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Osborne talks of ‘dangerous cocktail’
– EU referendum also weighs on Sterling.
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Sterling weakens versus Euro
– GBP/EUR falls close to three-month low.
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‘Cable’ sinks to five-year low
– US NFP report on tap.
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Commodity bloc down on risk aversion
– Oil hits 12-year low, Chinese market shut down.
Sterling
The Pound came under pressure against some of the majors yesterday as British Chancellor and future Prime Ministerial candidate George Osborne warned that the UK faces a ‘dangerous cocktail’ of threats at the beginning of 2016. The Chancellor highlighted the latest stock market meltdown in China, slower growth in emerging markets such as Brazil and Russia and increased tensions in the Middle East as headwinds that could potentially derail the economy after two years of robust growth.
Osborne failed to mention the prospect of an in/out EU referendum, which is also putting pressure on the Pound as investors hedge against a potential slowdown later in the year. Traders are worried that the economic uncertainty in the run-up to the vote – which a recent poll showed would see Britons vote to leave the bloc – could hamper business investment, reduce productivity and weigh on GDP.
Euro
Sterling weakened by a whopping -170 pips against the Euro yesterday to reach its lowest level since mid-October as economic sentiment in the currency bloc rose to its highest level since 2011.
Although Eurozone retail sales shrunk -0.3% during the month of November, bringing the headline yearly figure down from 2.4% to 1.4%, the single currency was boosted by news that the economic sentiment rose form 106.1 to 106.8 on hopes that European Central Bank stimulus is providing impetus to the region’s economic recovery. The Euro also benefitted from a surprising improvement in the Eurozone labour market as unemployment sunk from 10.6% to a four-year low of 10.5%.
US Dollar
The Pound to US Dollar exchange rate depreciated by around half a cent yesterday to strike a fresh five-and-a-half-year low as investors sent their funds across the Atlantic to the safety of the ‘Greenback’.
Risk aversion trends were exacerbated by further volatility in the Chinese stock market and, being the world’s premier safe haven currency, the US Dollar was the major beneficiary of such flights to safety. The Pound, on the other hand, suffered as ‘Brexit’ fears and dovish Bank of England speculation reduced its appeal.
We could see GBP/USD rally today if investors look to lock-in profit from yesterday’s five-year low, however, we could see the Pound sink further if this afternoon’s US non-farm payroll report prints at 200,000 as expected. A decent print could persuade investors to up their Federal Reserve rate hike bets and this is liable to drive demand for the ‘Greenback’ higher.
Canadian Dollar
Sterling rallied by around half a cent against the Canadian Dollar yesterday as oil prices tumbled to fresh 12-year lows on concerns regarding relations between Iran and Saudi Arabia and the recent turmoil in Chinese stocks.
The ‘Loonie’ recovered slightly during the afternoon as Bank of Canada Governor Stephen Poloz indicated that the BoC would not be providing further stimulus to help stimulate the domestic economy during this time of declining commodity prices. But it was not enough to wipe out the Pound’s previous gains.
Australian Dollar
The Pound to Australian Dollar exchange rate grew by around a cent yesterday as risk aversion flows drove investors out of assets denominated in the high-risk ‘Aussie’.
The People’s Bank of China (PBoC) allowed the currency to depreciate to a five-year low yesterday, which triggered sharp selloffs in Chinese shares and a record-breaking stock market shutdown after just 29 minutes. In order to curb panic selling and maintain stability the Chinese authorities had imposed a ‘circuit breaker’ to close the market for the day if shares dropped by -7%. This happened after less than half an hour yesterday and subsequently Chinese authorities have suspended the ‘circuit breaker’ scheme in order to prevent the kind of hysteria that ensued yesterday.
New Zealand Dollar
Sterling initially rallied to a new fortnightly high versus the New Zealand Dollar yesterday on Chinese meltdown fears. However, the risk-sensitive ‘Kiwi’ recovered during the afternoon in response to the PBoC’s decision to remove the ‘circuit breaker’ that had been put in place to stabilise markets but had inadvertently caused enhanced panic as traders rushed to sell stocks in anticipation of a shutdown.
Data Released
09:30 GBP Visible Trade Balance (Pounds) (NOV) Medium -£10500
13:30 USD Unemployment Rate (DEC) High 5.0%
13:30 USD Change in Non-farm Payrolls (DEC) High 200k
13:30 USD Average Hourly Earnings (YoY) (DEC) Medium 2.8%
13:30 CAD Unemployment Rate (DEC) High 7.1%
13:30 CAD Net Change in Employment (DEC) High 10.0k