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FX Day Trading - 24 August 2010
MPC member lists Britain's economic risks
Investors take the hint and sell Sterling
German Q2 GDP growth confirmed as 2.2%
A furore has developed surrounding the TV show 'X-factor'. The format of the show involves the selection of a bunch of talentless amateur singers who compete each week not to get the fewest telephone votes for their performances.
The most hopeless contestants are ridiculed by wealthy businessmen who hope the mediocre winner will make money for them. Now it looks as though it is more subtle than that. First it emerged that the producers were using an application called 'Auto-Tune' to correct deficiencies of pitch among the best-looking contestants.
The latest revelation is that the software is also used to degrade the performance of the ugly ones, making them sound even worse than they really are.
The process sounds remarkably similar to what goes on in the FX spread betting market. Investors tune out the shortcomings of the favoured 'safe-haven' currencies, ignoring their high structural deficits and the flow of what is laughingly referred to as 'stimulus' which keeps those deficits growing.
At the same time they mock the currencies lacking in safe-haven star quality: however hard the losers work on improving their performance there is always the mental software on hand to make them look worse.
Sterling had to cope with the ridicule of the judges on Monday after The Times published an interview with Monetary Policy Committee Member Martin Weale. Asked if Britain was on course for a double-dip recession, Mr Weale said, reasonably enough; 'I think it would be foolish to say that there's no risk of that.'
No damage done there then, but he went on to enumerate all the things that could bring it about: a renewed rise in unemployment, declining house prices, another banking crisis, a sovereign debt crisis, a new liquidity crisis in the private sector, tough fiscal tightening, higher levels of individual saving and lower consumer demand. Blimey Martin, don't forget the Four Horsemen.
Whilst none of the risks listed by Mr Weale is unique to the United Kingdom, the currency judges snapped up the opportunity to take it out on Sterling, subjecting it to a barrage of abuse.
The derision focused on the weakest aspect of Sterling's act; Cable. The Pound had been asking for trouble against the Dollar for more than a week, flirting with an important technical support level. Yesterday's selling built up the pressure to an intolerable level and price action in the Far East this morning was enough to confirm the downward break.
Inevitably there was a knock-on effect against other currencies. Sterling/Euro is a cent down on the day and three Yen lower. It is fractionally higher against the Rand and softer against everything else.
The day's winner was the Japanese Yen with the US Dollar as runner-up.
Yesterday's economic statistics showed Eurozone purchasing managers' indices (PMIs) for the manufacturing and services sectors both slipping lower. Germany's manufacturing PMI was also lower while the services index improved by a couple of points. Eurozone consumer confidence went up from -14 to -12.
Overnight the Reserve Bank of New Zealand's quarterly survey of inflation expectations fell from 2.8% to 2.6%. The change theoretically reduces the pressure on the RBNZ to raise interest rates but it will probably not alter next month's policy decision, nor did it have any impact on the New Zealand Dollar.
The final revision to German gross domestic product (GDP) for the second quarter of the year confirmed quarterly growth of 2.2%.
The first revision to Britain's Q2 GDP figures will appear on Friday, which is the only UK data out this week.
For the remainder of today, the Eurozone reports industrial orders for June and Canada reveals retail sales performance for the same month. From the US come existing home sales and the Richmond Federal Reserve's manufacturing index.
There is nothing on that list that will dig Sterling out of its hole.
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'FX Day Trading 24 Aug 2010', Article by Moneycorp, last update: 24-Aug-10
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