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Sterling pushes on ahead of UK debt data

21st Aug 2013
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The Reserve Bank of New Zealand's decision to tighten mortgage lending rules took the markets by surprise yesterday and the New Zealand Dollar weakened immediately. However,  with a little more time to digest the detail in the Governor's speech it is clear that the thing which most spooked the markets was the explanation that the imposition of strict loan-to-value measures was instead of interest rate hikes which the RBNZ accept would strengthen the NZ Dollar. That implicit confirmation that interest rates would stay low for an extended period is the main reason for the sell-off in the NZ Dollar but the Sterling - NZ Dollar exchange rate is still well below the psychologically significant NZ$2.00 level.  Whether it will get there depends on continuing strong UK data.

We may get some more of that today with the release of the public sector borrowing figures, industrial orders and mortgage approvals data. All are forecast to be quite upbeat so Sterling has every chance of putting in another strong performance today. Against the US Dollar, the Pound is at its strongest since June and against the Euro, Sterling has been battering on the doors of €1.175 - without success I might add. The correction to €1.1650 overnight is a crucial test of the Pound. If Sterling falls below the previous trendline at this point, we will continue to see lower and lower GBP - EUR levels but if Sterling can stay above that level, the potential for a more sustained rally is clear.

That euro strength is being carried over from last week's announcement that the Eurozone economy finally extracted itself from recession in Quarter 2. So in spite of the upcoming election in Germany which looks set to deliver a change of ruling party (a new style of coalition most likely), and despite the constant threat of further fall out in the countries which fringe the Mediterranean, the Euro is strengthening. Sometimes there is no logic in foreign exchange markets. The European data diary is an interest free zone today so perhaps if the UK data is stronger than forecast, Sterling will get its chance to shine.

Across the Atlantic, the market focus will be ion the release of the minutes from the last Federal Reserve Open Market Committee meeting. As we know, the Fed is starting to plan the cessation of its bond buying programs in order to taper off the extraordinary expansive money supply measures. When and how they will do that is still a matter for deep debate so investors, traders, analysts, bricklayers et al will be reading those minutes with a keen interest in search of answers or, more likely, vague hints.    The US Dollar could have a strong day if the timing is clearer and/or the timeline is shortened. US Dollar buyers who don't like a gamble should perhaps act early in the day and with the Sterling US Dollar exchange rate at current levels, it isn't a hard decision to make.

The US Dollar strength is also weakening the Canadian Dollar and that brings the Sterling - Canadian Dollar exchange rate to levels we haven't seen for 3 years. The pound has broken out from the top of a range which has been in place for 3 years and that makes the Canadian Dollar a very good buy right now. Because the Pound is highly likely to correct to lower levels from here

Elsewhere, the Japanese Yen and Swiss Franc are both being bought as safe havens in the wake of the latest massive leak from the Fukushima nuclear plant. A clean-up operation is underway but the leak has not yet been sealed and shares in Japan have dropped significantly as a result.
 

Article supplied by David Johnson, Director at Halo Financial - Currency Specialists

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