Market News & Insights
25 October 2013

Concerns of Chinese Growth Dulls Market Sentiment

EUR/USD 1.3814
GBP/USD 1.6205
GBP/EUR 1.1728 (0.8525)
EUR/CHF 1.2311
GBP/CHF 1.4446
GBP/AUD 1.6906

This week has been rocking between positive and negative risk sentiment between sessions, much of the lead has been coming from the overnight Asian session, more specifically driven by Chinese data. Last night we saw demand for safe havens driving EUR and JPY higher as Chinese borrowing costs rose to the highest levels since July, as SHIBOR (Shanghai Interbank Offer Rate) fixed at 4.89%.

Over the last two weeks we have seen the PBOC take some CNY102 bln from the markets, possibly to remove inflationary risks in China after CPI rose to a seven month high of 3.1%. This tightening may slow economic growth and we have seen Chinese dependent markets slide on the back of this, with both AUD and NZD facing selling pressure.

The risk off environment once again saw EUR demand and the single currency break to fresh annual highs above 1.3800, EURUSD seems destined to head towards 1.4000 and even negative PMI data from the region could not stop the EUR rallying, confirming that recent EUR strength has not been solely on the basis of stronger fundamental data, but investors seeking a liquid safe haven.

The pound has certainly been a very strong performer for the last four months as real market interest rates have risen against the BOE’s forward guidance objective. What has been telling this week is that the BOE, and particularly Governor Carney, has stood by their guns and maintained their rhetoric. The BOE minutes released on Wednesday gave no indication of policy tightening and the pound had begun to look somewhat heavy, losing ground to the Euro and failing to hold any sustained break to fresh highs.

What has been more interesting is actions taken by Carney yesterday evening where he announced an expansion of support to the banking sector, with longer dated and cheaper loans with an allowance for a broader range of collateral. Whereas this is not tantamount to further stimulus is does suggest that the BOE are happy to keep monetary policy loose, instead of tightening the reigns like real interest rates might suggest.

Today’s GDP reading should give us a clearer picture and may well provide the pound with some further short term strength with expectations for Q3 GDP to have risen by .8% from .7% in Q2, showing 1.5% growth on the year, up from 1.3%. Needless to say anything weaker will likely see the pound well and truly slide but for now the pound is trading firmer on expected growth. 1.6300 remains a key level for GBP against USD, a failure to break may well see GBPUSD reverse in coming weeks.

Despite the strong run for the Euro recent data from the region has deteriorated somewhat versus economist predictions, we’ve certainly seen some improvements in the peripheral with Spain exiting recession but yesterday’s weak PMI’s and a weaker than expected German IFO business climate dropping to 107.4 from 107.7 in September, and 108 expected. There have been warning signs to Eurozone weakness, the currency is not reflecting this but it does build a case for the ECB to act before year end.