Headlines
- UK Construction PMI beats forecasts – Service Sector on tap.
- Pound loses out to single currency – Greek debt proposal lifts European markets.
- GBP/USD rallies 1.5 cents – US factory orders down -3.4%.
- RBA cuts rate to new all-time low – GBP/AUD up 3.5 cents.
Sterling
Fears that Britain’s construction sector was beginning to slow were allayed yesterday when the latest PMI report showed that growth within the industry massively outperformed market forecasts in January. Smashing expectations of 57.0, the purchasing managers’ index jumped to 59.1, with sub-indexes for business activity, new business and sub-contractor charges all posting encouraging gains. The only concern from the report was that hiring plunged to a 13-month low, as firms struggled to find skilled workers to meet the surge in demand. Naturally, traders were happy that it was a shortage of workers, rather than a shortage of work, holding the sector back from even better growth.
The Pound only received a slight boost in reaction to the sturdy construction figures because the sector accounts for around 8% of gross domestic product. However, Sterling could draw more support later this morning if the dominant service sector PMI report, which accounts for around 75% of total economic activity, also prints positively.
Greek stocks soared yesterday in response to a new proposal from Greece to modify, rather than eradicate, its colossal debt pile. As images of new Greek finance minister Yanis Varoufakis looking like Steve McQueen did the rounds on the internet, Syriza official announced a new set of plans. They involved: swapping portions of Greek debt for growth bonds, swapping the European Central Bank-owned Greek debt for perpetual bonds, maintaining a primary surplus of just over 1% and asking for new cash to keep the Greek banking system afloat.
The proposed growth bonds would function in a similar way to the debt-restructuring package that Germany received in 1953 to help manage its War debt. By linking the interest rate on Greek debt to the nation’s growth rate, the growth bonds would prevent the Hellenic nation from spiralling further into the abyss during times of recession and there would also be an added incentive for other European nations to purchase Greek exports and foster economic growth in Greece; because only then would Greek creditors receive the money that they are owed.
The Euro appreciated by just over half a cent against the Pound in reaction to the debt reshuffle proposal as investors became less worried about the possibility of Greece being expelled from the 19-nation bloc.
The Pound rallied by around a cent-and-a-half against the US Dollar yesterday, as investors reacted to the upbeat signals coming out of the Eurozone. With the threat of a Greek debt default significantly decreased, demand for the safe haven ‘Greenback’ also waned. And this allowed Sterling to strengthen against the US Dollar.
And the ‘Greenback’s’ misery was compounded during the afternoon when a new report showed that US factory orders contracted for a fifth straight month in December. Depressed demand from major markets in Europe and Asia were blamed for the dismal report, which saw manufacturing orders decline by a steeper-than-expected -3.4%.
Canadian Dollar
Another rise in crude oil prices helped the commodity-sensitive Canadian Dollar strengthen against the Pound yesterday. The Toronto stock market climbed 162 points in reaction to the latest uptick in crude oil, which completed an astonishing 19% rally over the last four days of trade. Crude is currently trading at around $52 a barrel for the first time since the start of January and the hope of further crude rallies helped drive the ‘Loonie’ higher by around a cent.
Sterling skyrocketed to a new five-year high against the Australian Dollar yesterday morning, rallying by around three-and-a-half cents in response to the Reserve Bank of Australia’s decision to cut interest rates. The RBA wrong-footed traders by slashing its benchmark rate -25 basis points from 2.50% to 2.25% – becoming the 15th central bank to loosen monetary policy so far in 2015.
Speculative investors are awake to the threat of further rate cuts because Australian Central Banker Glenn Stevens commented that a weaker domestic currency would be advantageous to the Australian economy. However, there are concerns regarding overheating in the housing market and these anxieties could prevent the RBA from loosening policy further in the short term.
The RBA’s dovish decision also had a negative impact on the New Zealand Dollar because it was seen to increase the likelihood of a similar move from the Reserve Bank of New Zealand. The RBNZ recently announced a shift in monetary policy outlook to reflect the possibility that rates could come down later in the year, and the RBA’s 25 basis point cut could pile the pressure on policymakers in Wellington to loosen sooner rather than later.
The ‘Kiwi’ Dollar tumbled two cents against the Pound when the RBA reduction was announced but the New Zealand Dollar clawed back all of its losses during the evening thanks to an upbeat dairy auction, which saw whole milk powder prices jump 19%.
The ‘Kiwi’ was also supported by a statement from RBNZ Governor Graeme Wheeler suggesting that interest rates would likely remain static unless there was: a ‘worsening [of] external economic circumstances’. Of course, there is nothing to say that there won’t be a worsening of external economic circumstances and the New Zealand Dollar is likely to remain sensitive to dips and troughs in risk sentiment.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (JAN) 56.3
10:00 EUR Euro-Zone Retail Sales (YoY) (DEC) 2.0%
13:15 USD ADP Employment Change (JAN) 220K
15:00 USD ISM Non-Manufacutring Composite (JAN) 56.4
15:00 CAD Ivey Purchasing Managers Index s.a. (JAN) 53.7