Currency markets stabilise as China cuts interest rates
26/Aug/2015 • Currency Updates•
Global shares and currency markets rebounded yesterday, despite another sharp decline in stock prices in China following ‘Black Monday’. The FTSE 100 and DAX index both rallied by 3% during the day, with the Dow Jones index also around 2.5% higher.
This recovery came after the People’s Bank of China belatedly announced that it would be cutting its interest rate by 25 basis points to 4.6% and relaxing its reserve requirements. This gave a major boost to more risky assets, with the US Dollar recovering and the Euro and Yen suffering from sharp depreciation.
Sterling’s losses against the Euro on Monday were wiped clean yesterday (up by 0.65%), while the Pound lost ground against a resurgent Dollar, ending the London session 0.5% down.
These robust gains against the Euro helped the Pound recover from its one month low against its basket of currencies. However, fears of a delayed Fed hike and worsening outlook for global growth driven by a slowdown in China, may force analysts to push back expectations for a Bank of England rate hike further into 2016. Yet, Sterling looks likely to remain relatively stable for now, given it is somewhat less exposed to the risks in China and elsewhere.
Data out of the UK this morning includes mortgage approvals from the British Bankers Association and the CBI distributives trades survey at 9.30am an 11am respectively.
The Euro sank back towards Friday’s close levels against the US Dollar, with the Greenback given a boost by the Chinese rate cut. The single currency depreciated by 0.8% versus the Dollar.
A string of economic data in the Eurozone largely went under the radar yesterday. Growth in the German economy was confirmed at an annualised 1.6% in the second quarter of the year. This confirms a modest acceleration on the 1.2% recorded in the first quarter, driven predominately by strong exports. Meanwhile, confidence in Europe’s largest economy increased this month according to the latest IFO business indices released yesterday. The business climate index rose from 108 to 108.3, with companies in Germany apparently brushing aside concerns surrounding a China-led global slowdown. The forward looking ‘expectations’ index also surprised on the upside at 102.2.
Meanwhile, speaking at a press conference ECB Vice President Vitor Constancio claimed that the central bank stands ready to take additional measures in the case of a material change to the inflation outlook in the Eurozone.
There are no major data releases in the Eurozone today, and as such, most attention in the Euro-area will be on developments elsewhere.
The US Dollar jumped by 0.9% against its basket of currencies yesterday, buoyed by the interest rate cut in China, with strong gains against the Euro and Yen.
Markets paid very little attention to domestic data in the US for a change, which mostly came in below expectations. Sales of new homes rose in July, although slightly less than originally expected. Sales were up by 5.4% to a seasonally adjusted 507,000 in another sign that the housing market is slowly recovering in the US. This increase is likely driven by potential buyers eager to lock in mortgages before interest rates increase. Meanwhile, service sector growth slowed in August. The flash PMI slipped to 55.2 from 55.7 after new business volumes increased by its slowest pace since January.
However, there was positive news from the latest confidence index released by the Conference Board, which rose sharply from 91.0 to 101.5, its highest level since January and second highest since the end of the recession. This considerably more favourable view of economic conditions was primarily due to an improved labour market, which has continued to tighten of late.
The major data release in the global economy will come in the form of durable goods orders from the US Census Bureau at 1.30pm London time. This will be followed by a speech from Federal Reserve member William Dudley at 3pm.
Rest of the world
A host of emerging market currencies recovered yesterday back to levels seen before Monday’s dramatic stock market decline. The South African Rand, Russian Ruble, and Indian Rupee in particular experienced sizable appreciation against the US Dollar.