Fresh shockwaves as China devalues Yuan further
12/Aug/2015 • Currency Updates•
The Pound traded within a narrow range with the Dollar, appreciating moderately by 0.1% yesterday as trader began building positons before today’s labour figures.
Yesterday, the Confederation of British industry welcomed the devaluation of the Chinese Yuan, claiming higher growth in China would benefit the UK in the short term. This came after the Conference Board’s leading economic index showed that overall economic activity in the UK decreased in June, with the index down 0.2%.
Meanwhile, comments from outgoing Bank of England policymaker David Miles suggested there were very nearly two votes for higher rates at last week’s monetary policy meeting, rather than just one. Miles, who is set to be replaced by Gertjan Vlieghe for the next meeting, claimed there was a “reasonable” case for raising rates given recent signals from the labour market. However, he decided to vote to keep rates on hold given the outlook for near term inflation, which is expected to remain around zero for the next few months.
The highly anticipated monthly labour report is released this morning at 9.30am by the Office for National Statistics. The key data of note for Sterling will of course be the unemployment rate, and the latest wage growth figures, both of which are forecast to remain unchanged at 5.6% and 2.8% respectively.
Positive developments in Greece, and investor unwinding Euro-funded positions on the Yuan, caused the Euro to appreciate by 0.6% versus the Dollar and by 0.5% against Sterling.
There was some positive news on the Greek front, after the European Commission confirmed yesterday that a third bailout deal with the country had been agreed “in principle”. While some minor details needed to be resolved, the draft deal, which was agreed to after twenty hours of negotiations, will be presented to the Greek Parliament for a vote on Thursday so that the Eurozone can formally adopt it on Friday. Once completed, the deal will allow a €85 billion three year bailout package, required before the country’s next debt repayment to the ECB is due on 20th August.
There was some slightly disappointing data out of Germany after investor confidence in Europe’s largest economy fell unexpectedly. The ZEW economic sentiment index declined from 29.7 to 25.0; driven lower by concerns over China and low commodity prices. The same index for the wider Euro-area increased moderately from 42.7 to 47.6.
The ECB’s meeting minutes on Thursday remain the focal point for the Eurozone this week. In the interim, industrial production figures for June this morning could lead to moderate Euro volatility.
The US Dollar index dipped by 0.2% yesterday, although there were strong gains for the Greenback against the majority of emerging market currencies following the devaluation of the Chinese Yuan.
In the domestic economy, data from the Labor Department showed that US productivity rebounded in the second quarter, increasing by 1.3%, although slightly down on expectations. In the same report, unit labour costs, the price of labour per single unit of output, rose by only 0.5%. Downward revisions in previous months productivity suggests economic growth prospects for the economy may be slightly lower than had been previously expected. Elsewhere, the latest wholesale inventories figure increased unexpectedly to 0.9%, possibly suggesting that businesses are more confident about a future increase in consumer spending.
Focus in the US today will be on second tier announcements, namely the latest JOLTS job openings and monthly budget statement. Traders will be keeping one eye on retail sales tomorrow and the other on industrial production figures on Friday.
Rest of the world
The People’s Bank of China sent fresh shockwaves through the markets this morning by once again devaluing its Yuan for the second consecutive day. The currency has now lost around 4% in the last two days.
The first devaluation already caused havoc among a number of global currencies yesterday.
Asian currencies, including the Singapore Dollar, South Korean Won, and Malaysian Ringgit, were all driven lower by more than a percent. Meanwhile, the Australian Dollar and New Zealand Dollar, both of which rely heavily on trade with China, plunged during the course of the day.
The move in China also triggered a decline in oil prices, which in turn caused commodity currencies, such as the Canadian Dollar, Russian Ruble, and Norwegian Krone, to all lose ground versus the US Dollar.