Sterling
Despite a mixed economic picture, sterling continues to push ahead against the Euro while marking time versus the US. Against the Euro it reached the psychological 1.2500 last week and from a technical viewpoint it is now looking overbought in the short term. Economics do not fully justify the move, it’s more a case of disenchantment with the euro rather than genuine support for sterling. Given this, we feel this move against the euro could run out of steam at these levels.
Sterling could move even higher versus the dollar and euro, although it is starting to look overbought at current levels and is due a retracement, particularly against the euro. The inflation report aside, the direction will likely be dictated by events elsewhere, largely Europe, rather than UK data.
US Dollar
In a week of few data releases the dollar marked time against most major currencies, with the exception of the euro. Economic and political issues in Europe continue to weigh on the currency. Although the euro zone may benefit from a weaker currency, it is the US which is more open in wanting to maintain their competitive export edge and not see their currency strengthen too much. Meanwhile both need to combat debt by keeping interest rates low, so we do not see a sharp appreciation of the dollar in the short term.
It is difficult to predict how far the dollar will appreciate against the euro. Both areas have slow growth, zero rates, huge debts and the prospect of very slow nominal GDP growth for years to come. EUR/USD is the most widely traded currency pair in the world, but in reality there is no reason to own either of them. Against sterling, the dollar should look to strengthen slowly over the coming week, but will probably remain with a trading range of $1.60 – $1.6300.
Euro
The euro didn’t start last week on a good note, with the elections in France and Greece causing uncertainty first thing. The EUR/USD rate touched the important $1.30 level against the USD before steadying on the back of some positive German data before, only to plunge through support by Thursday as the impasse in Greek politics raised fears of more turmoil to come.
It’s difficult to find positive things to say about the euro in the short term. Uncertainty is widespread and is weighing heavily on the currency, although with the majority of investors already short of euro, there should be no collapse from current levels. We feel this ahead will be dominated by political events in Europe, but with the markets already discounting bad news, there may be room for modest euro improvement. Against sterling, the €1.2500 resistance level may prove a step too far at this stage, given the headwinds facing the UK economy, and we see a fall back on profit taking in the week ahead – support is at €1.2250. Meanwhile, EUR/USD support comes in around $1.2860 and $1.2625. Resistance is at $1.2960/80.
New Zealand Dollar
The kiwi dollar has continued to fall versus the pound over the last week, pushing up to resistance at NZ$2.0580/NZ$2.0600. Weak domestic data, fears about the euro debt crisis and slowing Chinese industrial production all took their toll.
Now trading at resistance around NZ$2.0580/NZ$2.0600, the next upside target will be NZ$2.0706, although a period of consolidation is looking increasingly likely. Support is now at NZ$2.0144 and NZ$1.9855.
Australian Dollar
The Aussie dollar took a kicking last week as market nerves on Europe, slowing Chinese industrial activity and a wider trade deficit undermined confidence in the currency. Stronger jobs data was a brief bright spot, but not enough to turn the tide.
Now trading at resistance at A$1.6051, the GBP/AUD rate could target A$1.6355 but this may be reliant on the Aussie falling below parity with the US dollar for the first time this year. Support is at A$1.5713.
Canadian Dollar
The Canadian dollar joined the other commodity currencies in falling versus the pound last week as risk aversion took its toll on growth linked currencies, although a strong jobs report earlier today reversed the trend.
Having been heading towards the highs of C$1.6350 from last Autumn, today’s jobs figure has sent the rate back towards support at C$1.6000 and back below parity versus the US dollar. Assuming the USD/CAD rate stays below C$1.0000 the GBP/CAD rate could well dip below C$1.6000 in the coming weeks, although short term spikes higher cannot be ruled out.
Chinese Yuan
The USD/CNY rate has remained in a narrow range through last week, although the trend has been towards yuan depreciation as the EUR/USD rate dipped below $1.3000 later last week. Domestic data suggests falling activity levels and does not support a stronger currency.
Last week’s data, coupled with the falling value of the euro, means that yuan appreciation would seem unlikely for the foreseeable future. We therefore expect recent ranges to persist, broadly from 6.2900 to 6.3200 with a risk of a move higher towards 6.3400 if EUR/USD weakens further.
Japanese Yen
The yen remained fairly stable versus the US dollar and pound last week as increased demand resulting from the political changes in Europe was outweighed by a fresh indications that the Bank of Japan is ready to intervene in the currency if it feels such action is warranted.
Although there was a brief dip lower last Wednesday, support at 79.60/70 remains in place and should push the USD/JPY rate higher. If not, the next support level remains at just over 78.00. GP/JPY now looks unlikely to head back over 130.00 with risks of a move sub-127.00 if GBP/USD falls.
South African Rand
The rand weakened versus the pound, trading above R13.00 as concerns about the changing political landscape in Europe and falling prospects for economic growth hit the South African currency harder than most due to its strong trade links.
Given the absence of any light at the end of the tunnel for Europe and no apparent support for the currency from the RBSA, there is little reason to think that the rand won’t continue to slide in the coming week. GBP/ZAR could well target the November 2011 highs of R13.34, with USD/ZAR heading towards R8.400+.
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