Not over in China yet
Last night was the quietest of the week in Asia with shares in China staging a relief rally and finishing the session in the green. A lot of the buying was courtesy of the state i.e. the authorities buying shares in order to generate confidence in markets. I doubt it can work too much further than the short term and the damage that has been done to investor psychology in the past 4 sessions will be a lot harder to quantify.
The People’s Bank of China’s strange game of chicken around the CNY fix has continued overnight. In the past few sessions the central bank has weakened the yuan by around a per cent, prompting additional falls in the offshore currency. Last night, they strengthened the yuan ever so slightly and the market has left both the onshore and offshore alone into the weekend.
There is no doubt in my mind that there is additional weakness to come and that while this market liquidity strategy may have headed off some of the concerns around the currency and the amount of money leaving the Chinese economy, doubts remain as to the efficacy of these measures on the Chinese economy. More will come from Beijing although we may have to wait until the beginning of the Lunar New Year celebrations a month from today.
GBP fears increase
The poor Q1 for sterling has continued with GBPUSD hitting the lowest level since June 2010 yesterday. There are many reasons that sterling is getting hurt in 2016; obvious risks around the referendum on the UK’s membership of the EU will limit sterling upside while poor current account issues – monetary flows in and out of the country – mean that investors are unwilling to pick sterling as a safe haven from the recent wobbles. Those flows have instead gone to the euro and the yen, two currencies that have started the year by gaining in value.
The poor PMI series released this week, as well as the market turmoil, has caused some members of the investment community to delay their expectation of when the Bank of England will hike interest rates. Both Bank of America and Goldman Sachs used to think that the May meeting of the Bank of England would signal the beginning of rate increases but have shifted their view to November.
We remain with our May prediction but risks remain for a further delay; next week’s inflation and wage figures are a lot more important to our forecasts than the data released this week. In the meantime, as long as the markets are hearing noises that the Federal Reserve is to hike rates 4 times this year and the Bank of England is seen to be twiddling its thumbs – rightly or wrongly – GBPUSD may have further to fall.
Payrolls due this afternoon
There is no greater catalyst for USD volatility than the jobs report and today is indeed Payrolls Friday. There is something quite petrifying about how easily markets can forget about one of the most important data pieces of the month because of gyrations elsewhere.
That being said, those of us looking for a calm market into the end of the week will be hoping for a solid yet unspectacular reading from the US labour market; anything overtly strong and the USD will fly higher as markets price in an increasing amount of those 4 hikes from the Fed whilst a poor number makes December’s interest rate increase look like a boo boo. We’re looking for 215,000 jobs today although wages will do well to beat the expectation of a 2.7% gain in the year to December.
As always, have a great day and a better weekend. We hope the first week of the New Year has been kind to you.