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November 2015

Weekly Currency Insight

Published: Friday 06 November 2015

I hope your Fireworks night wasn't a complete washout last night. On my journey home, I was just amazed at how many firework event visitors can't park their cars to save their lives. I can't count the number of blocked roads where cars had been abandoned on any piece of empty space. The South of London into Sussex was almost gridlocked in places. I just hope it was worth it.
 
I could talk about fireworks in the currency market yesterday but that would be too cheesy wouldn't it. Nope, you'll get no damp squib jokes from me; no mentions of sparklers or rates spinning like Catherine wheels. No Sir-ee. The Pound stalled and corrected and retraced and all those other euphemisms for weakening yesterday. The reason was the Bank of England's more considered tone in their minutes and in the inflation report. The vote to leave the base rate on hold at 0.5% was 8-1 and that was no surprise. However, their inflation report downgraded the forecasts and they made it clear we would need to see really solid reasons for a rate hike. That put, the expectation of an early rate rise on hold and I suspect we will see nothing from the BOE on that front until late 2016. The Pound rocketed lower (sorry everyone, couldn't resist it). I dropped back below €1.40 and fell into the $1.51 zone against the US Dollar. It also dropped below C$2.00 and slipped against everything else.  Sterling may be in for more pain today is the industrial output data is softer than last month as the forecasts would suggest.
 
On the US front, the Dollar is in good form; especially after today's very strong US employment report for October. Positive news was expected but the actual data was much stronger than the 175,000 we all expected. In fact the US added 271,000 fresh jobs in the non-agricultural sectors of the market. The Sterling – US Dollar rate is below the $1.53 support against the Pound, we could see the USD test $1.50 very easily. Beware is you are a Dollar buyer and rejoice if you are a seller.
 
After such a poor showing in the past few weeks, it was interesting to see the Euro make gains against the Pound but a quick glance at the Euro- US Dollar rate shows that this is almost solely a Sterling effect. The Euro-USD rate stabilised but very definitely didn't reverse yesterday. After falling 1.3 cents the previous day, this exchange rate fell another 30 pips on the day (roughly a third of a cent) and has only gained a few pips this morning. This morning's poor German factory orders haven't helped the beleaguered shared currency and, as mentioned above, the US data this afternoon was much stronger than anyone expected.
 
We also got Canadian employment data this afternoon. The Canadian Dollar gained against the pummelled Pound yesterday. We suspected the unemployment rate would stay at 7.1% but it improved to 7.0%. It's still high and it isn't what the Canadian authorities would like to see but it shows a bit of stability and that is fine for now. As the CAD was below C$2 to the pound, it slipped to the C$1.99 level but bounced and that leave sit in the same uptrend. However, if the rate drops below C$ 1.99 at any stage, the shorter term downward trend is in place and C$ 1.95 is a distinct possibility.
 
And in an apparently unashamed publicity stunt, Tesco in Wrexham is advertising a job for a Christmas Tree Light Untangler.  So, (I am quoting from the advert now) if you have a passion for Christmas, can untangle 3 meters of lights in 3 minutes and ae approachable, get yourself down to Tesco's job site and move to Wrexham.
 
Have great weekend.
 

The Don

 A Mafia Godfather, accompanied by his 2nd in command, walks into a room to meet with his former accountant. The Godfather asks the accountant, "Where is the 3 million bucks you embezzled from me?" The accountant does not answer. The Godfather asks again, "Where is the 3 million bucks you embezzled from me?" The 2nd in command, Vito, interrupts, "Don Gardini, the man is a deaf mute and cannot understand you, but my sister is deaf and I can use sign language. I can interpret for you." The Don says, "Thank you Vito. Ask him where my damn money is!" Vito, using sign language, asks the accountant where the 3 million dollars is. The accountant signs back, "I don't know what you are talking about." Vito interprets to the Don, "He doesn't know what you are talking about." Don Gardini pulls out a revolver, puts it to the temple of the accountant, cocks the trigger and says, "Ask him again where my damn money is!" Vito signs to the accountant, "He wants to know where it is!" The accountant signs back, "OK! OK! OK! The money is hidden in a brown suitcase behind the shed in my backyard! Just tell him not to kill me." The Don says, "Well....what did he say?" Vito shakes his head. "He says something very rude about your mother using words that I cannot say to you my Godfather and he says you don't have the guts to pull the trigger".
 

AUD

The Reserve Bank of Australia chose not to cut the Australian base rate when they met this week. They did though opt to send out a warning that rates could be cut if necessary. Most in the market expect them to follow that threat through in December. Oddly though, despite weakening initially, the Australian Dollar has gained strength through the week. In fact it has gained nearly 6 cents against the Pound this week but that has as much to do with the Pound weakening as it does with anything antipodean.  So, in the last couple of weeks, the GBP-AUD exchange rate has gone from 2.11 to 2.17 and back to 2.11 again. As long as it stays above 2.10, there is plenty of scope for another bounce to higher levels but if the Pound slips below there, the next target is 2.07.


 

CAD


Sterling's slide in the last 48 hours brought the GBP-CAD exchange rate back down to the levels we last saw in mid-October. It was almost inevitable we would get to the support level at C$1.9850 and we did just before the US employment report was released. The stellar results from that report overruled the slight improvement in Canada's unemployment rate (7.0% against a forecast of 7.1%) and sent this pair back up to test the C$2.00 level in a matter of minutes. The C$1.9850 level is pivotal. If we trade below there, the short term downward trend is intact and we will get to something in the region of C$1.95 without breaking sweat. The longer term upward trend support is now at C$1.9150 but, if the Pound can boost its way back above C$2.00, then we may well see another climb into the C$2.02 level and another test of the upper end of this trading range. 


 

EUR


The Sterling – Euro exchange rate suffered when the BOE decided to go all dovish on us; (more details in the main report) but bounced back today when US employment numbers were much better than expected and after the BOE suggested we will get a rate hike in 2016. That's not much of a revelation; a date and time would have been more useful, but it is always better to hear comments like that from the horse's mouth.  So, having slipped to test the previous resistance level (now a support line) at 1.3870, the Pound bounced and, at the time of writing it is back up at 1.3990. At the moment traders seem happier to buy the Pound than sell it but these short term dips do give GBP buyers a chance to offload other currencies at more attractive levels. The direction of travel for the GBP-EUR rate does seem inexorably higher but the caveat to that prediction is that we cannot see any more poor UK consumer related data. If we do, the markets will start factoring in a rate hike some time in 2017 rather than next year and the Pound will slide again.



 

EURUSD


The Euro – US Dollar rate dived like Tom Daly wearing lead speedos after the US employment report. To be fair, it was already slipping before that announcement but resurgence in the US labour market was always going to fuel the debate over an early US interest rate hike and the remarkable creation of 271,000 non-agricultural jobs in October brings the likelihood of a December hike back into focus. $1.07 proved to be an important technical support level in March and April and is proving the same today but if it breaks, we will see traders start to target 1.06 and maybe even the 1.0450 level we saw in March. Hold on tight, this is going to be a bumpy ride.


 

NZD


From Mi9d-September to mid-October, the Sterling – NZ Dollar rate fell from NZ$2.46 to NZ$ 2.24. We saw it bounce back to NZ$ 2.33 and we are now – after a very volatile few days – seeing it level off in the NZ$2.30 area. This volatility comes from continuing speculation over when and by how much the Reserve Bank of New Zealand might cut their base rate in the months ahead but that is balanced against a similar debate over whether the BOE will raise the UK base rate in 2016 or later. A few weeks ago, everyone seemed convinced the UK base rate would rise in December and the NZ Base rate was more likely to rise than fall. Oh how quickly things change. From a technical standpoint and based on the likelihood of an imminent NZ rate cut, the upward momentum in this exchange rate should resume and we ought to see NZ$ 2.35 very soon. However, events in the commodity markets, in Australia, in China and in the UK service and retail sectors will have a bearing. So don't get too confident in a rise just yet.


 

USD


The last few days have bought a slightly pessimistic view from the Bank of England and a stellar set of US employment numbers as well as a rise in US average wages. Why wouldn't the Sterling – US Dollar rate fall by 4 cents in two days. However, the Pound has clawed back some of its losses this afternoon and we may well see it make further gains as long as UK retail and service sector data is buoyant. There is a lot of speculation over whether this solid US jobs growth will herald an early US interest rate rise but I think then  Federal Reserve will be a little more cautious than that and err on the side of caution. If the November employment report (due to be published a month from now) is as strong, that might alter my thinking but US employment numbers are inclined to be amended and I suspect we will see that in the next report. Technically, $1.4950 is the next downside target but any ounce that takes us back above $1.5250, sets up attest of the medium term downward trend channel at $1.54