Sterling
Sentiment towards Sterling remained fairly weak yesterday as investors reacted to the customarily concerning trade balance report.
Net trade as been the thorn in the UK economy’s crown over the past few years while other sectors – most notably services – have flourished. And December’s report was cut from the same cloth as the previous ones: the trade gap increased by around £10 billion, which brought 2015’s calendar year deficit in physical goods up to a new record high of £125 billion.
The Office for National Statistics reported that exports declined -£8.1 billion last year due to a drop off in demand from China, which bodes ill for future performance. With India (7.3%) now growing at a faster rate than China (6.8%), maybe British exporters will find solace from an increase in demand from the subcontinent but it certainly cannot be counted on.
Euro
The Pound to Euro exchange rate tumbled by around half a cent yesterday to strike a new 13-month low. Unlucky for Sterling, the latest UK trade balance figures showed that 2015 was the worst calendar year on record for trade in physical goods.
Another torrid day on financial markets saw the FTSE fall to a new three-year low and European banking stocks racked up a significant year-to-date loss of -25%. This heightened sense of risk aversion did nothing to help the Pound’s cause as the Euro continued to absorb defensive inflows from traders settling riskier investments that were taken out with funds obtained cheaply from the Eurozone.
US Dollar
Strangely, Sterling managed to strengthen against the US Dollar yesterday. GBP/USD rallied by around 70 pips in what seems to be a move by investors to hedge against a dovish statement later this afternoon from Federal Reserve President Janet Yellen.
Last Friday’s labour market report sent the ‘Greenback’ surging higher across the board – despite the fact that the headline non-farm payroll print came in 40,000 lower than forecasts of 190,000. It was the dip in unemployment to a new eight-year low of 4.9% and a surprise 2.5% rise in wage growth that propelled the US Dollar higher on Friday, but investors are wary that Yellen could focus on the volatility in global markets and the soft NFP number this afternoon.
If Yellen closes the door to a rate hike in 2016 the US Dollar will likely stump. If she leaves the door open it is entirely likely that we could see the demand for the ‘Greenback’ grow.
Canadian Dollar
The Canadian Dollar registered some minor gains against Sterling yesterday as British stocks tumbled to three-year lows but equity markets in Canada remained relatively sheltered from the storm.
Crude oil prices managed to stay above the psychologically significant US$30 a barrel mark for most of the day and this also supported demand for the ‘Loonie’.
Australian Dollars
After losing ground on Monday, the Pound managed to claw back some of its losses against the risk-sensitive Australian Dollar yesterday. With markets firmly in risk off mode it was unusual to see GBP/AUD decline on Monday and it seems yesterday’s gains for Sterling were an attempt by traders to rectify that.
New Zealand Dollar
Sterling recovered minimally against the New Zealand Dollar yesterday but the Pound was unable to register any meaningful gains against the commodity-correlated ‘Kiwi’.
This morning’s UK manufacturing production report is tipped to print negatively at -1.4% and subsequently the Pound could struggle again this morning.
Data Released