China starts February poorly
January is in the books and for most people in markets it was a difficult month. Economic sentiment and data does not respect calendar barriers and although today is the first day of a new month the stories governing the ebb and flow of the world of currencies are still the same.
As always, we start the month with a look at the global manufacturing sector, with PMIs released regularly through the day. China’s numbers were always going to be the most closely watched overnight, with both the official and unofficial Caixin number showing that the Chinese manufacturing once again contracted. That deterioration is the sixth month in a row – the worst on record.
We have to ask if there is any surprise to these numbers and the reaction has been relatively muted; the yuan has been guided lower this morning with AUD and CAD also drifting weaker through the Asian session.
Jobs and oil key for European PMIs
With China’s PMI out of the way, we can now drill down into the European and US numbers. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30.
We are looking for the European numbers to back up thoughts that the worst for the European economy may be over for now and we hope to see that unemployment dynamics are starting to improve. The US number may be afforded some positivity from the warm winter weather, although the strong dollar may drag on export growth.
Manufacturing in the UK is set to remain weak, one has to feel, with weakness in oil production the obvious drag. It will be interesting to see whether the weakness of the pound has started to afford manufacturers a little more comfort.
Japan starts a new currency war
Elsewhere, markets are still chewing over some of the more interesting morsels that were served up in January. The Bank of Japan’s push into negative interest rates follows moves by the central banks of Sweden, Switzerland, the Eurozone and Denmark to drive loan demand. Obviously this is very much like pushing on a string – you can make borrowing as cheap as you want but if the demand is not there then little is likely to happen.
Pressures on Japanese debt and the yen have been the obvious side effects of the Bank of Japan’s move but it will be the movements of regional central banks in reaction that will be crucial moving forward. We must keep an eye on the central banks of Korea, Singapore, Vietnam, Thailand and most importantly China to see whether another round of currency war skirmishes is on the cards.
The Day Ahead
Speeches by European Central Bank President Draghi and Federal Reserve Vice President Fischer today are unlikely to signal much, however the broad trend in policymaking is towards further accommodation and stimulus. We expect to hear dovish talk from the Bank of England this Thursday as part of their latest policy decision with the minutes increasingly focused on developments abroad.