Politics weighed on Sterling – 1st February 2016
Politics weighed on Sterling again amid Brexit concers on Friday losing nearly three cents to the US Dollar during the UK trading day; it did recover half of those losses during the US trading day. Despite the lack of any UK economic data acting as a catalyst for it’s decline, Sterling was the weakest performing currency, falling by an average of -0.6% against the other dozen most actively-traded currencies.
If investors had been focusing solely on the economic fundamentals, Sterling surely would have fared better against the US Dollar following the news that US annualised gross domestic product grew by 0.7% in Q4 2015. The quarterly growth of 0.2% was less than half the growth clocked by the UK over the same period but that didn’t seem to matter as Sterling was sold.
Two central banks made interest rate adjustments at the end of last week. The South African Reserve Bank raised its repo rate from 6.25% to 6.75% and the Bank of Japan cut its deposit rate from 0.05% to -0.1%. Guess what – the Rand strengthened and the Yen weakened.
The SARB’s move did not come as a surprise. Even so, with the Rand already recovering from the all-time lows of early January the increase – and the prospect of more to come this year – helped it move ahead. The BoJ cut was a different matter altogether. Although investors had been aware that the bank had easing on its mind they were not ready for a negative interest rate. The outcome is that the Rand has strengthened by 3.2% since Thursday morning and the Yen is down by -2.4%.
The traditional first-of-the-month round of purchasing managers’ index readings has already kicked off with mostly uninspiring figures from the Far East as Chinese data showed continued slower growth in the services sector while the two manufacturing measures indicated contraction. Japan and Australia also reported slower growth; Sweden’s 55.5 manufacturing sector PMI could well turn out to be the best of the lot. The forecasts around Europe are between 50.0 (France) and 54.9 (Italy) while the two US measures are pencilled in, somewhat unhelpfully, at 52.7 and 48.5.
The UK manufacturing PMI is pitched at 51.8, a tick lower on the month. For Sterling the worst case would be a sub-51.4 number, which would represent a two-and-a-half-year low. It is conceivable that a strong figure would help Sterling but only if there is progress on the political front.