Sterling got a bit of a shot in the arm following service sector PMI this morning, as although the figure was slightly lower than last month, it will still very good. The news suggests that the largest part of the UK economy is still on the right track so I am not unduly worried about any big losses for the pound in the near future, and whilst we do have the Bank of England decision tomorrow I feel this will be somewhat of a non-event. With no data of note in the next couple of days for the UK it will largely depend on the data releases for other currencies so what should we be looking out for?
Overnight we have retail figures for Australia. In the last couple of days we have had very clear guidance from the governor of the RBA that further changes in interest rates are unlikely and my view has been that current levels on GBP AUD are excellent buying opportunities because I don’t see the pound surging up (as the BofE aren’t going to increase any time soon), or the Aussie Dollar tumbling again (as the RBA are now on hold). Aussie GDP for Q4 has been revised up, so if retail figures are good I think the AUD will gradually settle against the pound this week. We do have Chinese data out over the weekend, and jobs are still a big area of concern in Australia, but I think anyone holding off for another big surge in the Aussie may be disappointed.
Today we have seen good service data and retail figures for Europe and following Friday’s better than expected inflation data it is still unclear what Mario Draghi may say at the ECB press conference tomorrow afternoon. Recently he has expressed concern that the longer inflation remains at a low level, the harder it will be to turn around, so there is still an element of risk that the ECB may feel the need to act. I think it is unlikely tomorrow but I am expecting a volatile day during the course of the press conference as journalists probe for any hint of a future policy change. We have seen some Euro weakness this afternoon but anyone buying or selling Euros in the near future should be on red alert tomorrow just in case.
The US Dollar still remains very weak as the Fed remain cautious about the pace of tapering QE and Non Manufacturing and employment figures this afternoon were on the weaker side of forecasts, although recent bad weather has a lot to answer for. However Friday is the next key date with the release of the non-farm payroll figures. The creation of new jobs is one of the big measures that the Fed are using to determine an appropriate monetary policy, and so far the rate of improvement has been modest. With the issue over energy costs caused by the crisis in the Ukraine, and the ever present debt debate in the US, there are a lot of potential banana skins for the Dollar, but I feel it is only a matter of time before the economy stateside picks up enough to increase the rate of tapering, and when we get closer to the pricing in of a US interest rate hike (probably hike late next year in my view) then USD EUR rates should move back under 1.35, and sterling slip back to the early 1.60’s.
The Bank of Canada left rates on hold today and pretty much said growth in Canada had been a bit better than expected, although was broadly in line with forecasts, and inflation was likely to be below target for some time. They did acknowledge there was a downside risk to inflation which had led some to believe the BOC would cut rates, and this threat hasnt been completely lifted but I would say it is now unlikely as long as Canada and the US keep growing. Canadian jobs figures also come out on Friday, but if anyone was hoping for another sharp weakening of the GBP CAD rate then they may be out of luck in the near term- worth buying at current levels in my view.
The Kiwi has fought back a little against the pound in the last week and a combination of growth forecasts and increasing inflation concerns have allowed the NZD to strengthen as New Zealand is the main economy expected to raise interest rates at some point later this year. With dairy exporter Frontera making huge strides in China there seems little sign of the Kiwi economy waning, I think the only warnings for the Kiwi would be a sudden downturn in Chinese demand , or a huge increase in the pace of US tapering. To this end keep a close eye on this weekend’s Chinese CPI and the US jobs data on Friday. Snap up buys over NZD$2 in my view.
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