- Sterling rebounds on interest rate expectations
- US Dollar mixed on confused signals
Councils have devised another way to fleece us, not only do we pay
council tax to cover the cost of rubbish disposal, they are going to
invoice us for the rubbish we dispose of as well and all in the name of
being green. Greenness has become the latest half truth, like ‘90
percent fat free’ in stead of the factual ‘10 percent fat’ and like ‘up
to’ in front of any discount claim. Still we live in a time of half
truths and mixed signals. Take the Pound for example; many investment
banks are forecasting a decline in the Pound before the end of the year
and yet they are still buying Sterling ahead of an expected interest
rate hike in February and after this morning’s surprise rise in
December UK retail sales as reported by the British Retail Consortium.
. The US Dollar is similarly schizophrenic with everyone convinced it
is in decline and $2.06 targets being bandied about by some forecasters
and yet US central bankers and ex central bankers talking about their
continued fears over inflation. With the UK data out of the way this
morning, there is pretty well nothing of note on the data front for the
rest of the day. Consequently, we should see sterling maintain its
composure and we are unlikely to see any substantial volatility ahead
of tomorrows trade balance data and the markets may well remain
tentative ahead of Thursday’s interest rate decisions. And as for Ruth
Kelly, personally I have no interest in what she does with her children
as long as we don’t get preached to about what we should do with ours
but sadly that will never happen.
It is getting to the point where traders of the Canadian Dollar watch
the oil market more than they do the forex market. The fall in the cost
of crude oil over the past few days has weighed heavily on the CAD
because the export of oil - primarily to the US - is a large component
in Canada’s overseas trade. The fact that the US currency
managed to rally after surprisingly good employment data didn’t do the
CAD any favours either. However, there are known to be a whole heap of
oil buying orders below $54.00 and that should underpin the Canadian currency.
The reasons for the slide in oil prices would occupy another 2000
words, so I can’t cover them here but the underlying oversupply and
overpricing of oil is starting to unravel a little. I suspect no one in
the energy markets is expecting a continuation of this decline and the
upturn in the US economy is a good signal of this with more employment
creating more demand which in turn creates more strength in the US currency
and the link between the Canadian and US Dollars is still fairly
strong; albeit a tad more elastic these days. The bottom line (he said
resorting to clichés) is that you have to go all the way back to June
2005 to find the Sterling - Canadian Dollar exchange rate as attractive
as this for Canada bound migrants. Not only that but this exchange rate
is completely overbought at these levels and even though it has slipped
from the high we saw last week, there is easily another 6 cents of
decline available before we get to the major support at C$ 2.20. Not
only that but we have seen the top of a five wave Elliot pattern. Now
that probably doesn’t mean a thing to more than a handful of you but it
is an ominous sign that we should see a substantial decline - or
correction as we chartists would have it. If you have Canadian Dollars
to buy, doing so now would make absolute sense.
The current Vice Chairman of the US Federal Reserve Mr Khon says it is
too early to write off inflation and whilst that doesn’t herald further
US interest rate hikes, it does pour cold water on the prospects for
imminent interest rate cuts. The Ex-Fed Chairman, Alan Greenspan is
reported as having said that the US economy may be re-accelerating and
thereby adding to the change in forecasts for US interest rates. What’s
more, whilst many financial
institutions are quite vocal in their expectation of US Dollar weakness
in 2007, they are all rather quick to buy the USD whenever the
opportunity arises. The result of all this is that GBPUSD will remain
tightly range traded ahead of Thursday’s UK interest rate announcement.
Once the UK base rate is held at 5.0 percent we could well see Sterling
a little more volatile against the US Dollar as rumour and speculation
about the relative prospects for UK and US interest rates drive the
markets. I still maintain the same targets as in yesterday’s report for
the time being.
The real struggle is not between East and West, or capitalism and communism, but between education and propaganda.
Martin Buber
FX Research and Analysis undertaken by:
David Johnson - Halo Financial
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