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October 2015

Daily Currency Insight

Published: Friday 30 October 2015



China is running out of people of working age so they have abandoned their 'one-child-per-couple' policy and replaced it with a 'two-children-per-couple' policy. How very modern of them. That didn't change anything in the foreign exchange markets but I thought it was interesting to note.
 
We are hearing rumours that the Bank of Japan is shaping up to expand the money supply to weaken the currency although they prefer to think of it as stimulating the economy. The Yen is likely to weaken on that news.
 
From the UK, we got consumer credit and mortgage data as well as the CBI retail sector survey yesterday. The mortgage data remained the strongest it has been since April 2008 but the CBI survey was more downbeat, falling significantly since last month. However, as mentioned yesterday, this is an oddly erratic survey that tends to be at odds with official retail sales data. Sterling stood it's ground and even advanced a little on the day. The lack of UK data today should see the pound give back some of its gains but not much.
 
Yesterday's US data included the preliminary GDP growth report. The forecasts suggested the figure would fall from the previous 3.9% to around 1.6%. The actual number was a tad below there at 1.5% and that hardly makes the case for a US interest rate hike but the Federal Reserve is still suggesting they may hike rates in December.
 
We heard overnight that New Zealand's business confidence improved slightly. The index moved back into positive territory at +10.5 after last month's very poor -18.9.
 
The Swiss National Bank; Switzerland's central bank has posted a loss of CHF34 billion as their interventions into the market and the subsequent abandonment of the 1.20 peg against the Euro have left them with hefty currency reserve losses. It doesn't look good on the CV does it.
 
Today's big news comes in four forms. We have the unemployment rate from the Eurozone which might improve slightly but even if it does drop from 11.0% to 10.9%, that is still a really awful figure. We will also get Eurozone inflation data for October. The short report on that is that there isn't any Eurozone inflation, so it isn't really a story. Sorry.
 
The Third story is that of Canada's economic growth data for August. That is going to be disappointing in comparison with July's data and that won't be good for the Canadian Dollar.
 
The fourth news is the US personal income and expenditure data which is forecast to show a slight improvement in disposable income. It is unlikely to be enough to give the US Dollar any kind of boost but it adds to the feeling that the Federal Reserve is nearing a rate hike. The Dollar would like that. 
 
And we've all been tempted to sing along at the theatre or cinema but I can't ever remember being thrown out for doing so. One woman at the Nottingham Royal Concert Hall was ejected though after singing all the way through the first 20 minutes of The Bodyguard. Her off-key and loud renditions of the famous Witney Houston tracks were so annoying that other members of the audience complained and in spite of her loud and no doubt off-key protestations, she was removed before the second half of the show. The problem is that we all now want to sing 'coz I-eee-I will always love you-oooOOoo-I will always love you' at the top of our voice. Or maybe that's just me. A bit of Friday Karaoke? Probably a bad idea.
 
Oh and have a Happy Halloween; something that always sounds like such a contradiction. It's supposed to be scary.
 

Thoughts for the week

  • If you understand Morse Code, do tap dancers mess with your head?
  • Why is there a light in the fridge and not in the freezer?
  • I was offered Mount Everest for £1 million. That's a bit steep isn't it?
  • If you arrest a mime artist, do you need to tell him he has the right to remain silent?
  • Why does the word 'monosyllabic' have five syllables?
  • Why doesn't glue stick to the inside of the bottle?
  • Clapping is just hitting yourself because you like something.
  • Do you think, if humans could fly, we would consider it exercise and find excuses not to?
 

 AUD

Since 2013, the Sterling – Australian Dollar rate has been in an upward trend channel and in recent weeks, the Pound has been battering the top end of that range. Australian banks have been shifting their mortgage rates higher in anticipation of what many think we will see in November; an interest rate cut from the Reserve Bank of Australia. With inflation rising less than expected and fears over the slowdown in China weighing on Australia's mining sector, there is clearly scope for the RBA to cut the base rate and every central banker wants a weak currency these days. With all of this in mind and the resurgence of the Pound in the background, it would seem logical for the GBP-AUD rate to head towards A$2.20 again. If it doesn't, there are likely to be plenty of GBP buyers lining up at the 2.08 level and the psychologically significant 2.00.


 


CAD

Weaker commodity income and weaker US demand are weighing on Canada's export outlook. We have though seen a small scale recovery in crude oil and that may have stabilised things a little. The Bank of Canada seems pretty certain they will not need to cut their base rate any further and that has capped the Sterling – Canadian Dollar rate off at C$2.03 for now. In fact this pair is in a downward trend and has been since the spike we saw in August related to Chinese data.  There is support for the Pound at C$1.99 and the two trend lines you can see are converging. So something will be broken soon. As the Canadian Dollar is also influenced by its Canada's largest trading partner, the USA, the strength of the US Dollar is also helping the CAD to strengthen. Whether the Canadian's want that or not is another matter. The trend is downward unless something happens to change the picture.
 


EUR

 Improving UK data and hints of early interest rate rises in the UK are being balanced against the likelihood of further Quantitative Easing in Europe and some petty dire European data.  The upward momentum in the Sterling – Euro exchange rate is pretty obvious too. Having found support on the dip to €1.3350, the Pound looks like it may be unstoppable. That isn't a true picture of course; everything is stoppable; we only have to see a smidgeon of poor UK data and traders will take their profit and steal the momentum from the Pound. But for now, we may well see another test of the €1.42 level and maybe higher if it is carrying any pace when it hits that target. 
 
 


NZD

 All central bankers are trying to keep their currencies weak. It helps exporters and the only threat it poses to the domestic economy is that it could fuel inflation. However, with so many falling raw material costs and suppressed demand around the globe, inflation just isn’t an issue right now. So when the Reserve Bank of New Zealand threatens to cut the base rate if they see the NZD strengthen, we have to believe them. In spite of that, the NZ Dollar is still strong against the Pound and other currencies. In the GBP-NZD rate, the markets are happily trading a range roughly between NZ$2.25 and NZ$2.30. However, this exchange rate looks overbought at this level and that means there is scope for a rally. That could take us to NZ$2.40 or thereabouts and it may be that the RBNZ is the catalyst for that bounce.
 


USD

 US growth data was released today and it reflected a marked slowdown in activity. However, this is based on only a small portion of the overall economic data and skewed by a sharp reduction in business inventories. i.e. companies have been using up reserves of stock rather than buying afresh.  That suppresses demand and the underlying data looks promising. With the Federal Reserve hinting at early interest rate hikes, the US Dollar is set for a period of strength. That assumes the Fed carries its threats through to completion and, as they are central bankers, we won't rely on that. In the meantime, the US Dollar is relatively strong and the Sterling – USD exchange rate remains caught between a converging pair of trend lines. USD buyers ought to be targeting the $1.54 top and USD sellers have a target level at $1.52. Something will have to give way soon. The direction of that break out