Headlines
UK government borrowing down
– Public sector surplus of £1.3bn in July.
GBP/EUR declines two cents
– Pound hits two-month low.
GBP/USD hits 50-day high
– Sterling fails to settle above resistance.
Pound hits near-seven-year high vs. ‘Loonie’
– Sterling close to six-year high vs. ‘Aussie’.
Sterling
It was reported last Friday that the British government posted a rare surplus of £1.3 billion last month thanks to a 4% rise in tax receipts compared to July of last year. The Office for National Statistics (ONS) mentioned that July is traditionally a strong month for tax receipts but nevertheless the result was encouraging. So far the government has borrowed £24 billion this fiscal year, which is 21.6% down on the period from April to July in 2014 and reflects the recent advances in the domestic economy – most notably the return of positive real wage growth.
The Bank of England looks set to raise rates at the beginning of 2016 to re-align monetary policy with the current levels of expansion in the economy but there are some analysts who fear that the recent volatility in commodity markets and in China could persuade policymakers at the BoE to delay the first rate hike until the middle of next year.
Euro
The Pound to Euro exchange rate tumbled by around two cents to a two-month low on Friday as markets continued to unwind carry trades in reaction to the latest downturn in China.
Traders have been taking advantage of the European Central Bank’s ultra-low interest rates by borrowing large amounts of money in Europe and then using that money to buy riskier currencies with much higher returns. This has the effect of weakening the single currency. However, when risk appetite declines it is common for traders to settle their positions, thus buying back into and strengthening the Euro. A mixture of this unwinding of carry trades and concerns that headwinds from China could deter BoE policymakers from tightening allowed the single currency to strike a two-month high against Sterling on Friday.
US Dollar
The Pound rose to a 50-day high against the US Dollar on Friday but once again Sterling was unable to assert itself above key psychological resistance and GBP/USD softened before the end of the day.
The Pound garnered a little support from the upbeat UK government borrowing figures and the ‘Greenback’ suffered from a miss in manufacturing output (52.9 instead of forecasts of 53.8) but it looks as if investors are keen to hear statements from Bank of England and Federal Reserve officials during the week before making up their minds about ‘Cable’. If the central banks are seen to have converging plans for interest rates then it could benefit Sterling but if Fed policymakers talk up the prospect of a September hike it could lead to a strong surge in demand for the US Dollar.
Canadian Dollar
The Canadian Dollar plunged to a new near-seven-year low against the Pound on Friday as oil suffered its longest weekly losing streak since 1986. Domestic data actually printed positively, with Canadian consumer prices up form 1.0% to 1.3% and Canadian retail sales up 0.6%, beating forecasts of 0.2%. However, the commodity-correlated ‘Loonie’ was hit by another slide in its most lucrative export – crude oil – as markets reacted negatively to the worst Chinese manufacturing index result for over six years.
Australian Dollar
Sterling came within 10 pips of striking a fresh six-year high against the Australian Dollar on Friday as global slowdown fears impacted the appeal of the risk-sensitive ‘Aussie’. The latest Chinese factory output report showed that manufacturing activity slowed from 47.8 to 47.1 in July, which raised concerns that the world’s second-largest economy is on the verge of a hard landing following years of robust growth.
New Zealand Dollar
Despite the anxiety surrounding Chinese growth prospects the New Zealand Dollar managed to record a 250-pip daily gain against the Pound on Friday, which brought the Sterling to New Zealand Dollar exchange rate to a two-week low.
Data Released Today
19:55 US Fed’s Lockhart speech