Most exciting movements are Down-under Entry
Focussing on GBP; at last Thursday’s Scottish Independence vote, we saw Sterling spiral downward throughout last Friday after hitting a two year high against the Euro, and the highest levels against the US dollar in 2 weeks. The rally against the US Dollar was soon stopped as investor focus fell back on the UK economic fundamentals.
After such an eventful week last week on the the charts, this week looks to be so much quieter with the release of only a small volume of UK economic data. The first set of data was yesterday with mortgage approvals from the British Bankers Association. Thursday we are expecting housing data as Nationwide release a report on housing inflation. Investors will be looking for further growth after the increase in August. There is no major data from the UK at all this week so really most movement will be driven by events elsewhere, and also we will see further corrections to the markets following the Scottish referendum.
The USD had a positive day last Friday, this was thanks to the long term outlook over interest rate rises and the approaching end of QE. Despite a lack of data the dollar strengthened against the majority of its major partners seeing the longest gains since 1967. This week has seen USD maintain the strength it gained but there will be some pressure on Thursday with the release of durable goods orders.
Mixed data from the Eurozone has indicated France could be heading for recession again whilst the German economy is at least maintaining some growth ; Markit’s purchasing managers’ index (PMI) for France fell to 52.3 for the Eurozone in September – a new low for 2014. At the same time, Germany’s survey data edged up to 54.0 from 53.7 – a small improvement.
Down under, the RBA has become more vocal about the high exchange rate as commodity prices have slumped. Replicating the RBA’s fair value model suggests that the AUD is 12-13% overvalued. Adjusting for unconventional policies in the major economies by using shadow policy rates, Barclays Capital calculate that the currency is overvalued by 9-10%. This does not mean that AUD will depreciate by this amount but the market is likely to allow AUD to depreciate to some degree. The movement in AUD is also likely to drag NZD with it.