Headlines
Employment declines, wages cool.
Euro rallies as Chinese devaluation wrecks havoc –
Cross-trade benefits single currency.
PBoC devalues Chinese Yuan
–Again!
US rate hike bets pushed back –
On fears of currency wars in Asia Pacific region.
Sterling
Sterling lost some ground against the majors yesterday as data showed that unemployment increased for the second month in a row. The headline jobless rate remained at 5.6% but the report detailed that 63,000 jobs were lost in the three months to June. Demand for the Pound was also compromised by a sharp drop in British bonuses, which took total wage growth down from 3.2% to 2.4%. Analysts had been primed for a slightly more subtle dip in average earnings to 2.8%.
Overall the labour reports were seen to confirm that policymakers at the Bank of England will be in no hurry to cut interest rates this year and Sterling weakened slightly as a result. Cautious investors warned that the recent drop off in employment growth could signal a levelling off after two years of sturdy gains, whilst the more optimistic market makers posited that the underlying trend of rising wages and increased productivity supported the case for higher rates around the turn of the year.
Euro
The Pound to Euro exchange rate tumbled by around 125 pips yesterday to touch a fresh monthly low as traders reacted to the slightly underwhelming UK labour market data.
The single currency, rejuvenated by the recently sealed Greek bailout package, also drew support from goings-on in China where the central bank has created financial shockwaves by sanctioning a 4% hour decline in the domestic currency. The People’s Bank of China (PBoC) announced this week, in two ‘one-off’ statements, that it was allowing the Chinese Yuan to devalue. This had a widespread influence on currency markets and gave the Euro a significant boost against the safe havens.
There were two factors driving the single currency higher: 1) the volatility in China is likely to weigh on Federal Reserve rate hike bets and therefore reduce the appeal of the ‘Greenback’, and 2) the devaluation has caused traders to pull out of positions against the single currency denominated in currencies from nations with a lot of exposure to China such as Mexico, New Zealand and Australia.
US Dollar
The Pound to US Dollar exchange rate strengthened by around 70 pips yesterday as the impact of the PBoC’s second 2% currency devaluation impacted global growth prospects and subsequently reduced the possibility of a Federal Reserve rate hike in September.
Sterling lost some ground following the surprising dip in UK employment numbers but the decline was short-lived and the Pound powered its way to a near-fortnightly high during the afternoon. The prevailing view among financial market places was that the latest shock announcements out of China could spark a currency war in the Asia Pacific region with the potential to destabilise global growth prospects enough to delay the Fed’s first rise in interest rates.
Canadian Dollar
Despite the negative impact that China’s latest currency moves are likely to have on demand for commodities such as crude oil and iron, the Canadian Dollar managed to rally by around 150 pips against the Pound yesterday as Fed rate hike bets receded.
The acknowledgement that the US central bank may not look to tighten monetary policy over the next few months allowed the ‘Loonie’ to recover some of its recent losses, with the prospect of looser monetary policy for longer bolstering the appeal of the risk-sensitive currency.
Australian Dollar
Sterling came within 15 pips of striking a fresh seven-year high against the Australian Dollar yesterday but demand for the commodity-correlated ‘Aussie’ rose during the afternoon as investors all over the world cut back on Federal Reserve rate hike bets, which in turn helped to improve the outlook for the more volatile currencies.
New Zealand Dollar
It was a similar story for the Pound against the New Zealand Dollar: GBP/NZD surged 200 pips to a near-six-year high when the PBoC’s second 2% devaluation was announced but, as Fed rate hike bets deteriorated, the ‘Kiwi’ managed to fight back and claim a 200 pip daily gain to mark a massive 400 pip swing.
Data Released Today
13:30 USD Advance Retail Sales (JUL) 0.6%
15:00 USD Business Inventories (JUN) 0.3%
23:45 NZD Retail Sales Ex Inflation (QoQ) (2Q) 0.5%