China brings some calm
January is typically a month of moderation, and that is finally being seen in currency markets this morning. Last week’s run of risk aversion seems to have come to an end, although the question must be asked whether this means a rebound is on the cards or whether we are merely taking a breather ahead of another round of selling.
The People’s Bank of China has continued to intervene this week in an attempt to narrow the gap between the onshore and offshore yuan. This has two effects; firstly it limits the attraction of betting against their currency and devaluing the yuan a lot faster than the central bank wants, and secondly, it may slow the desire for Chinese yuan holders to move money out of China.
Comments from the central bank that speculation against the yuan is ‘doomed to fail’ is all well and good but the stability that it has been afforded has been felt across the Asian region overnight.
Oil close to $30 a barrel
Oil prices have continued to slide overnight, driving to fresh 11 year lows, with more and more people preparing for the price of a barrel of oil to start with a 2 soon. Speaking with an oil intelligence specialist last week, the situation does look geared towards additional price declines.
Saudi Arabia and OPEC have made it clear that the supply glut of oil will not stop anytime soon regardless of price, although rumours abound most mornings that someone like Nigeria or Venezuela will call an emergency meeting should the price drop below $30 a barrel. The marginal cost of a barrel of oil in Saudi Arabia is around $3 a barrel, with some fields bringing oil through at $1 a barrel, so they can bring prices lower should they wish.
The effect on policy
Markets will continue to watch the Saudi Arabian fiscal position as well as the costs of insuring the debt of oil production companies as proxies for the risk in the market. For now, there is little reason for Saudi Arabia to change its policy and therefore little reason to be bullish on oil prices. 2016 is not shaping up to be an easier year for central bank policymakers. This week’s Bank of England meeting is unlikely to see Ian McCafferty change his vote for a rate hike, however it was the January meeting of last year that he rejoined the pack having voted for rate hikes through the end of 2014. The reason? Falling oil prices and the hit to inflation expectations. It’s all looking painfully familiar.
The Day Ahead
Yen and euro continue to outperform as they have done throughout the early days of 2016. The haven trade from Chinese fears and poor economic data is overextended in my eyes but it will take a cessation of Asian risks and a rebound in growth and inflation dynamics to turn that around.
UK industrial and manufacturing production numbers are the main releases from the UK economy this week and will do well to avoid a slip into negativity. Other surveys of manufacturing performance have been negative for months and the warm weather that we saw through the winter period so far will certainly limit the demand for energy. We also have to expect that oil price falls will limit North Sea production on the basis of marginal costs. The numbers are due at 09.30.