Market volatility returns following China stock market slump
05/Jan/2016 • Currency Updates•
Volatility returned to the currency markets on Monday after a relatively quiet holiday trading period which saw a moderate strengthening of the US Dollar against almost all of its major peers on the back of the Federal Reserve’s interest rate hike in December.
This rally continued during the first London trading session of 2016 yesterday, with the currency finishing comfortably higher against both the Pound and the Euro, and indeed the majority of all G10 and emerging market currencies.
Trading on Monday was dominated by concerns regarding the Chinese economy, which led to a sharp sell-off in the Chinese stock market and stock markets around the world. Shanghai shares dropped by 7% after manufacturing data in China suggested that the troubled Chinese economy was continuing to slow further.
This in turn spurred demand for the safe-haven Japanese Yen and Swiss Franc, the former being one of the few global currencies to appreciate during the day against the US Dollar.
The Chinese Yuan touched its weakest position in four years, making any Yuan purchases against GBP/USD/EUR very competitive, while the Australian and New Zealand Dollar, both of which rely heavily on demand from China, tumbled by over 1.5% against the Greenback. We’re observing businesses with invoices in these two currencies paying their suppliers sooner to take advantage of the pricing levels.
Closer to home, there was more disappointing manufacturing data in the UK economy. This caused Sterling to dip to a nine-month low against the US Dollar. Investors remain worried that the UK economy will not be strong enough to warrant a Bank of England rate hike this year, while jitters surrounding the seemingly imminent EU referendum continue to provide a concern.
For UK exporters this is positive news as a weaker home currency attracts overseas buyers to UK products and services, but on the flip side, it’s not such good news for importers.
The Euro also tumbled against both of its major peers following weak inflation data in Germany which fuelled speculation that the ECB would need to pump additional stimulus into the Eurozone economy at some point in 2016.
Major currencies in detail:
Sterling’s position as the middle currency was evident again on Monday with the Pound finishing higher against the Euro (+0.65%) and lower against the US Dollar (-0.3%).
The latest manufacturing PMI from Markit disappointed, falling to a three-month low to 51.9 from 52.7. A relatively strong Pound in trade-weighted terms, particularly against the Euro, and the weak demand we’ve recently seen in Europe, continue to hamper manufacturing companies in the UK. Overall, manufacturing production failed to contribute to economic growth throughout much of 2015, with the economy instead remaining heavily reliant on its dominant services sector.
The construction PMI this morning is the only major data release today ahead of next week’s Bank of England meeting.
The Euro fell across the board, down 0.9% versus the USD amid weak inflation data in Germany.
Despite relatively impressive manufacturing PMIs on Monday morning, investors focused more on inflation data from Germany, which missed even the most pessimistic of expectations. Price growth fell by 0.1% in the month to December, registering a meagre 0.3% on an annualised basis.
This does not bode well for the overall Eurozone CPI number, set for release this morning, and provides further evidence that the ECB could expand its existing quantitative easing programme this year, having failed to do so in December.
Broad Dollar strength caused the US Dollar index to climb by 0.9% on Monday.
Traders were not put off yesterday by underwhelming manufacturing data in the US. A strong US Dollar and weakness in demand from emerging market economies and the Eurozone continue to hamper the industry, with the PMI from ISM falling to 48.2 in December, a contraction on a month previous.
Similarly, construction spending disappointed, falling by 0.4% in November, its first decline in 17 months. This reflected a weakness in spending on hotels and other private non-residential construction.
Economic data in the US today is limited with the Redbook index at 1:55pm GMT being the only announcement.
Rest of the world
Sweden’s central bank, the Riksbank, moved a step closer to currency intervention on Monday after it gave its Governor Stefan Ingves the formal power to intervene in the currency market in order to weaken the Krone and push up inflation. Consumer price growth printed negative throughout much of 2015, despite interest rates being cut deep into negative territory.
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