G10 currencies trade in tight ranges, Chinese Yuan devaluation rumours affect financial markets
11/Jan/2016 • Currency Updates•
Given the turmoil in financial markets worldwide, with US equities off to their worst start of a year in history, major G10 currencies remained remarkably aloof last week. They traded in tight ranges throughout the week, with the exception of the Japanese Yen which rose 2-3% against the Dollar, Euro and Sterling as part of the massive flight to safe-haven currencies.
The story was very different in commodity currencies such as the Australian, New Zealand and Canadian Dollars, as well as emerging market currencies, which dropped in lockstep with risk assets worldwide.
You won’t have missed the jitters around the Chinese Yuan, brought on by rumors of another sharp devaluation. We think these rumors are exaggerated and that Chinese authorities are happy to see the Yuan trade in line with a trade-weighted basket of currencies, as they announced last month.
Major currencies in detail:
The second week of the year saw modestly disappointing data out of the UK.
The composite PMI business sentiment indicator fell slightly, to 55.3 from 55.7, on the back of declines in services and manufacturing. However, this level is still consistent with our expectations for UK growth in the 2-3% range.
Another interesting point is that manufacturing SMEs reported better sentiment than larger firms, a sign that nimbler, smaller enterprises may be taking up the slack in this sector.
At any rate, PMI sentiment north of 55, continued employment gains and growth in the 2-2.5% range are enough to maintain our call for a first Bank of England hike in the third quarter of 2016.
Despite this, Sterling traded lower, towards the bottom end of its recent 1.30-1.40 range against the Euro, on jitters that this week’s Monetary Policy Committee meeting may be dovish, given financial market fragility worldwide.
Sentiment data out last week in the Eurozone was consistent with the weak recovery of past quarters.
PMI business sentiment indices edged up, with the composite level at 54 and consistent with continued 2% growth. There were, however, worrisome developments in the inflation outlook, with inflation defying expectations and dropping again both in headline (0.2%) and core terms (0.9%). Deflationary pressures remain intact.
Political trouble is developing once again in the periphery, with Spain in the midst of a secessionist process and seemingly unable to form a government.
These factors, combined with financial market jitters worldwide, make us think the market is not sufficiently pricing in the likelihood of another quantitative easing expansion.
The strong US payroll report for December, which is normally the most important single piece of economic news worldwide, was almost completely ignored by financial markets.
The US economy continues to look healthy. The labour market added a net 291,000 jobs, and previous data was revised up by 50,000. This number was stronger than expected and other labour market indicators (such as unemployment and participation) were strong as well, with the exception of wages, which were flat on the month.
We think that a healthy labour market is the best guarantee of continued strength in the US economy, regardless of external factors and market fluctuations. We expect the Fed to remain on a gradually tightening path that will keep the US Dollar well placed against other major currencies.
Receive these market updates via email