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FX Day Trading - 20 July 2010
Euro still flavour of the month
Sterling settles into its wallflower role
Public sector net borrowing this morning
Prime Minister Cameron flew to Washington yesterday for a meeting with President Obama. To show solidarity with the rest of us in austerity Britain, instead of chartering his own plane for the trip he flew with BA. Downing Street says his decision has saved the taxpayer £200,000. A charter would have cost £250,000; his club class ticket on a scheduled BA flight cost just £50,000 (including a second baggage item).
Even bigger savings have been achieved by investors since the beginning of July by the simple expedient of not buying sterling against the euro. Well, by not buying anything at all against the euro actually.
There can be no doubt that the single currency has been the flavour of the month thus far. With a UK-centric hat on it looks depressingly as though it is sterling that has been going down the pan. Look elsewhere, though, and the picture is little different. Against the Swiss franc and the yen, for example, the pound has barely budged since the beginning of the month. Against the two North American dollars it is slightly stronger.
So this is a strong-euro-weak-dollar play, not a War On Sterling (though nobody is pretending the pound is in peak condition).
The steady feed of feeble American economic data and a vague nervousness that Barack Obama might plump for yet another round of stimulus are together making investors uncomfortable with the dollar. The straight alternative to the dollar is the euro so that is where the money is going. After a six month run during which nobody liked the euro and everyone wanted the dollar, the polarity has flipped.
Will the euro still be wanted when August comes around? Or are we due for another flip?
It is unlikely that the US economy will suddenly regain its momentum and begin to impress investors with its vitality. It is inconceivable that the Federal Reserve will hurry to deliver the tighter monetary policy that might encourage buyers of the dollar. Unless there is an abrupt disenchantment with the euro it is difficult to foresee anything that could provoke a fresh reversal of direction.
But of course the operative word there is 'unless'. There is a sensation that in traders' minds the euro/dollar debate comes down to selecting the lesser of two evils.
At the moment the euro is ahead because the economic gloom in the States is more recent than the fiscal gloom in Euroland. That could change. Top of the most-likely-to list is the stress test imposed on EU banks by the Committee of European Banking Supervisors (CEBS). Results are due out on Friday that will show how 91 of Euroland's biggest banks are fixed to survive a range of external stresses, such as the bankruptcy of a group of creditors.
There is already a story on the street that Germany's Hypo Real Estate Bank - nationalised two years ago to prevent it going bust - has failed the test and will need a fresh injection of capital.
The purpose of the tests is to reassure any given 90 of the banks that the remaining one is not about to fail. With that reassurance in place, they will all start lending to one another just like they did in the good old days. That's the plan, anyway.
In the meantime there are still the minutiae of daily business to consider.
Figures released so far have delivered suitably positive German producer prices and a Swiss trade surplus in June. Britain's contribution this morning will be money supply, including bank mortgage approvals, public sector net borrowing and the CBI's business optimism and total orders surveys.
The United States reveals the pace of housing starts and building permits in June. The Bank of Canada is expected to raise its policy interest rate from 0.5% to 0.75%, having doubled it from 0.25% at last month's meeting.
There is not much on that list to light a fire under the currency spreads market but you never know...
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'FX Day Trading 20 Jul 2010', Article by Moneycorp, last update: 20-Jul-10
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