China to Snowball and Safety to Reign Supreme? – 12th January 2016
China to Snowball and Safety to Reign Supreme
How would you react if a very senior figure at your bank sent you a letter advising you that 2016 is going to be a “cataclysmic year”? I imagine you would be rather concerned. Well, that is more or less what Royal Bank of Scotland investor customers received from the Head of Credit and to “sell everything except high quality bonds”.
His apocalyptic view is that “China has set off a major correction and it is going to snowball”. If you look at foreign exchange rate movements since 1st January 2016 it seems many would share his view. Investors have run for the safety of the Japanese Yen, which has strengthened by 4.4% against Sterling, while the US Dollar is up by 2% and the Euro by 1.5%. Safety reigns supreme.
At the back of the field risk lies rejected: the South African Rand is down by -6.2% while the Aussie and Kiwi Dollars have both taken a 2.5% hit. To an extent the Canadian Dollar’s US connection has insulated it against this flight to quality but it is still down by nearly a cent. Sterling has lost an average of -0.2%, equivalent to a third of a US cent, against the other dozen most actively-traded currencies.
Amidst all the uncertainty and talk of armageddon, Sterling had one of its better days on Monday, strengthening by an average of 0.3% and losing ground only to the Aussie and Kiwi Dollars. However, its performance over the last month has been hurt by the fading chance of an interest rates rise this year and and the looming EU in/out referendum.
The experience of the Scottish independence vote 16 months ago suggests that opinion polls are not to be trusted and that the bookies’ odds ahead of the event are not necessarily any better guide to sentiment. The current indications show an odds-on likelihood of the country staying in but investors are still edgy about a possible break. As for interest rates, whilst the possibility of a hike this year cannot be ruled out, the US$30 a barrel oil price and the ongoing supermarket price war do not point to an inflation-driven increase any time soon. There is also speculation that Ian McCafferty, the Monetary Policy Committee’s perma-hawk, might vote this week against a rate increase for the first time in six months.
Today brings the data for UK industrial and manufacturing production. The projection is that both will have been close to flat in November but analysts’ predictions for these numbers can often be wide of the mark.
Disappointing figures would be another reason for investors to look down their noses at Sterling. Another important ecostat comes out this afternoon, with the NIESR’s estimate of fourth quarter gross domestic product; Bank of England governor Mark Carney will be speaking in Paris after lunch so there is plenty there that could go wrong for Sterling.