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Publication date: 10 December 2012
Author: Richard Driver, CaxtonFX
Not much currency action this week
It was all action in the currency markets last week and whilst there are still some important events to look out for in the coming sessions, the calendar is pretty bare for today. From the UK, we can only really look forward to some unemployment figures on Wednesday, apart from some words from BoE Governor King this afternoon. Expect focus to rest with the eurozone, after Italian PM Monti announced his intentions to resign.
STERLING/EURO: Political instability in Italy keeps single currency on the back foot.
• Mario Monti, PM of Italy, has stated that he will resign once the 2013 budget is approved, which opens the door to anti-austerity or anti-euro campaigning, or a flimsy coalition government which is unable to implement necessary economic reforms. Elections are likely to be held in February 2013.
• Speculation surrounding this political uncertainty in the eurozone’s third-largest economy is likely to keep the euro under pressure today. For now, this pair trades above €1.24.
STERLING/US DOLLAR: Employment data reveals further progress in the US economy, which bodes well for the greenback.
• The key monthly update from the US labour market was unexpectedly very positive, with 146 thousand jobs added and the unemployment rate falling to 7.7%, the lowest seen since March 2009. This saw market players reduce their expectations of expanded quantitative easing from the US Federal Reserve.
• Given the current state of the UK economy and the high chance of economic contraction in the current quarter, the case for a move for this pair below $1.60 is a strong one.
EURO/US DOLLAR: The eurozone’s potential recovery from the debt crisis was dealt another blow this weekend, which could pave the way for a weak finish to 2012 for the euro.
• PM Monti’s resignation plans is likely to see Italian bond yields rise today, which has a habit of weighing on the single currency. Silvio Berlusconi’s party is well behind the pro-euro Democratic Party in the polls, which should keep hysteria contained, though the uncertainty looks highly likely to weigh on confidence in the euro.
• The dollar faces its own risks this week in the form of the US Federal Reserve’s QE decision on Wednesday evening, though we still prefer the greenback in the coming sessions. This pair trades at $1.29.
STERLING/AUSTRALIAN DOLLAR: The aussie dollar remains firm despite weak Chinese trade balance data
• You have to start to wonder what further bad news has to emerge to hurt the AUD. Chinese trade balance data, which was the worst in six months, was the latest development to threaten the aussie dollar, but still the market broadly speaking turned a blind eye. Admittedly, Chinese industrial production data did offset these concerns. We still hold out hopes of higher levels for this pair.
• This pair currently trades at 1.53 and decent support kicks in around here, which should give GBP a lift.
STERLING/NEW ZEALAND DOLLAR: Sterling took another dive against the kiwi dollar, which was lent a boost by positive news for NZ farmers.
• New Zealand’s milk producing giant Fonterra has raised its forecast payout for kiwi farmers next year, which gave the NZD another lift. This pair has lost almost three cents in the past week, which leaves it at a four-month low of 1.9250
• The kiwi dollar is unlikely to get much stronger from here – these are excellent levels at which to sell the NZD.
STERLING/CANADIAN DOLLAR: Strong news from the US and Canadian labour markets meant this pair could only lose ground.
• The US employment market saw some significant and unexpected improvement in November, while Canada also saw its unemployment rate dip to 7.2%, the lowest level in over a year. This is the good news from the Canadian economy that the loonie needed.
• Sterling is trading down at a multi-week low of 1.5850 and we may see sterling recoup some of its recent losses in the short-term.