- GBPAUD is tenuously perched on a support level
- Euro holding up remarkably well
- Fed’s Yellen – No fixed timetables for interest rate hike
Oil prices continue to dominate the news as yesterday President of OPEC and Qatar's energy minister Mohammed Bin Saleh Al-Sada said after an informal meeting in Algeria that a preliminary deal was agreed to curb oil productions for the first time in eight years. OPEC production will be limited at 32.5m barrels per day, compared to current estimated output of 33.2m barrels per day. Oil surged 5% in response and is currently trading around $47 per barrel. This had a positive result on risk as we generally see the commodity currencies edge higher.
Fed chair Janet Yellen says there is no "fixed timetable" for the next rate hike. But she noted that her preference is not to hold low interest rates for much longer as continuous job gains could overheat the economy. It seems clear that she is trying to prepare the market for hike in interest rates however the Federal Reserve are beginning to lose credibility by laying the groundwork and then not pulling the trigger. For now the Dollar remains range bound.
The German government and financial authorities are working on a rescue plan for Deutsche Bank in case it cannot pay fines in the US, according to Die Zeit newspaper. Germany's biggest lender is facing a $14bn bill for mis-selling mortgage-backed bonds before the financial crisis of 2008. In the worst-case scenario; the government would even take a 25% stake in the bank. In a quiet week of tier one data, any extra stresses on the Eurozone’s financial system should put the Euro into negative.
A subdued week on the European data front with today's highlight being German unemployment rate and Eurozone inflation data. This afternoon we await US final Q2 GDP, consumer spending and pending home sales.
When your only tool is a hammer, all problems start looking like nails
I don’t have solution, but I do admire the problem
Letting the cat out of the bag is a whole lot easier than putting it back in.
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. Canadians 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 second 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 NZ$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 NZ$1.80 could take us to NZ$1.90 without much drama, but this could be a drawn out recovery, with Brexit talk constantly weighing on the Pound. If NZ$1.75 breaks on the downside, we are into unprecedented regions of the market for this pair and we ought to expect NZ$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 that of the UK, Japan or the Eurozone. So, while 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.
Weekly Currency Insight by David Johnson
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