Mike Paterson’s daily Forex brief

The EU leaders have failed to come up with the ultimate master-plan recognizing that there isn’t one size that fits all. At least, not one that logistically can be agreed by all 27 European member states, but we’ve now had the final communiqué setting out the new rules on fiscal management for the 17 Euro countries and the 6 who aspire to join with the UK and Hungary making it clear they want no part of it, and Sweden and the Czech Republic referring it to their parliaments. Still, 23 or possibly 25 out of 27 countries in agreement still makes it a fairly historic event.

In addition to a tightening of fiscal rules, the leaders also took several critical decisions on the permanent bailout fund, the European Stability Mechanism, which will come into force in July 2012. The ESM's capacity will be capped at € 500 billion, less than had been suggested before the summit, but the facility will not get a banking licence, as Van Rompuy originally had proposed, due to German opposition. It also was agreed that EU countries would provide up to €200 billion Euros in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion Euros of the total coming from the Eurozone countries.

Markets remain relatively subdued after the announced plans as the ramifications and practicality come under close scrutiny and, more importantly just where the ECB will fit into it all. After yesterday’s unexpected comments by ECB President Draghi effectively curbing any further ECB assistance (see my article relating to this HERE) the markets still await the ECB reaction to the new rules.

Yesterday’s comments by Draghi caused a concerted sell-off in the Euro and equity markets after we had a seen a positive move higher immediately after the ECB rate cut of 0.25%, and from a peak of 1.3459 we saw EURUSD move all the way down to 1.3281 before finding support. There is talk that this area will be vehemently defended by China and others and, indeed we’ve seen another attempt on it this morning amidst the disappointment of the initial EU announcement having rallied back above 1.3350 last night. As I type it’s back at 1.3332 but the next real move is by no means certain.

EURGBP fell to 0.8495 (GBPEUR up to 1.1771) yesterday but has also since rallied back to 0.8545 (1.1702) and EURCHF also gave ground to 1.2311 before bouncing. There is talk of large stop-loss sell orders should 1.2300 break.

Daily FX Update

Daily FX Update

The Pound has been a side-line player in all this and we’ve seen a mixed but generally more positive bag as other currencies get slapped harder in the usual risk-off manner. Yesterday’s decision by the BOE to keep interest rates and QE on hold was expected but the markets will look closely at David Cameron’s decision to veto the new/enhanced EU fiscal measures fearing that it would impose too much on our financial services sector. The danger is that if a large majority of EU countries do push ahead with deeper integration, it could involve changes to the single market and financial regulation, both of which could have a profound impact for the UK economy.

On a cheerier note UK trade data just out shows the shortfall narrowed to £ 7.557 billion in October from £ 10.175 billion in September below the median forecast of £ 9.4 billion. Exports surged 8.7% on the month in October, the largest monthly rise on record, while imports fell 1.5%. There were strong exports to non-EU countries of chemicals and medical products and capital goods to the European Union. The Pound has found a few buyers on the news but reaction has been relatively muted.

This afternoon brings the US trade balance figures but most attention will still be on the Eurozone and trying fathom out whether this latest initiative has any real clout or just another case of buying time.

And talking of real clout the mighty Shrimpers take on third-placed Cheltenham tomorrow in a crucial top-of the table clash that makes the Manchester’s very own EU exit strategy during the week pale into insignificance.

Have a great week-end everyone.

Today's Data:

09.30-UK- Trade Balance / PPI Input-Output

13.30-US- Trade Balance

14.55-US- Michigan Consumer Sentiment Index

Interbank Rates as of 08:40 BST

Current Price

Overnight

High

Low

EUR/USD

1.3331

1.3372

1.3281

GBP/USD

1.5618

1.5657

1.5585

EUR/GBP

0.8536

0.8545

0.8515

GBP/EUR

1.1710

1.1746

1.1700

GBP/CHF

1.4459

1.4496

1.4435

GBP/AUD

1.5473

1.5528

1.5336

EUR/CHF

1.2344

1.2368

1.2311

GBP/HKD

12.1086

12.1388

12.0830

EUR/HKD

10.3403

10.3750

10.2869

GBP/ZAR

12.8946

13.0051

12.8054

USD/JPY

77.71

77.74

77.55

GBP/CZK

2.9916

3.0071

2.9686

Agree or disagree? Then please leave a comment in the box below or contact me by e-mail.

Mike ‘Oscar’ Paterson has been in the Forex trenches for nearly three decades working as a senior Spot trader in London at UBS, Chief Dealer FX at the State Bank of Victoria and in charge of Spot CHF at Credit Suisse with a daily turnover in excess of $1.5 billion. Mike now works as an independent consultant providing a fully bespoke service to the corporate and private sectors in physical FX delivery as well as guiding those who wish to improve their currency trading. Mike also presents seminars and workshops and writes for a number of publications.
To contact Mike please call +0044 (0) 1732 700383 or email mike.paterson@economicvoice.com
The views expressed above are those of the author and should not be taken as investment advice. MSP Foreign Exchange Services will have no liability for, or to, any persons executing trades based on the content above.

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