Caxton FX Currency Blog: 09/22/09

Tuesday 22 September 2009

In reduced trading yesterday, the pound rallied as investors booked profits, but gave back gains as risk appetite returned to the market.

Initially, the higher-yielding kiwi gave back some of its recent gains against the pound as investors consolidated their positions.
With markets in Japan, Singapore and several other Asian countries closed Monday for holidays and with little data to go on, investors may have chosen to continue to take profits and pare back on riskier positions.
Analysts noted that the tone appeared to be one of consolidation as the market focused on this week's key events, which include the FOMC meeting, and MPC minutes.
However, the negative sentiment toward the UK economy, and falling equities weighted on the pound, allowing the kiwi to rally back up to 2.2936.
In trading today the kiwi has extended its gains by over three cents (1.4%) after the New Zealand’s biggest dairy exporter, Fonterra, raised its forecast payout to farmers and the current account deficit unexpectedly plunged to a near five-year low.

A pullback in equity markets impacted negatively on investor appetite for riskier currencies yesterday, enabling the pound to rally slightly.

Sterling reversed a five day slide against the aussie as traders booked profits following quiet trade in Asia, where markets in Japan, and Singapore were closed for holidays.
With little data or direction in the aussie market, in the absence of commodity trading, investors took the opportunity to cash profits, which enabled a broadly weak pound to make slight gains.
Additionally, with the US interest rate statement and minutes from the UK monetary committee policy meeting both being released tomorrow, there is also the potential for volatility in the market over the next few days which could leave traders exposed.
However, the aussie has advanced strongly in trading today, owing much to the rally in the kiwi, which leapt to a 13-month high against the US dollar.
Confidence in higher risk currencies has risen following upbeat news from New Zealand’s largest dairy exporter, helping the aussie to climb 0.6% against sterling in trading today.

The single currency fell further yesterday, mirroring a drop in equities as investors booked profits from an extended rally.

Dollar rose broadly, extending its pullback from a one-year low against the single currency, as traders trimmed short positions in the US dollar following broad losses so far this month.
Falling global equities also gave rise to a slight easing in risk appetite, which allowed investors to take profits in the recent rally in the euro and ahead of this week's Federal Open Market Committee meeting.
However, in the afternoon, the greenback halted its climb and gave back some of its gains, following a slight rally in stocks with the euro climbing over half a cent from a day low of 1.4612.
In trading today, the single currency has continued to advance amid speculation that the Fed statement tomorrow evening will reaffirm confidence in the global economic recovery.
Analysts have suggested that there is unlikely to be a shift to an upward trend in the dollar, seen briefly yesterday, with forecasts that U.S. policy makers will soon signal a possible withdrawal of economic stimulus measures.

Heightened concern over the UK economy and an easing in risk appetite, saw the pound lose ground to the greenback yesterday, closing at $1.6214.

The pound slid a further half cent against the dollar, as renewed fears over the UK economy were realised following the BoE’s quarterly report which stated that sterling’s long-run sustainable exchange rate may have fallen.
The report added selling pressure to an already weak pound and strengthened investor sentiment now is not currently a good time to buy sterling from a risk-reward perspective.
Haven demand was also supported yesterday as global equity markets fell with investors taking profits from last week's rally, which had propelled benchmark indices to year highs.
With important interest rate data released in both the US and the UK later this week, investors were further encouraged out of risky positions, with volatility in the market likely.
However, in trading this morning, risk speculation has returned to the market allowing the pound to regain yesterday’s losses against the greenback, currently trading just shy of $1.6300.

Bearish sentiment toward the pound accelerated yesterday following a BoE report on sterling weakness in the wake of UK debt and banking concerns.

The pound continued to fall to a five month low amid a warning from the Bank of England that foreign investors may not be as willing to purchase UK assets, due to an increased focus on the UK’s economic imbalances, thus hurting the pound's long-term exchange rate.
There was positive data on the UK economy from a Rightmove survey that revealed a rise in UK house prices, but market reaction was muted, as the data failed to outweigh negative sentiment.
However, the pound did not lose too much value, with a lack of major economic data keeping trade activity relatively subdued.
There was also significant selling pressure on the euro following a general easing in risk appetite, which prevented it from making significant gains.
Trading between the pair remains steady this morning around 1.1050, as investors continue to hold back from taking significant positions ahead of tomorrow’s MPC minutes.