Headlines
• UK manufacturing PMI slows –
UK banks pass BoE stress tests.
• Eurozone unemployment falls –
GBP/EUR slides 50 pips.
• ‘Cable’ flat as US manufacturing contracts –
Lowest ISM reading since 2009.
• Canadian GDP rises 2.3% in Q3 –
BOC rate decision due.
Sterling
The Pound weakened slightly yesterday as data showed that UK manufacturing output slowed in November. The PMI indicator softened from a 16-month high of 55.2 to 52.7 as output and new order growth started to slow. The underlying message from the report was a familiar one: decent domestic activity but worryingly low export growth.
The other news event concerning Sterling traders was that all seven major UK banks passed the Bank of England’s latest stress tests. The investigation looked into whether UK banks would be able to cope with another crash to the global financial system, specifically a 15% drop in the Pound against the Euro, a 25% drop in the Euro against the US Dollar, a dip in oil prices to $38 a barrel and a slowing of the Chinese economy from around 7% to 1.7%.
That all the banks passed the stress test was obviously good news for the British economy, but rate hike bets were dealt a blow by remarks from Governor Mark Carney suggesting that the BoE is considering using macro prudential tools to increase resilience in the system, which would allow policymakers to leave rates low for longer.
Euro
The Pound to Euro exchange rate slid by over half a cent yesterday as investors reacted to soft data out of the UK and encouraging economic numbers out of the Eurozone.
The UK manufacturing PMI came in at 52.7, compared to forecasts of 53.6, while Eurozone factory output printed at a 19-month high of 52.8 and unemployment in the currency bloc fell to a near-four-year low of 10.7%.
This morning’s economic calendar is tipped to feature a rise in Eurozone consumer prices, from 0.1% to 0.2%, but the slight improvement is unlikely to be enough to prevent the European Central Bank President unleashing further easing measures on Thursday.
US Dollar
The Pound remained fairly flat against the US Dollar yesterday as both currencies suffered soft manufacturing reports.
The headline US ISM factory output index fell from 50.5 to a six-year low of 48.6 in what was the first print below the 50.0 mark that separates growth from contraction since 2012. Low commodity prices, weak demand from abroad and a strengthening of the Dollar were blamed for the surprise contraction. The relatively slight reaction in financial markets suggests that the data was not enough to deter December Federal Reserve rate hike bets.
Canadian Dollar
Sterling rallied by just under half a cent against the Canadian Dollar yesterday in reaction to a mixed bag of Canadian growth numbers.
The headline third quarter GDP report showed that the North American economy emerged from a mild recession in the third quarter with a decent growth print of 2.3%. However, investors were concerned by a -0.5% monthly GDP contraction, which analysts saw as an indication that economic performance was beginning to wane again in the fourth quarter.
The Bank of Canada is due to announce its interest rate for December later this afternoon and the majority of traders expect the BOC to leave rates on hold at 0.50% but the soft monthly growth figures planted the seed of doubt and the ‘Loonie’ suffered as a result.
Australian Dollar
Despite another dip in iron ore prices, Australia’s biggest export, and another disappointing manufacturing PMI report out of China – Australia’s largest export market – the Pound to Australian Dollar exchange rate weakened by around -250 pips to a near-five-month low yesterday. Holders of the high-yielding ‘Aussie’ were pleased with the Reserve Bank of Australia’s decision to leave interest rates on hold at 2.00%. Although the RBA noted that weak inflation could lead to future rate cuts, the general tone of the report suggested that policymakers were happy to remain on the sidelines for the foreseeable future.
New Zealand Dollar
Sterling also suffered heavy losses against the New Zealand Dollar yesterday as dairy prices rose 3.6% at the latest GLobalDairyTrade auction. The upbeat result drove GBP/NZD lower by around -300 pips to a monthly low.
Data Released Today
09:30 GBP Markit/CIPS UK Construction PMI (NOV) Mediumf 58.5
10:00 EUR Euro-Zone Consumer Price Index Estimate (YoY) (NOV) High 0.2%
13:15 USD ADP Employment Change (NOV) Medium190190K 190k
15:00 CAD Bank of Canada Rate Decision (DEC 2) High 0.50%
16:00 USD Fed’s Yellen Speaks to the Economic Club of Washington Medium