Brave New World

The Week Ahead for Currencies 26/10/2009

The week has started in lacklustre fashion with little movement in nearly all the main G10 currency pairs. In overnight Asian trading the Swiss France moved tantalisingly close to parity against the US Dollar, although the pair has since moved away from this important psychological level. Little in the way of economic data or equity price action has given much of a direction to the FX market. This is unlikely to last.

Important data from the US and Europe should stir market price action, with American consumer confidence data out on Tuesday and Q3 GDP and personal consumption data out on Thursday. The market is looking for an annualised rate of economic growth for the latest quarter of 3%, with the same expectation for consumption. Given the US Dollar’s current status as the weakling of the G10 (second to Sterling) it will take much stronger than expected readings to change the course of the greenback.  The EURUSD will be a particularly important pair to observe as the recent rally appears to have stalled around 1.5000. Before the psychologically level was breached many strategists warned of a break-out with the expectation of barrier options being triggered. This hasn’t happened, and calls into question how much further the rally in the Euro has left to run. EURUSD has been trading on risk appetite and interest rate differentials, both of which have been given a boost by an impressive run in recent weeks of positive economic data. The pair has had a remarkably close correlation to the S&P 500. My view, therefore, is that the equity market is well overdue for a correction translates into a bearish EURUSD position. A surprise to the downside in German and Eurozone CPI data later on this week, as well as consumer confidence data from the US tomorrow, may also influence a sell-off.

Sterling has found a some support today following Friday’s meltdown. Some in the FX Strategy community are beginning to forecast a reversal in Sterling’s weakness, particularly against the USD. BNY Mellon’s Simon Derrick believes the political fallout of Sterling reaches parity with the Euro would be too great for the Labour government in the run-up to the general election for them to continue their policy of benign neglect. Also, there is widespread scepticism about the preliminary GDP numbers released on Friday.  I don’t buy the Sterling bull story one bit. The Brown government is powerless in so many areas that the idea they have control over the currency markets is laughable. If EURGBP does go to parity it will be due ti Asian central banks continuing to diversify their FX reserves into Euros following a maintenance of the peg to the USD. The British pound has no such friends. 70% of the UK’s GDP is made up of consumer spending- something that will remain on its uppers for some time to come. GBPUSD may reverse but given the US relationship with China, a dollar collapse is almost unfathomable in the near term.