Headlines
UK manufacturing PMI slows in August –
Weak export orders and job losses weigh.
GBP/EUR remains softer –
Eurozone unemployment improves.
‘Cable’ hits 80-day low –
Despite dud US manufacturing print.
Canada in recession –
But GBP/CAD strikes monthly low.
Sterling
The Pound struggled yesterday as traders reacted negatively to an underwhelming UK manufacturing PMI report. The factory output index remained in expansionary territory at 51.5 but missed analysts’ expectations of 52.0 due to contracting export orders and the first month of negative job growth for over two years. The decline in the manufacturing labour market was especially worrying for holders of Sterling because robust jobs growth is one of the main factors underpinning Bank of England rate hike bets.
The recent turbulence in Chinese equity markets was not seen as having a huge impact on the PMI report but a separate survey conducted by manufacturing lobby EEF over the weekend indicated that half of British manufacturing firms were worried about the consequences of the slowdown in China and one-in-ten had already altered their business plans in response to the crisis.
Euro
Sterling lost out on a cent against the Euro yesterday as softer-than-anticipated British manufacturing numbers weighed on demand for the Pound and an unexpectedly bright Eurozone unemployment print bolstered the appeal of the single currency.
Although the currency bloc retains a worryingly high jobless rate markets were buoyed by an unexpected decline from 11.1% to 10.9% and this helped send the Euro higher versus the Pound yesterday.
However, it was not rosy for the Euro as factory output in the 19-nation bloc slowed from 52.4 to 52.3 in August due to another month of contraction in France, a 16-month low in Germany and a 10-month low in Spain. And there is potential for the single currency to weaken later on in the week if concerns over Greece’s ability to implement economic reforms and anxieties related to the recent turmoil in China persuade European Central Banker Mario Draghi to start talking about loosening policy further at Thursday’s interest rate announcement.
US Dollar
The Pound to US Dollar exchange rate plunged to an 80-day low yesterday marking a massive turnaround from the 50-day high ‘Cable’ reached at the beginning of last week’s session.
Increased concerns over the economic outlook in China stoked demand for the safe haven ‘Greenback’ as investors continued to put faith in the prevailing argument that the Bank of England is not prepared to start normalising monetary policy until after the Federal Reserve. This view suggests that although BoE Governor Mark Carney is talking up the possibility of a rate rise in the first quarter of 2016 the UK central bank will not act unless the Fed does first, therefore giving the US Dollar the advantage in policy projections.
During the afternoon it was reported that US manufacturing growth performed worse than the UK in August with a six-year low export orders score bringing the ISM index down to a two-year low of 51.1.
Canadian Dollar
Sterling slid to a monthly low against the Canadian Dollar yesterday as GDP data showed that the domestic economy expanded by 0.5% in July, which beat the median market forecast of 0.2%. However, the ‘Loonie’ was unable to hold onto any significant gains because revisions to past data showed that the economy shrunk by -0.8% in Q1 and -0.5% in Q2, thus signaling that Canada is experiencing a technical recession (defined as two consecutive quarters of negative GDP growth).
Australian Dollar
The Pound to Australian Dollar exchange rate rallied by over two cents yesterday as markets reacted to more worrying data out of China. The official Chinese manufacturing PMI dipped to a three-year low of 49.7 whilst the Caixin PMI of smaller firms slid to a six-year low of 47.3. The knock-on effect of the slowdown in Chinese private sector output weighed on demand for the ‘Aussie’ because it was seen to bode badly for cross-border trade between the two nations.
The Reserve Bank of Australia opted against cutting interest rates from a record low 2.00% in September but the decision failed to lift the ‘Aussie’ because RBA Governor Glenn Stevens noted that weakness in China could impact the Australian economy over the next few months. Markets are currently pricing in a 50-50 chance of a 25-basis-point cut at the next RBA meeting.
New Zealand Dollar
The Pound remained relatively flat against the New Zealand Dollar yesterday as further warning signs from China impacted demand for the ‘Kiwi’ but weaker-than-expected UK manufacturing data hurt Sterling.
Data Released Today
09:30 GBP Markit/CIPS UK Construction PMI (AUG) Medium 5
13:15 USD ADP Employment Change (AUG) Medium 200K