FX Market Overview
 
Yesterday was a tad rangy as the only interesting data releases were the very poor Eurozone retail sales numbers showing a 4% drop on the year (the worst since the Euro’s inception)  and equally poor EU Producer Price Index (inflation at the production level) which showed a 1.8% year on year drop. That PPI number is the worst in 10 years. The Euro weakened throughout the day against the US Dollar as safe haven buying of the US currency resumed and nervousness over the management of the Eurozone raised its head again. Against Sterling, the Euro trod water in a very narrow range for most of the day with a few brief periods of minor volatility.

The overnight news was more interesting with the Reserve Bank of Australia cutting their base interest rate by 25 basis points. This was a surprise to almost everyone; most traders expected a 50 basis point cut and those that didn’t forecast that were looking for a ‘no change’ outcome.  More of this below.

We also had the interest rate decision from the Bank of Japan overnight and that was entirely as expected with an ‘on hold’ decision at 0.1%. The BOJ did however expand the types of securities it will accept from banks and institutions in return loans. This is part of a whole suite of assistance they are offering to shore up the financial markets and hopefully, by default, the domestic economy as well.

Today continued with a warning from the British Chamber of Commerce that UK unemployment will hit 3.2 million and their quarterly manufacturing survey showed the worst reading since the data series began in 1989. That pessimism was reinforced by the record breaking drop in manufacturing output announced this morning. A 14% year on year dive is as bad as it gets and Sterling should find it hard to gain against anything with that kind of data ringing in traders’ ears.

The next piece of news was the sharp contraction in the Eurozone economy as reported in the Gross Domestic Product data released this morning.  This as Ireland prepares itself for stark reminder that bubbles do burst eventually as the mini budget is due to be delivered today. The Irish government will have to cut spending and/or raise taxes if it is to plug the massive hole in its annual budget.

The rest of the day brings the US consumer credit numbers and New Zealand’s business sentiment index. Neither are expected to be market altering but, if recent data surprises are anything to go by, there is always the potential for surprise and therefore, for volatility.

And finally, the image that this story conjures made me laugh. A chap driving to work in Poland in his dinky little Fiat 126, saw a deer lying at the side of the road. Thinking it was dead and fancying a bit of venison, he managed to manhandle it into the back of his car and carried on to work; leaving his car in the street near his office. Unfortunately, the deer, which was not dead, just unconscious, woke up and started trashing the inside of his car. When it stepped on the car’s horn, passers-by called the police and the car’s owner, Dariusz Kaminski is now being charged with illegal possession of a wild animal and animal cruelty.  The deer was removed to a sanctuary but no mention is made of the plight of the poor little Fiat.
 
 
Currency - GBP / Australian Dollar

As mentioned above, most analysts in the foreign exchange market were expecting the Reserve bank of Australia to cut its base lending rate by 0.5% last night and the others were no expecting any change at all. So in treading the middle path and cutting by just 0.25%, the RBA managed to wrong foot almost everyone. Their rationale seems to be that the evidence to stop cutting interest rates is not yet clear and yet neither is there a clear signal that they have done enough to help the Australian economy weather the continuing financial storm.  It always takes a hefty dollop of hindsight to know whether central banks have done the right thing or not because at this stage, everyone will have an opinion but no one has all the answers. Nevertheless, the foreign exchange market is very democratic; any currency will strengthen or weaken as traders vote with their ‘trade’ button and either buy or sell the currency. In the Australian Dollar’s case, the jury appears to still be out because the overnight range in the Sterling - Australian Dollar exchange rate was no more than three cents and that is a tiny trading range for the Aussie Dollar. As long as the strength in the US Dollar continues to ebb away, we should see more strength in the Australian and New Zealand Dollars but there are no straight lines in any of the charts right now and that means there will be periods of weakness in the Aussie Dollar which will almost certainly coincide with US Dollar strength; so watch for those spikes or better still, place your automated orders so that you are trading with foresight and not hindsight.
 
Quote 
 
By the time a man realizes that maybe his father was right, he usually has a son who thinks he's wrong.”
Charles Wadsworth
 
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