Whatever the reasons behind yesterday’s surprise move by Chinese authorities in loosening its currency peg against the US Dollar, the one thing that can be safely assumed is that the actions were prompted by concern about the continued slowdown and lack of inflationary pressure in the Chinese economy, and likely to be a precursor to further action.
Having eased policy four times since November without any discernible effect on economic activity the sharp dive in exports to the EU and Japan seen in last month’s trade numbers merely reinforced the fact that the recent policy actions by the ECB and Bank of Japan over the last 12 months have significantly eroded Chinese export capability.
In seeking to address this recent currency strength the Chinese are merely pushing back in an attempt to regain some of that competitive advantage, given that since May last year the Yuan has gained 20% against the euro as well as the Japanese yen.
There is also the fact that today’s industrial production and retail sales data for July are likely to underpin these concerns and are unlikely to show any significant improvement and risk the prospect that this year’s 7% GDP target could fall well short.
This attempt to weaken its currency and in the process try and engineer some inflation and underpin exports to an economy that appears to be on its uppers, is also likely to have significant ripple out effects to the global economy as a whole, at a time when commodity prices are falling sharply and showing no signs of bottoming out, with crude oil prices once again falling sharply yesterday.
This also helps explain the sharp declines seen in stock markets in Europe and the US yesterday, and which could well continue today, as companies that do significant amounts of business in China saw sharp falls in their share prices, with notable names like Apple (NASDAQ:AAPL), Burberry Group PLC (LONDON:BRBY), Bay.Motoren Werke AG ST (LONDON:0O0U), Daimler AG (XETRA:DAIGn) NA O.N. (LONDON:0NXX) and LVMH Moet Hennessy Louis Vuitton SA (LONDON:0HAU) all sharply lower, over concerns that further Yuan devaluations in the coming days and weeks could well hit profitability further, not an unrealistic concern given the fact that the PBOC announced another weak Yuan fix, earlier this morning.
Here in the UK last week’s decision by the Bank of England to keep rates unchanged despite some dissent from one member of the MPC is likely to come under early scrutiny with the latest unemployment and average earnings data for the three months to June.
The unemployment rate is expected to stay at 5.6%, while the increase in average earnings of 3.2% that we saw in May is expected to moderate slightly to 2.8%, still well above the headline and core rates of CPI inflation.
Meanwhile back in Europe investors barely batted an eyelid at the latest Greece €86bn bailout agreement, given that despite all the harmony there still remains the not insignificant matter of getting it through votes in not only the Greece parliament, but also in the other European parliaments.
While compromises have been made on the subject of primary surpluses, these are a mere rounding error when set against Greece’s debt sustainability, the questions surrounding IMF participation, as well as the ability of the Greek government to actually meet the targets being set, at a time when the latest economic data for July doesn’t appear to have been reflected in the bailout agreement.
Greece’s economy fell off a cliff in July and while capital controls remain the damage being done to the banks, as well as Greek businesses remains unquantifiable with respect to the amount of bad loans, as well as the money needed to the recapitalisation the banking system.
EURUSD – every single euro rally since the beginning of July has failed at the 50 day MA, and while below it seems likely that this could well continue. We need to push through 1.1125 to suggest a return towards 1.1230. On the downside support remains between 1.0850 and 1.0800, while a move below 1.0800 could well signal a move towards 1.0600.
GBPUSD – the pound continues to struggle to push higher failing to get above 1.5600 yesterday, but while we remain above the converging 100 and 200 day MA at 1.5390, the bias remains to the upside. The high of the last five weeks at the 1.5680 level remains a key resistance on the upside. A move above 1.5700 has the potential to retarget the 1.5820 level.
EURGBP – we got the rebound to 0.7120 yesterday and need to get above that to suggest further gains towards 0.7220. On the downside support comes in at the 0.7020 area. The 0.6930 lows remain the key obstacle to further losses towards 0.6830.
USDJPY – yesterday’s push back above 125.00 opens up the previous highs at 125.85, with a move beyond that targeting 127.20. Support sits back at the lows this week at 124.10.
Equity market calls
FTSE100 is expected to open 45 points lower at 6,619
DAX is expected to open 123 points lower at 11,170
CAC40 is expected to open 37 points lower at 5,062
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