Daily Forex Commentary
11 January 2018 - US recovers all its losses after China calls bond buying story “fake news”. GBP is weakest of the major currencies
By Nick Parsons
Thursday 11 January
British Pound (GBP)
The GBP was notably weak early on Wednesday, hitting a fresh 2018 low of USD1.3486 before jumping more than half a cent on the Chinese comments about buying US bonds (see US Dollar). Even after reaching 1.3555, the pound couldn’t sustain these gains and spent the rest of the day falling back to the low 1.35’s to leave it the worst performing currency on the day. Overnight in Asia it has fallen once more, and is down against all the major currencies we track here, though it has not yet broken down through yesterday’s low against the USD. It took the UK Government almost 18 months after the referendum to discuss in Cabinet what it wants the post-Brexit landscape to be. It has never set out properly what a “bold and imaginative” deal might actually look like. Yet, Chancellor Philip Hammond in Berlin yesterday complained that, “Since the referendum . . . there has been a marked asymmetry between the enthusiasm expressed by certain third countries to pursue future trade deals with the UK and the relative silence from Europe on what the EU wants our future relationship to look like.” We might well imagine there’ll be some push-back against these comments from the EU side… Whilst politicians are focusing efforts on gaining access to the Eurozone for UK banks and financial companies post-Brexit, today we’ll see what’s been happening to the supply of – and demand for – bank credit at home in the UK. The Bank of England releases its Quarterly Survey of Credit Conditions at 9.30 this morning; an always very useful and comprehensive guide to the state of the economy and the banking sector. There are no other economic statics this Thursday and the pound opens in London this morning at USD1.3495, AUD1.7135 and NZD1.8745.
US Dollar (USD)
USD/GBP expected range: 1.3445 – 1.3540
The Dollar has had a very lively 24 hours. On Wednesday, it was slammed lower in the European morning after reported comments that officials that who are reviewing China''s FX holdings have recommended slowing or halting buying of US Treasuries. The USD index was sold down to a low of 91.60 before recovering to 92.00 in the New York afternoon. The Chinese comments said that US government bonds are becoming less attractive relative to other assets and that trade tensions with the US may provide a reason to slow or stop buying American debt. We said yesterday in our Sydney morning commentary that, “Of course, there is no way of knowing the status of the comments: whether they are a genuine sign of an imminent policy shift or merely a diplomatic response to the US Administration’s talk of tightening restrictions on China’s exports.” Overnight, China’s State Administration of Foreign Exchange (SAFE) has put out a statement saying, “"We are also aware of the news through some media reports. We think the report might have cited wrong sources or may be fake news… China has always managed its forex reserves investments in accordance with the principle of diversification, to ensure the overall safety of FX assets, to maintain and increase their value. Like other investments, FX reserves investments in U.S. treasuries is managed in a professional way according to market conditions and investment needs. China’s FX reserves management department is a responsible investor both for the FX reserves and for the market in which it participates. China’s investments have promoted the stability of international financial markets and the preservation and appreciation of China’s foreign exchange reserves.” Whether it was “fake news” or not, one lasting effect of the fiasco is to remind international investors and the US Administration of the financial power of China. The US Dollar index is now back where it was 24 hours ago at 92.08 and US 10-year bonds are back at 2.53% having hit 2.59% yesterday. On the domestic economic calendar in the US today, we have weekly jobless claims and December’s producer price index.
European Euro (EUR)
GBP/EUR expected range: 1.1220 – 1.1350
After two poor days at the beginning of the week, the EUR rallied on Wednesday following the Chinese comments on purchases of US Treasuries. On Tuesday, EUR/USD had fallen to a 2018 low of USD1.1919; its lowest since December 28th and had barely recovered 20 pips to 1.1935 in Europe yesterday before suddenly jumping almost a full cent on the China news. By the New York afternoon, it had given back around half its gains to USD1.1960 and this morning it is a touch lower again at 1.1945. It may well be the case that US bonds are unattractive relative to other assets but exactly the same can be said about Eurozone bonds. 10-year US Treasuries hit a 10-month high of 2.59% today but their German equivalents yield only 0.53%. For sure, this is still well above the December lows of 0.30% but the differential with the United States is back over 200bp at the 10-year maturity. And, in terms of attracting capital flows at the shorter end of the yield curve, 2-year US notes yield 1.97% compared to a still negative -0.63% in Germany. The interest rate market is still not fully pricing an ECB rate hike until early 2019. Strong economic data are certainly helping the EUR but the yield differential is now creating quite a headwind for the exchange rate against the US Dollar. Against this background it will be interesting to see the foreign exchange market’s reaction to Eurozone industrial production figures later this morning. A pretty solid +0.8% m/m and 3.0% y/y is expected. Will it be enough to reinvigorate the EUR or will it once again be ignored as ‘old news’? The EUR opens in Europe this morning at USD1.1935 and GBP/EUR1.1300.
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