollar rate looks like it is out of place at 1.06 but, as you can see from the chart above, this is just the bottom of its trading range over the last two years. Strength in the US economy and the likely December interest rate hike in America balanced against the ECB’s expectation of an extended period of low EU interest rates and high levels of quantitative easing can only push this exchange rate lower. If, as has happened before, the Euro finds buyers at this 1.06 level, then we could easily see this pair trending back up to the top of this range at 1.13-ish. A break below $1.06 would change that expectation and could heralds a drive down to the low seen in March 2015, around $1.04. Below there is territory we haven’t entered since 2003 and the all-time low for this pair is US$0.82 to one euro. So when forecasters suggest Parity between the Euro and US Dollar is on the cards, it isn’t such a dramatic statement really. 





 

USD


The US Dollar is the darling of the market right now. A buoyant US economy and the lack of positive places in the rest of the world makes buying the USD and US equities an easy decision for international investors. But Sterling is returning to form and this week’s strong UK data has allowed the Pound to make some headway against the USD. Janet Yellen, the head of the US Federal reserve suggested a US interest rate hike is imminent and many believe the Fed will act in December. So there is scope for further USD strength. Be wary of that if you need to buy USD. Any upward momentum in the Pound will find resistance around $1.27 and $1.32. Any falls in the Pound will find GBP buyers in the $1.22 area. It gives us a range to work with but greater volatility seems unlikely right now. 



 

Weekly Currency Insight by David Johnson

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