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October 2015

Daily Currency Insight

Published: Monday 19 October 2015

Scotland you were robbed by a very suspect penalty decision. That was the best Scottish Rugby performance I have seen in years and you really didn't deserve that ending. 
The third week of the month is generally light on data but this one has a few meaty chunks in it. It started before I did this morning with the release of Chinese economic growth statistics for Q3 which showed the slowest pace of growth since 2009 and well below expectations. 6.9% is a growth rate most economies would give their left arms for but that is well down on the 11% figures China used to boast. That was accompanied by manufacturing growth data which also disappointed forecasters. The result is that the Australian, New Zealand and Canadian Dollars have all started the week on the back foot and the South African Rand likewise. The Reserve Bank of Australia will release the minutes from their last board meeting early tomorrow (UK Time). Hints will be sought as to their next interest rate move which is as likely to be downward as upward. 
However, apropos nothing, further evidence that the Chinese economy is sliding towards consumer dominance came in the retail sales data which showed 10.9% growth; above the market forecast and above last month's figure.
The rest of this week will bring two major central bank events; that of the European Central Bank and the Bank of Canada. The BOC will make their rate announcement on Wednesday and whilst no change is expected, they may add to the expectation of further easing which seems to be pervading the markets.
The ECB is likely to do much the same; keep the base rate on hold and the QE budget likewise but to hint at further monetary easing in the months ahead if necessary. The Euro is levitating at the moment but may well weaken as we approach Thursday's meeting and the release on the same day of the ECB's economic bulletin.
UK data includes retail sales number which is likely to be rather upbeat what with the Rugby World Cup visitors and the improved weather. The Pound recovered last week but could make further gains if that data is as expected.
And I'll leave you with the advice one criminal in America should have taken. If you are on the run from the police, keep your head down. Justin Taulbee from Kentucky did not. He escaped whilst awaiting arraignment but rather than taking that advice, he posted a video rant explaining to anyone who cared that he had been released on his own recognisance. He hadn't by the way but the video was useful to the police because it tagged his location and they just popped over to re-arrest him.  


The Australian Dollar has had a mixed week but the tone is quite negative. The Reserve Bank of Australia is pointing to the potential for further interest rate cuts from the already historically low 2.0%. The Chinese slowdown is hitting commodity prices hard and hitting Aussie exporters in similar fashion. Some are even forecasting a rate cut as soon as November and that is keeping the Aussie Dollar on the back foot. We will await that meeting with renewed interest. In the meantime, the Sterling – Australian Dollar rate has some support at A$2.10 and A$2.07 but there are plenty of AUD buyers around the A$2.13 level. 



Canadian data is very mixed right now. Of course Canada's commodity and energy exports have been battered by the fall in both prices and demand and of course the CAD has weakened in light of those developments. However, factory sales fell less than expected in August and commodity markets seem to be levelling off. Hence the Canadian Dollar has recovered some of its composure and is making tentative gains in some currency pairs. Against the Pound the loonie is 10 cents stronger than it was 8 weeks ago but, put that into context and it is still 20 cents weaker than it was at the turn of the year. A 50% recovery, which is fairly common in foreign exchange rates, would take this pair back to C$1.92 or thereabouts and I wouldn't be at all surprised if we get there. As long as the Pound can keep its head above that level, there is scope for another advance; maybe as high as C$2.08 again but a break below C$1.90 would signal further falls.


Mixed data from across the Eurozone and poor data from Germany are holding the euro back. We have yet to see the real impact of the VW scandal on German exports but that probably isn't going to look pretty when we do. Hence, traders are very nervous over the euro right now. The European central bank is exacerbating the situation with talk of further quantitative easing and well they might. There is no inflation to speak of in Europe, unemployment is still up around 11% across the currency sharing bloc and manufacturing and industrial activity is notable for its lack of expansion. Further cash injections into the economy may be the Eurozone's only chance for survival so why isn't the ECB getting on with it? They appear to be working at the pace of rabbits caught in 2am headlights.  Meanwhile the Sterling – Euro exchange rate is trapped in a €1.3350 to €1.3850 range and doesn't appear to be ready to change.


The NZ Dollar seems to be shrugging off the impact of China on both New Zealand's exports and those of its largest export market, Australia. New Zealand Consumer confidence seems to be as high as that of the All Blacks team. An index reading of 114.9 matches the April figure and is substantially higher than September. Perhaps news that the Reserve Bank of New Zealand may be planning interest rate cuts is falling on welcoming ears although that will weaken the NZ Dollar and increase the cost of imports but I guess kiwi consumers will cross that bridge when they get to it. While we wait for that, the New Zealand Dollar has gained 20 cents against the Pound since the start of September but it still remains 30 cents weaker than it was in April. On one hand, the NZD is a good buy at these levels but if you are a 'glass half empty' kind of person, you will notice that you missed the NZ$2.52 spike we saw in August.


 In the year to June 2015, the Sterling – US Dollar exchange rate (cable as we know it) fell by 25 cents. Falls always seem easier than recoveries in this market and it has taken 4 months of volatility to get the Pound to recover from that $1.46 low to the current $1.55 area. The trend is marginally positive in spite to the recent dip but mixed data from either side of the Atlantic makes it hard to know what will happen next. In essence traders are all trying to second guess the timing of the first interest rate hikes from both the Federal Reserve and the Bank of England. The global impact of the Fed's decision will be so much more important than the BOE's but we in blighty will be interested in the UK base rate nonetheless. 6 months ago, most analysts expected the US base rate to have risen by now and the UK base to be edging towards an end of year hike as well. With the slowdown in China and the impact of the resulting commodity market slump still playing out, it is hard to see either central bank pushing the cost of borrowing higher any time this year and perhaps not even in 2016. Certainly equities traders are pretty confident of that; hence the strength of the FTSE and Dow Jones. As far as FX goes, if the Pound can break above $1.56, there is scope for a push up to $1.60 again with very little resistance. If on the other hand, the Pound slides below $1.51, the risk of a fall to $1.56 is a very real threat.

It's really weird
The other day someone left a piece of plasticine stuck to my front door. I don't know what to make of it.