Headlines
• UK unemployment hits new seven-year low –
But wages remain at 3%.
• GBP/EUR rises as Eurozone debt crisis in focus –
Investors wary of Portuguese debt downgrade.
• ‘Cable’ rallies –
GBP/USD continues to rebound.
• Sterling appreciates vs. commodity bloc –
Crude oil slides on rising US inventories.
Sterling
Sterling strengthened slightly against the majors yesterday as traders reacted to a surprise slide in the British jobless rate. UK unemployment fell unexpectedly from 5.4% to a new seven-year low of 5.3%, which was seen to strengthen the case for a near-term rate increase from the Bank of England. However, BoE rate hike bets did not increase much because UK wage growth printed at 3.0%, disappointing expectations of 3.2%. The movements in the labour market mean that the employment rate moved up to 73.7% – the highest since records began in 1971.
Euro
The Pound to Euro exchange rate rallied by around 60 pips yesterday, which brought Sterling close to its highest level against the single currency since mid-August.
Demand for the UK tender increased a little bit following the surprising dip in UK unemployment and the Euro continued to struggle as investors geared up for looser policy in the Eurozone.
The situation in Portugal, where the newly re-elected centre-right government was toppled by a loose alliance of left-wing parties on Tuesday, has also weighed on the Euro. Fears are beginning to grow that Portuguese debt, which is already ranked as junk by the big three ratings agencies, could be downgraded by DBRS Ltd on Friday. DBRS is the only major agency that deems Portuguese debt investment grade and if this badge is lost it would mean that the European Central Bank would no longer be permitted to purchase Portuguese bonds under its OMT quantitative easing programme. Traders do not expect DBRS to downgrade Portugal just yet, because the newly realised left-wing coalition has agreed not to campaign for a Euro exit, but if a downgrade were to occur the ramifications could be brutal and subsequently the single currency has weakened ahead of the decision.
US Dollar
Sterling rallied by around a cent against the US Dollar yesterday as markets continued to lock-in profit from GBP/USD’s sharp depreciation last week.
‘Cable’ is still over 250 pips weaker than it was last week before BoE Governor Mark Carney released a downgraded set of UK inflation projections and Federal Reserve President Janet Yellen’s remarks on the possibility of raising rates in December were vindicated by a glittering US non-farm payrolls report.
Although the Fed’s probable raising of interest rates in December has already been priced into the market there is potential for sharp swings in GBP/USD next month. This is because US Treasury contract volumes declined by an average of 78% in the past two Decembers, leaving prices exposed to enhanced volatility.
Canadian Dollar
The Pound rose by around 80 pips versus the Canadian Dollar yesterday as generally upbeat British jobs figures bolstered the appeal of the UK tender. The commodity-correlated ‘Loonie’ was also hurt by a -2% slump in crude oil prices, which came as a result of a 6.3 million rise in US crude stocks. Oil is Canada’s most lucrative export and as such fluctuations in the value of the ‘black gold’ often translate to fluctuations in the value of the domestic currency.
Australian Dollar
The lowest UK unemployment rate since 2008 helped drive the Pound to Australian Dollar exchange rate higher by around 70 pips yesterday. The ‘Aussie’ Dollar was also impacted by a report out of China, the world’s second largest economy, showing that industrial production cooled from 5.7% to 5.6% in October. China is the largest buyer of Australia’s commodity exports and therefore Chinese industrial activity is seen as a good gauge of future trade prospects between the two nations.
New Zealand Dollar
The Pound completed a clean sweep against the commodity currencies yesterday by registering an 80 pip gain against the New Zealand Dollar. It seems the combination of robust UK labour market stats, falling oil prices and softening Chinese industrial output was taken as a bear signal for the risk-correlated ‘Kiwi’ Dollar.
Data Released Today
13:30 USD Initial Jobless Claims (NOV 7) Medium 270k