Markets subdued after China data. Sterling drops back

Tom Tong11/Mar/2014Currency Updates

GBP

It was abandon ship from the word go yesterday as investors came out of the blocks and out of the pound. The decline continued over the day and eventually leveled off by the afternoon, settling at a cent lower against the greenback at about 0.5%. It also fell against emerging currencies, moving to the downside of the yen, rand and rupee amongst others.

This all came about despite the British Chamber of Commerce saying yesterday that it expects the UK economy to return to its pre-recession peak by the Q3 2014, 3-months earlier than predicted just in December. The figures include upwardly revised growth figures of 2.8% for 2014. The truth is that sterling’s decline was rather more to do with the other half of the currency pairs than the UK itself, as the bullish sentiment in euro and dollar markets that came from positive data at the end of last week seems to have spanned the break in trading.

While the pound may have been little more than an extra on the global stage last week it will certainly be the centre of attention tomorrow, as Mark Carney, the governor of the Bank of England, spends his day in the company of the cross-party Treasury Select Committee. The topics for discussion include the Bank’s annual inflation report, the foreign exchange market, as well as a speech from Mark Carney made in Scotland in January on the ‘economics of currency unions’ (or Scottish independence). Analysts will be donning their waders in an attempt to pick up any interesting bits from the Governor, who might give more hints on the Bank’s interest rate policy.

Also due out tomorrow is industrial and manufacturing production for January, as well as a 10-year bond auction.

EUR

The darling of the currency world last week continued its fine form yesterday morning, taking yet more points off the pound in strong early trading. It saw less decisive movement against the dollar and for all the volatility ended the day pretty much where it started. It is sticking for now around Friday’s highs, and this week will be a test of the consistency of the single currency.

Last week’s inflation report may have been perceived as a triumph in central banking from Draghi, but the reality is that a predicted level of 1.6% inflation two and a half years from now, having held interest rates at record lows for a record time, is nothing spectacular. In context, however, the report is encouraging, and the resulting euro strength may be more relief than true belief. It remains to be seen whether the Eurozone economy will lives up to the expectations of the ECB’s President.

Italian industrial output increased by 1% MoM and 1.4% YoY in January, and even Greece joined the party with an upbeat inflation report. Euro-wide investor confidence did drop off, but only very slightly.

Today we saw German current account data come in slightly under expectations and we have Portuguese GDP later this morning, although the biggest excitement in a quiet week for the euro will come from the ECB’s monthly report on Wednesday.

USD

Continuing positive reaction the recent Non-Farm Payroll lenses support to the dollar yesterday, as it made heavy gains against the pound. The battle for supremacy between the greenback and the euro continued into a Monday, with no clear winner emerging.

Last Friday’s jobs report gave the Fed some vindication, and probably some satisfaction, in their steadfast approach to tapering. The likelihood of a freeze in the asset purchase rate, which seemed possible only weeks ago, is now greatly diminished, and the long predicted but as yet unseen dollar strength could well materialize in the near future.

There was no data of note of yesterday, and the scant offerings today include wholesale inventories and the red book index.

CHINA

The surprisingly bad data from China had an impact on equity markets across the world, with emerging market bourses particularly hard hit. In the UK the FTSE All-World equity index fell 0.6%, while the S&P 500 was down 7 points or 0.4% early on yesterday. China’s exports, which were expected to show a strong positive number, declined a shocking 18.1% YoY in February, compared with growth of 10.6% in January.

Asian stocks fell in the immediate aftermath, although markets have learnt to take recent Chinese data readings more than ever with a pinch of salt, and these figures were heavily disturbed by Chinese New Year (during which the country effectively shuts down for ten days) coming in February this year as opposed to January last year. There are however increasing and undeniable signs of a slowdown, some might say inevitably, in the world’s second-largest economy, as its increasing bourgeois middle class spends more of its income on desirable foreign goods.

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Written by Tom Tong

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