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September 2016

Sterling oversold but month-end trades may change that

Published: Friday 30 September 2016

  • Sterling oversold but month-end trades may change that
  • NZD stronger on business confidence bounce
  • AUD improves on new home sales rise
  • Canadian GDP awaited – forecast is poor

It has been a week of inappropriate people giving advice. Radio 4 had the former Greek Finance Minister telling the UK how to run its finances and we listened because things are so very rosy in Greece…obviously. We had Donald Trump very proud that he restrained himself from giving Hilary Clinton marital advice. This the man who has had 5 children by three women and who said of his daughter Ivanka, “..she does have a very nice figure. I’ve said that if Ivanka weren’t my daughter, perhaps, I would be dating her.” Not a man from whom parenting or marital advice should be sought I think. And we’ve had every spokesman and his cat telling the UK government when and how to get the Brexit negotiations underway.
The uncertainty of that decision and the timing of the Article 50 starting pistol is the big story of the week. Of course the Deutsche Bank debacle is ongoing and there are other stories in the background but the world awaits the Brexit negotiations and many investment decisions have been paused in anticipation. Not so much abated breath as abated debt. Meanwhile, UK data continues to surprise in a positive way. Nationwide says house prices rises slowed to just 5.3% in the year to September but that is still an attractive rate, mortgage lending has held up well and consumer confidence is back up to the levels seen before the referendum. Perhaps the fact that the world didn’t collapse after the vote is sinking in. Nonetheless, Sterling remains weak and is heavily oversold on most metrics. We’ll get the final number for Q2 UK economic growth this morning but there is virtually no chance of a revision. We are though, in the last 24 hours of the third quarter and that can cause traders to settle positions to crystallise the profit. So a bounce in the Pound before the day is out is highly likely.
The NZ Dollar is stronger this morning after a sharp upturn in New Zealand business confidence. The August figure was a big improvement at 15.5 but the leap to 27.9 in the September reading is remarkable, given the global concern over China, Deutsche Bank, oil prices etc etc.
The Australian Dollar also had a boost from a nice bounce in new home sales. Last month’s 9.7% drop was a worry, so the 6.1% rise this month is welcome relief.
Today should bring a bounce in Eurozone inflation to 0.4% on the year and perhaps a small dip in the Eurozone unemployment level. We are only talking about a move from 10.1% to 10.0% but any good news, however small, is still good news.
This afternoon brings Canadian economic growth data and we are expecting to see a drop from 0.6% in June to 0.3% in July. That will hit the Canadian Dollar if the forecast proves to be true, so stand by for a weaker loonie.
The afternoon also brings a smattering of US income and expenditure data, so the US Dollar could have a lively session.
And then the 3rd quarter of the year will be over and we will be into the ‘oh my word there are Christmas decorations in the shops already’ period. But before we get to that, the last day of the month and the quarter is generally a volatile one, so there are great opportunities for automated orders to be triggers at the outer limits of those moves. Speak to your Halo Financial Consultant or Dealer to discuss how that might work for you.
Australian job vacancies jumped to a four year high in the three months to August. That is pretty much the last nail in the coffin of the ‘rate cut’ demands that were so prevalent a few weeks ago. It would seem Australia’s central bank was right to pause before considering further monetary stimulus. If companies are hiring, that suggests business confidence and the fact that vacancies are left unfilled would suggest there is no slack in the labour market and that ought to leave to higher wages and increased consumer confidence.  If it were not for the overpriced Australian Dollar, things would be looking rosy. The GBPAUD exchange rate is tenuously perched on a support level that could allow this pair to slip to A$1.66 and still be within the range. A break below there though, opens up a possible dive towards the lows we saw in 2013 and that is 25 cents below the current level. If only Sterling can muster some strength from the surprisingly positive economic data emanating from all sources, those depths will not be tested.
Against the Pound, the Canadian Dollar is remarkably strong in spite of the low energy and commodity prices but because of the Pound’s perilous state. Canadian’s can feel smug about their finalisation of the Comprehensive Economic and Trade Agreement (CETA) at a time when the UK is about to embark upon trade negotiations with the EU of its own. The EU accounts for about 9.5% of Canada’s international trade, so any enhancement to that would be very valuable for Canada. However, with the USA taking roughly 70% of Canada’s exports, the improvement in American economic data is proving a real boon for the Canadian Dollar. Technically speaking, the GBPCAD rate is balanced between C$1.65 and C$1.75 and is generally trading in a narrower range than that. A break of C$1.75 would take us rapidly back to C$1.80 and a break below C$1.65 opens a trapdoor to C$1.62 initially and maybe the 2013 low of C$1.52 eventually.
Considering the 2nd largest contributor to the EU is about to set a timetable to leave, the Euro is holding up remarkably well. I know the Eurozone is not the EU but the overlap is significant. What is also significant is that the GBPEUR exchange rate hasn’t been this oversold since 2009 and that marked the start of a sustained rally which only ran out of steam in Q3 2015. For now, the Brexit debate or “what the hell do we do now” debate as it appears to be, is keeping Sterling on the back foot and the downward momentum can’t be considered over until we see this pair back near the €1.20 level. €1.18 will prove hard to break and €1.20 is a psychological barrier. If this pair does fall further, then €1.1350 which was a support level in 2013 will come back into traders’ eye-line and €1.1111 is equivalent to 90p to €1. That will make it a target.
The strengthening NZ Dollar showed its hand in the New Zealand trade deficit last month. The trade gap rose to NZD$1.265 billion as the historically strong NZD made imports cheaper but made NZ exports expensive to overseas markets. The Reserve Bank of New Zealand could weaken the Kiwi Dollar if they chose to cut the interest rate again but that would also stimulate an already quite buoyant domestic economy. Technically the GBPNZD rate is precariously balanced on the same support level it found in 2013 but this is a record low. However, as you can see from the lower twin lines in this chart, the Pound is massively oversold at this level but may be in the very embryonic stages of a recovery as the two moving average lines have crossed. A rally beyond NZD$1.80 could take us to NZD$1.90 without much drama but this could be a drawn out recovery with Brexit talk constantly weighing on the Pound. If NZD$1.75 breaks on the downside, we are into unprecedented regions of the market for this pair and we ought to expect NZD$1.70 as a short term target.
The highly volatile US Presidential race couldn’t come at a more highly charged time from a market perspective. When Hilary Clinton was ahead in polls after the televised debate, the US Dollar strengthened. However, a rising oil price after an OPEC deal appears to have been reached did serve to weaken the USD. US Domestic data is mixed but the Dollar still holds the honour of being the safest of safe havens, aside perhaps from gold bullion. As such, the USD will continue to hold its strength while the Brexit talks affect the Pound and Euro and while the US economy is comparatively more successful than the UK, Japan or the Eurozone. So whilst the US Dollar is at its strongest level since 1985 and is testing the bottom of a range that goes back before that date, there is scope for spikes in the GBPUSD rate. Spikes driven by central banks, presidential clashes and economic stats and automated orders are the only reliable way to make sure you don’t miss out.
Politics quotes

If con is the opposite of pro, then isn’t Congress the opposite of progress?
Jon Stewart
Never trust a man when he’s in love, drunk, or running for office.
Shirley Maclaine
Being president is like 
running a cemetery: You’ve got a lot of people under you, and nobody’s listening.
Bill Clinton
Democracy: Where any two idiots outvote a genius.

Daily Currency Analysis by David Johnson

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