Sterling takes a double blow – 2nd December 2015
Just about everyone everywhere decided yesterday was the day to sell Sterling. It began to head lower as London opened for business when the Bank of England governor introduced the results of the latest stress tests on UK banks. Whilst all of them passed the tests, Mark Carney said they may have to put aside a further £10bn in reserves. That would be akin to monetary tightening, possibly reducing the need for higher interest rates.
That wasn’t the end of Sterling’s woes but just the start as it took a second blow from the UK manufacturing sector purchasing managers’ index which came in at 52.7. Although the number was not far short of Germany’s 52.9 or Euroland’s 52.8, it was lower than investors had been expecting and it added to the pound’s burden. Sterling ended up sharing bottom place, falling by a third of a US cent and three quarters of a Euro cent.
Along with Sterling, the Canadian Dollar was also in the doldrums as it lost ground as a result of weaker-than-expected economic growth in the third quarter. It was the opposite story for the Aussie Dollar, which was again the day’s strongest currency even before third quarter Australian growth beat expectations. In fact, both the Antipodean Dollars had a good day, thanks partly to the US manufacturing PMIs. One of them was actually ahead of forecast at 52.8 but the other, the longer-established Institute for Supply Management measure, fell by three and a half points into the contraction zone at a six-year low of 48.6. Together with dovish comments from the Chicago Federal Reserve chief the figure was a vote against higher US interest rates this month. Time will tell.
By the same logic, the 0.9% quarterly expansion of the Australian economy reduced the likelihood of any rate cut by the Reserve Bank of Australia. Putting the two together, investors were more inclined to stock up with “risky” commodity-related currencies.
This evening the Federal Reserve chairperson, Janet Yellen, will deliver a speech to the Economic Club of Washington. She will doubtless have some comment on whether or not the Federal Open Market Committee will pull the trigger on higher rates in a fortnight’s time.
The other interest rates in the frame today are those of Euroland and Canada. This morning’s provisional CPI data from the Eurozone are expected to show inflation languishing far below its 2% target at 0.2%. After lunch the Bank of Canada is likely to keep its benchmark rate steady at 0.5%.
Filling in the rest of the day’s agenda are the UK construction sector PMI, America’s ADP employment change figure and the Fed’s Beige Book economic assessment.