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Getting Pounded!
The British pound has blown threw psychological support levels at 1.50 vs. USD this morning as polls in the UK show the minority party holding a slight lead in the upcoming elections. It is the biggest loser this morning and is at a 10-month low. I identified this potential trade last Tuesday, saying that the Pound could be near 1.50 in “no time flat”.
There is a lot of news out this week, with various readings from the UK contributing to Pound weakness today, as well as Canadian GDP due out later this morning. If Canadian GDP comes in better than expected, then look for the market to bet that rates will be advancing sooner than later this year.
In addition, we are going to get interest rate decisions from Australia, Canada, and the Euro zone, as well as first Friday’s Non-Farm Payrolls report here in the US, which is ALWAYS a market-mover. If overall global risk can be shown to be contained to a few areas, then expect to see some risk-taking this week.
In currencies:
Aussie (AUD): The Aussie is higher this morning as corporate profits came in higher for the first time in 5 months and manufacturing expanded at its fastest pace since 2007, ahead of tomorrow’s interest rate decision. It is widely expected that the RBA will raise rates at the meeting, though the market is trading cautiously this morning. The Aussie is at a 25-year high vs. the British pound, making this pair the largest gainer of the morning.
Kiwi (NZD): The Kiwi is mixed this morning, as the N.Z. economy may have lost some momentum as retail spending and the housing market have slowed in 2010. This may give the Reserve Bank reason to pause on rate hikes until GDP growth is definitive. It is widely expected that rates will higher than the current 2.5% by June.
Loonie (CAD): Congrats to Canada for winning Olympic gold in hockey yesterday over the US and for putting on one of the more memorable Olympic games in recent history. Canada is also going to report GDP figures this morning and a higher reading may suggest higher rates. Tomorrow will be the Bank of Canada interest rate decision, and while they are not expected to raise rates from the .25%, they could issue stronger language foreshadowing a hike to come.
Euro (EUR): The Euro is hovering right around 1.35 vs. the US dollar and is down against all currencies but the Pound, trading at .906 at the moment. The unemployment figures came in showing an official 9.9% unemployment rate which will all but guarantee that the ECB will not be raising rates at Thursday’s policy meeting. However, even with subdued economic growth prospects, benign interest rate policy, and possible defaults, the Euro zone may STILL be in better shape than the UK and we could see Euro-Pound parity soon.
Pound (GBP): In addition to the impact that a change in government might have on the UK economy, mortgage approvals dropped to an 8-month low. The UK may be heading for the dreaded double-dip recession as their housing-market recovery may be losing momentum. On Wednesday the UK will report consumer confidence figures which are expected to be low in light on conditions, and Thursday will bring the decision on interest rates (expected to remain unchanged) and the BOE decision on Asset Purchases which could put further pressure on the Pound if continued and expanded. The Pound is currently at 1.493 vs. USD.
Dollar (USD): The Dollar is mixed this morning as the market digests all of the weekend news and is looking ahead to this week’s action. The US ISM Manufacturing Index is due out this morning, which will show if we are seeing any type of economic expansion. Aside from that, we are seeing mild risk-taking this morning, though problems with the Euro and Pound are causing the dollar to advance.
Yen (JPY): The Yen is lower this morning as the battle between the Bank of Japan and the government over quantitative easing continues. Tonight, Japan will be reporting their unemployment figures, which are expected to show 5.5% unemployment. We could see some yen weakness on the Australian rate decision as carry-traders become emboldened if the RBA raises rates.
Oil is back over $80/barrel and gold is roughly 1118/oz.
The Euro zone must be thrilled with the problems in the UK which hopefully will shift focus away from their problems and on to the Brits. While some are likening the situation in the UK to that of Greece, it should be noted that these two economies couldn’t be more dissimilar. The UK has many more options than the Euro zone regarding how to grow the economy, so while we may see some temporary Pound weakness, the UK economy is still in better shape than the Euro zone.
But always remember; trade what you see, and not what you think you know!
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