Tuesday, January 21, 2014

Inflation and exchange rates | Currencies waiting to move

Edit @ 9:45 GMT: Unemployment in the UK has registered a sharp drop, causing the GBPUSD pair to resume its upward trajectory

The Australian Consumer Price Index (CPI), which measures inflation and which was released just after midnight GMT last night, reminds us of the general relationship between a country’s currency and the rate of inflation. While the purchasing power of a unit of currency loses its buying power when inflation is rising, its value relative to other Forex units tends to increase. This is because high inflation allows for an increase in interest rates and this attracts the attention of the Carry Trade, those investors who borrow in a low interest country so that they can make loans in a high interest rate one, and make a profit on the difference.

That is why the Aussie rose across the board after the larger than expected rise in inflation that was announced by the Australian authorities last night (GMT).

Currencies waiting to move

Yesterday was a quiet day in the Forex markets, perhaps as a consequence of the holiday for Martin Luther King Day in the US on Monday and the fact that there was a dearth of announcements of the type that is calculated to move the market.

The Aussie, Kiwi, Yen and Euro against the US dollar, and the Aussie against the Kiwi, are all poised to continue a trend, in the sense that they are aiming to establish higher highs to go with higher lows in the case of an uptrend, or the opposite where the already established direction is down. We are waiting to capitalise on this state of affairs in each case, where we do not hold positions already.

The reaction to the inflation figures in Oz has not materially changed that situation. The rise in the AUDUSD pair, for example, still constitutes no more than a retrace in a dominant downward trend.

The British pound against the US dollar and the Kiwi against the same unit are in a state of sideways movement. Cable (GBPUSD) is deciding whether to continue its uptrend or to make a possible turn, as alluded to here. The minutes of the Bank of England and UK employment figures, due for release later today, may have a bearing on what happens in this regard.

In all cases we must watch and wait.

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