Today's Highlights
Germany and Britain at odds over Euro
UK and US bank minutes awaited
Safe haven flows having an impact
FX Market Overview
They tried to put a professional businesslike gloss on it but the meeting between David Cameron and Germany’s Chancellor Merkel was patently frosty. The rhetoric from these two was positive enough and David Cameron may have a new ally in the shape of Spain’s new conservative Prime Minister but the true story is more likely found in the comments from some of the minions on bthe edge of the story; ‘Britain will have to join the Euro’, ‘Britain will become a pariah if we don’t throw loads of money at supporting the euro’, ‘Britain’s economy would collapse ouside the European union’, those kinds of things. Britain may not be part of the Eurozone party (or should that be called a wake?) but we are directly affected by the growth or contraction of the Eurozone and Europe more widely so the movement of the Pound is very heavily influenced by the euro.
We have seen that in recent weeks; whilst the pound has been gaining against other currencies, it has failed to break out of its trading range against the Euro. €1.17 is a tough nut and the Pound can’t seem to crack it. The Eurozone contagion is testing the UK economy and there is a very real chance the Bank of England will be forced to expand its fiscal stimulus by injecting more money into the bond purchase plan as soon perhaps as January. What isn’t clear is what that will do to the Pound. On the one hand, this is a way to boost cash supply and theoretically boost growth but on the other, extra money in circulation should weaken the currency. In a market which is mostly driven by sentiment, the former theory is likely to hold sway. We may get some hint of their thinking when the minutes to the last BOE Monetary Policy Committee meeting are published on Wednesday so that will be a key date for Sterling traders’ diaries. However, we also get government borrowing data and the 2nd estimate of UK economic growth figures this week so it will be a busy one for the Pound.
The minutes from the US central bank’s last meeting are released tomorrow night and there is always a lot of talk around the markets about the Federal Reserve’s quantitative easing plans so that’ll be closely watched as well. Wednesday’s US data diary is crammed with items of interest; of these, durable goods orders & personal income and expenditure are probably the two most influential. But while Europe struggles to get on top of its crisis, the flow of funds away from Europe is causing a great deal of concern for the US Dollar traders who are seeing safe-haven buyers boost the value of the USD. That safe haven demand is also coming from traders who are worrid about the impasse on the US debt level agreement. The two sides are split along party lines and their demands are diametrically opposed; One side demanding no agreement with extra taxes and the others pledging no agreement without extra taxes. They say ‘never the twain shall meet’ but the tgwin are going to have to compromise or America can’t meet its debt commitments and we all know what happened to Greece and what is happening to Italy in that situation. America can’t go to the IMF because, to a large degree America funds the IMF so their only options are to print more money, raise more in taxes or cut spending. Option D is ‘all of the above’ at that is likely to be the end result.
The same safe haven buying is happening to the Swiss Franc and Japanese Yen which are both dramatically overvalued on most technical measures. The opposite effect is seen in the value of the higher yielding currencies like the Australian and New Zealand Dollars; both are weaker than they were, even a week ago. Both are losing ground as nervous investors sell the riskier cross border assets and buy safety in the US Dollar and that is likely to continue until the American debt level is agreed and until Europe solves its economic problems.
Meanwhile, we in the UK speak of ‘the great train robbery’ and think of Ronnie Biggs and his cohorts who stole millions form a train. In Switzerland’s Vapeur Park, thieves have stolen the trains themselves from a miniature train collection. But these are not teenie-tiny trains, one weighs in at 800Kg. The police and park owners are baffled as to how anyone loaded a train like this and whipped it away without being seen. I wonder if they are the same thieves who make the carriages from my commuter route disappear on a regular basis.
