Chinese Slowdown and ‘Brexit’ Concerns Provoked Pairing Volatility
Emerging-market currencies experienced a fresh bout of volatility on Tuesday with the release of February’s Chinese trade data. While markets had anticipated a further display of weakness from the world’s second largest economy the figures ultimately showed a more severe contraction than forecast. Exports proved a particular concern, slumping -25.4% on the year to reignite fears over a potential hard landing for the Chinese economy.
As a result the Indian Rupee saw renewed softness, with investors opting to buy back into safe-haven assets in the wake of this disappointing data. While the Indian economy has appeared to show more promising signs of strength in recent months this reminder of global slowdown pressures nevertheless eroded some measure of confidence.
The GBP/INR exchange rate struggled to hold onto its resultant gains, however, as the ‘Brexit’ question continued to weigh on the outlook of the Pound. Bank of England (BoE) Governor Mark Carney testified before a parliamentary committee on the subject, reiterating the belief that uncertainty stemming from the EU membership referendum is the greatest domestic threat to the UK economy. Although the Governor also highlighted that there are risks to remaining within the EU this prompted a sharp fall in the Pound.
Pound Weighed Down by Slowing UK Growth Estimate
Stronger UK Industrial and Manufacturing Production figures helped Sterling rally on Wednesday morning, with the manufacturing sector showing a smaller contraction in output than traders had expected. As uncertainty is likely to drag on the domestic economy over the coming months this stronger showing fostered greater confidence in the UK’s current economic health.
Even so the GBP/INR exchange rate quickly resumed its downwards trajectory when the NIESR Gross Domestic Product confirmed that economic growth slowed further from 0.4% to 0.3% in the three months to February. With the UK economy appearing to weaken under the pressure of negative global headwinds and market turbulence this eroded the Pound further.
An unexpectedly strong surge in the Chinese Consumer Price Index, which rose from 1.8% to 2.3% in February, helped to shore up demand for the Rupee on Thursday. Worries over the Chinese economy consequently eased and risk sentiment was bolstered by the hopes of more imminent economic stimulus from the People’s Bank of China (PBoC).
Contracting Indian Production Dents Rupee
While the Rupee benefitted in the immediate aftermath of the European Central Bank’s (ECB) announced raft of monetary loosening measures the GBP/INR pairing soon saw a rapid resurgence. Comments from ECB President Mario Draghi that he did not see the need to lower interest rates further undermined the impact of the announcement, driving down demand for higher-risk assets as concerns over central banks’ ability to effectively bolster growth.
Ahead of the weekend the Rupee was dented by disappointing Indian Industrial and Manufacturing Production figures, as output slumped deeper into contraction territory. This rather undermined the stronger impression of the Indian economy, suggesting that global volatility had dragged on productivity more significantly than previously estimated.
Nevertheless, as the UK’s visible trade deficit remained wide in January at -10.2 billion Pounds the GBP/INR exchange rate struggled to particularly capitalise on the softness of the Rupee. With the country’s trade gap failing to narrow as Chancellor of the Exchequer George Osbourne would like this has raised questions as to the contents of Wednesday’s budget speech.