Tag Archives: China

Currency Update

Positive UK data released this morning fuelled a moderate rally in the Pound, albeit a very short lived one. UK Markit Services PMI showed a substantial rise to 51.5 in January and caused Cable to spike upwards immediately following the release before dropping back off to where it is now, trading flat for the day at 1.5750. Similarly GBP/EUR rose slightly following the UK PMI figures, however the pair has now weakened and Sterling’s decline has seemingly resumed, with the pair now trading at 1.1630.

The Euro has strengthened against both the Pound and the Dollar this morning following the release of PMI figures. Whilst UK PMI data showed a positive increase, Markit Services PMI results for Spain, Germany and the Euro Zone were also positive. However, this data was soon contradicted by EU Retail Sales figures which showed sales were down -3.4% in December. As market participants digest the figures, it would appear that they have not yet decided that Sterling is oversold or the Euro has appreciated too far. However, one must recall the comments made several weeks ago by Luxembourg Prime Minister Jean-Claude Juncker, who stated that the Euro is ‘dangerously high’ – if that observation was correct then, the Euro must now be in an extremely precarious situation.

Elsewhere this morning we saw the Reserve Bank of Australia commit to keeping interest rates at 3.0%. The Aussie Dollar dropped off against Sterling and the Greenback following the data release as RBA Governor Glenn Stevens gave an explicit indication that rates could well go lower in the future. Despite these comments, the outlook for the Australian economy would appear to be consistently improving as China’s rebounding growth continues to be confirmed. This morning the HSBC China Services PMI hit 54.0, up from 51.7 the previous month. GBPAUD currently trades at 1.5140.

Decisions, Decisions, Decisions

Markets are relatively flat this morning as participants wait and see what will be the outcome of two major pieces of economic data due out this afternoon. First we will see the Bank of England release its decision at 12:00 GMT on whether or not to alter interest rates or their asset purchase program. Whilst both of these are expected to remain as they are, market participants look keen to wait until these decisions are confirmed before taking a position within the markets.

A little later this afternoon we will see an ECB Monetary Policy Statement and press conference at 13:30 GMT. As in the UK, the ECB are expected to keep interest rates on hold at their record low of 0.75%. Whilst the Eurozone appears to have been stabilizing recently, there has however been no spectacular data release to suggest that a rate change at present would be warranted.

Elsewhere today we have seen commodity currencies react favourably to the positive data released in China this morning. Figures show that the Chinese Trade Balance rose substantially in December, reaching 31.6B for the month, well above market expectations of 19.7B. The Australian Dollar rose to its highest point against the Japanese Yen in four years following the data release, and is currently trading at AUD/JPY 93.23. The Aussie Dollar was also aided by Japanese Prime Minister Shinzo Abe, who has called for the Bank of Japan to raise inflation targets to 2%, weakening the Yen right across the board.

Mark Webster

Caught Between a Rock and a Hard Place

Cable is trapped. GBP/USD has been trading pretty much sideways for the last couple of days and appears trapped in a clearly defined channel, a break either side of which could be very significant. Fibonacci levels show clear support at 1.6010 and substantial resistance at 1.6124, with a further key level found in between at 1.6067, which is where the pair is currently trading. A break above the upper price level would suggest a move back towards 1.6309 and potentially a test of the recent sixteen month high of 1.6381. Conversely, should the lower end of the current price channel give way, the pair is expected to fall back to the next area of key support at 1.5909 and below this the four month low of 1.5825 could be tested once again.

The key question is obviously; which way will the pair break? Cable is currently in a six month upward trend and what could make or break this trend could well be economic data released later this week. Tomorrow we will see the Bank of England release their interest rate decision at 12:00 GMT. Whilst rates are expected to remain at their current levels, any increase, or even a suggestion of an increase, would be very bullish for Sterling. As we saw last week in the US where the FOMC minutes suggested there could be an earlier than expected end to monetary easing policies and interest rate increases – the Greenback immediately strengthened right across the board. Whilst we will also see various figures released in both the UK and US on Friday, the crucial variable could come from outside both of these countries. On Thursday and Friday this week we will see crucial data coming out of China, including Chinese; Trade Balance, Consumer Price Index and Producer Price Index. Should these results prove favourable, this would be extremely positive for the global economy and invariably lead to increased optimism globally and consequently a weakening Dollar.

This Morning we saw the release of UK Goods Trade Balance figures that showed there is now a £-9.164B deficit, worse than what markets had been expecting. GBP/EUR did drop off slightly immediately following the release, however the Pound has recovered and is currently trading up for the day at GBP/EUR 1.2282. EU GDP figures for Q4 were released at 10:00 GMT and had little bearing on the markets as they showed that GDP for the region remained at -0.1%. EUR/USD is currently trading flat at 1.3067, only marginally above a key level of support at 1.3064.

Mark Webster

The Euro Strikes Back

The Euro is on the up. This morning it is trading higher against the Pound, Dollar, and Yen on the back of positive data coming out of China, where the HSBC Manufacturing PMI hit 50.4, a thirteen month high. Sentiment is now relatively optimistic within the markets as a result of this Chinese data, with many market participants believing this signals an end to China’s slowdown and potentially a return to China’s customary 8% plus growth.

A positive Chinese outlook is encouraging for the Euro and coupled with the anticipation that an agreement on Greece will soon be reached, these two factors have led to a slightly improved Euro this morning. European PMI data has also contributed to the Euros gains as figures released were slightly better than markets had originally feared. German Manufacturing PMI hit 46.8 surpassing expectations of 46.0 and EU Markit Manufacturing PMI also did better than expected, recording an improvement to 46.2, although EU Markit Services PMI did decline this month to 45.7.

Sterling has dropped from 1.2432 against the Euro this morning to its current low of 1.2385. The Euro is also up against the Dollar today hitting a high of 1.2883, after gradually increasing from 1.2831 last night. It is possible that we could see further movement in the Euro this afternoon as EU Consumer Confidence figures are due out at 15:00, however trading volumes are likely to be lower today given that it is Thanksgiving in the US.

Mark Webster

Interest Rates

Today (07/04/11) as expected the European Central Bank (ECB) has raised its benchmark interest rate by 0.25% to 1.25%, the first such increase since July 2008. The Bank of England has kept interest rates on hold for the 25th month at their historic low of 0.5% and the Bank’s Quantitative Easing Asset Purchase Programme remains at £200bn.

 The focus will now shift to the release of the minutes (due 20th April) of today’s BoE Monetary Policy Committee (MPC) meeting to see if any further MPC members have been swayed to the rate hike camp. At the previous meeting in March, six members voted to keep rates on hold whilst three members voted for an increase in interest rates. The conflict between above target inflation coupled with weak economic growth making the Bank’s decision difficult. The market will also seek further clarity on the future direction of ECB interest rates as there had been some suggestions that the hike today may be the first of a gradual increase in ECB interest rates.

Typically, as a central bank increases interest rates their currency will appreciate as global investors seek a higher yielding currency. The widening interest rate differential between the BoE and ECB has been a major contributing factor to Sterling’s relative weakness against the Euro despite the ongoing European sovereign debt crisis.

Comparative World Interest Rates

Bank of Japan: 0.1%

Federal Reserve (USA): 0.25%

Swiss National Bank: 0.25%

Bank of England: 0.5%

Bank of Canada: 1%

European Central Bank: 1.25%

The Reserve Bank of Australia: 4.75%

People’s Bank of China: 6.06%

Brazil: 11.75%

Currency News

Last week the currency markets were firmly focused on the Euro with the fiscal problems of Greece and also Spain and Portugal taking the headlines. Speculation built throughout the week that the other European Monetary Union states, led by Germany, would come to Greece’s aid. However, markets were clearly disappointed that whilst a rescue package was agreed in principle, European leaders failed to set out a comprehensive package.

The Euro was also pressured following the release of disappointing Eurozone GDP data. Total Eurozone 4th quarter 2009 GDP expanded by a mere 0.1%, the market had been expecting growth of 0.3%. Noticeably, German GDP (the largest European economy) failed to expand at all, whilst Italian GDP slipped back into contraction. Spain, hit by a housing market collapse and official unemployment greater than 20% remained in recession.

As a result, the single currency fell to a low of 1.3531 against the US Dollar, its lowest level since May 2009. The US Dollar, viewed as a safe haven, appreciated across the board as investors took flight from risk as stocks and gold prices tumbled. The Pound fell to 1.5534 against the US Dollar but rose past 1.15 against the Euro.

 In the UK the Bank of England released its Quarterly Inflation Report. The report was markedly pessimistic about the UK economy, revising its growth forecasts down. UK Interest rates are expected to stay low for a protracted period of time as growth remains weak and inflation is expected to fall back below the 2% target after initially spiking higher to 3%. Moreover, the Bank of England failed to rule out the possibility of extending its asset purchase scheme know as Quantitative Easing. Consequently, the Pound is expected to stay weak for some time. However, some gains could be made against the Euro, depending on how the Greek bailout develops. Sterling’s 25% depreciation should eventually help the UK economy grow as our exports become more competitive.

 Elsewhere, the Australian Dollar rallied following better than expected employment data with GBPAUD falling to 1.76. In China concerns over potential asset bubbles, led officials to order banks to increase their levels of reserves in a bid to cool the amount of lending.