Chinese growth figures weak

Publication date: 10 August 2012
Author: Richard Driver, CaxtonFX

The ECB’s monthly bulletin cited downside risks to eurozone growth yesterday, while Chinese growth figures have also been alarmingly weak. Confidence in sterling is returning in light of this week’s less dovish BoE Quarterly Inflation Report, while the dollar is also seeing some higher demand.

Today’s session brings little by way of major scheduled announcements, though we do have some important monthly employment data from Canada.

STERLING/EURO: Sterling continues to recover against a softer euro, despite some weak UK trade.

• Monthly UK trade data was disappointing again yesterday, equalling the widest deficit in years. Still, sterling is trading higher. After the better than expected UK manufacturing and industrial production data from earlier this week, combined with Mervyn King’s comments indicating that the UK economy is not as bad as data suggests, an upward revision to the UK’s Q2 GDP figure is essential on August 24th. If this does not come, then sterling could face some more pressure.

• The market appears to be getting tired waiting for signs of concrete action from the ECB, so the euro is weakening off accordingly. This pair is trading above €1.27.

STERLING/US DOLLAR: The dollar strengthened yesterday as once again levels around $1.57 prove to be a stretch.

• The air up around $1.57 proved too thin once again yesterday and this pair saw another sharp correction downwards. There was further evidence of jobs growth yesterday, while the US trade balance was also the best seen since February 2011.

• The market is getting increasingly concerned with the lack of new developments from the eurozone, which saw a weak EUR/USD pair weigh on GBP/USD yesterday. This pair trades below $1.56.

EURO/US DOLLAR: This pair has lost momentum entirely, with the market running out of patience for ECB action.

• Spanish 10-year bond yields are only marginally below 7.0%, which explains the market’s ongoing eagerness to see the ECB follow up its promise of a plan with some action. The ECB’s monthly bulletin also highlighted the weak outlook for eurozone growth.

• We continue to prefer the dollar to the euro and in the absence of any major euro-positive headlines, we expect the dollar to outperform as we head into the weekend. This pair trades at $1.2275.

STERLING/AUSTRALIAN DOLLAR: Sterling saw some upside against the aussie dollar as the RBA’s quarterly statement revealed currency concerns.

• If there is one thing that spooks currency investors, it is indication of central bank intervention. There were hints of this in the Reserve bank of Australia’s quarterly monetary policy statement. The statement expressed concerns that the persistently strong AUD could be a drag on Australian growth. That said, the RBA revised GDP expectations for this year up to an impressive 3.5%, from 3.0%. Regardless, the market focused on the currency aspect.

• Sterling is trading comfortably above 1.48 this morning and we are likely to see this pair correct slightly lower in the short-term.

STERLING/NEW ZEALAND DOLLAR: Sterling continues to edge higher against the kiwi dollar, as this week’s poor NZ and Chinese data weighs.

• Asian risk appetite ran out of steam last night, driven by weak Chinese trade balance data. Headlines surrounding a ‘hard’ Chinese landing are hurting the kiwi dollar, as are Wednesday night’s weak NZ employment figures. Bets on a rate hike from the RBNZ are now being pushed right back.

• Sterling is trading at 1.9250 this morning and the risks for this pair continue to be skewed to the upside.

STERLING/CANADIAN DOLLAR: The Canadian dollar makes further gains as this pair posts a fresh 11-month low.

• This pair broke through support levels and declined by another cent yesterday, helped by positive US data. We have some important Canadian employment data released today, and further improvement in labour market is expected.

• This pair is now approaching its one-year low close to 1.54 and we certainly expect this level to be tested soon.