- Risk aversion still dominating the market
- Upbeat data from China
- Markets range bound - waiting for FOMC on Wednesday
Risk aversion stemming from the fall in oil prices has spilled over into the beginning of this week. Oil has fallen to it's lowest level in 7 years as Iran pledged to boost oil exports into an already over supplied market. The price war is likely to continue for the foreseeable future as producers compete for market share. Commodities in general are trading much lower and in this environment it is difficult to see the Australian and New Zealand dollar rallying too hard.
South Africa got their third finance minister in a week after President Zuma replaced newly appointed David Van Rooyen with the more experienced Pravin Gordhan in a surprise Sunday night announcement. The Rand which had weakened to record lows after the controversial appointment of the inexperienced Van Rooyen has recovered it's poise and is now 5 % off the recent lows.
Markets are range bound at the moment as we await the most anticipated Federal Reserve meeting for years on Wednesday. We are probably only a few days away from the first hike in 9 years yet no-one really seems to agree on what the Feds message will be if and when they raise rates. There has been a lot of chat around a dovish hike where rates rise although the accompanying statement will temper expectations of further moves and that they will be data dependant. Bizarrely the biggest surprise would be a more hawkish Fed announcement in a couple of days! For now current ranges should be respected until we get clearer signals on Wednesday evening.
A dog runs in through the door of a butcher’s shop, grabs a huge piece of fillet beef that had been set aside to be cut up as steaks and runs out again.
The Butcher sees the dog escape with the beef in it's mouth and follows it out into the street. It runs about 100 yards along the road and into the font door of a Solicitor’s Office and disappears behind the reception desk.
The butcher asks the receptionist who the dog belongs to and she confirms that it belongs to the Lawyer who runs the business. The butcher demands to see him.
“Now you are a man of that law,” he says to Mr Struthers of Struthers and Pocock. “So if an unleashed dog steals meat from a butcher, is the owner of the dog responsible for the loss?”
“I believe he is.” says Struthers.
“Good,” says the butcher, “So could I have the £35 to cover the cost of the prime beef that your dog has just taken please?”
The lawyer is bang to rights as the dog is still chomping on the expensive meal. So he writes a cheque for £35.00, the butcher thanks him and heads off back to work.
Three days later the butcher receives a letter from Mr Struthers. It reads, ‘For professional advice re theft from shop, £150.00.’
The reserve Bank of Australia has a lot of thinking to do. They are mulling whether to cut the base rate in Australia again in order to stimulate the economy. Commodity exports are still producing dwindling results and Australia's major export market, China is posting increasingly poor data. As things stand, the Sterling – Aussie Dollar exchange rate has bounced from the A$2.03 low we saw on 3rd
December and we tested A$2.12 briefly earlier today. The 50% recovery of the fall from August's high of A$2.23 to December's low of A$2.03 is A$2.13. That would seem to be the obvious target in the short term.
A slump in oil prices and apparent resistance to any measures to assuage that relentless fall is contributing to significant weakness in the Canadian Dollar. We saw the Sterling – Canadian Dollar rate fall to C$1.98 on 3rd
December but the market tested C$2.0875 earlier today. These are levels we haven't seen since august when this pair topped out just shy of C$2.10. These are the highest levels this pair has seen since 2007 and a break above C$2.10 would see traders aiming at the trend line resistance of C$2.15 and C$2.17. Those planning to move to Canada or import from Canada may get that early Christmas present they so deserve.
Sterling had a rough week last week whilst the Euro benefitted from the delayed implementation of more substantial interest rate cuts and larger scale quantitative easing by the European Central Bank., This week's data has not been sufficiently strong to get the blood cursing through the veins of the Pound, so we have seen a pretty lacklustre performance by Sterling. As things stand, the Sterling – Euro rate is poised at €1.3850; a rate that has proven to be pivotal throughout the year. In spite of the fact that the ECB may have to produce much stronger policies to turn the Eurozone economy around, we may still see a dip to €1.35 in this pair before we see further gains. If, however, the market pushes higher from here, November's high of €1.43 beckons.
Unlike its antipodean cousin, New Zealand's Dollar is holding up very well. The higher yielding interest rate makes the Kiwi Dollar attractive to overseas investors and that certainly strengthens it. On the other side of the equation, Sterling has had a rough couple of weeks and that has left the Sterling – New Zealand Dollar rate meandering around the bottom of its recent ranges. The current NZ$2.25 seems a world away from the heady heights of 2.45 and 2.50 we saw in August and September. Beware though, if you need to buy NZD, this pair could easily make it to NZ$2.15 and still be within the current downward trend.
The Federal Reserve is widely expected to fire the starting pistol on interest rate hikes next week. However, recent mixed US data has made a few commentators question whether the Fed could just pause for another month before making the big change of direction. The current trading range for the Sterling – US Dollar rate is $1.4850 to $1.5250but this is a declining trading range. Hence we are likely to see lower levels in the months ahead; especially if the Fed raises the base rate by more than a few basis points.