The single currency opens today just shy of a two-month high vs. the dollar and also the yen as hopes once again build ahead of the ECB meeting. There is every sign that the ECB and also political leaders have been working towards backing a more effective ECB bond-buying program to be announced on Thursday of this week.
More meetings are taking place today designed to get European leaders behind the ECB’s new plan. The euro has gained on all the majors apart from sterling over the past week. The bottom line is that the ECB has to deliver a credible plan on Thursday, otherwise the hope currently underpinning markets will quickly and rapidly dissipate.
Guest post by Forex Broker FxPro
Commentary
Politics and the pound. With the economy still mired in recession, which in turn is compromising the government’s fiscal strategy, the way sterling performs over coming months will depend to some degree on whether the government can cobble together a coherent growth strategy. Both the prime minister and the chancellor recognise that more needs to be done. The former has vowed to reveal more details of specific growth measures over the course of this week, including the introduction of a small business bank, reforms to the planning system and a scheme to encourage residential construction. Although the government is severely constrained by existing fiscal imperatives, nevertheless it simply must deliver a more convincing narrative on growth than this. For example, finding a path through the haze to boost infrastructure spending is imperative for the economy’s longer-term future. One example is the debate over a third runway at Heathrow. The economic and financial arguments (for the extra runway) are extremely compelling, and Osborne knows it, but do he and Cameron possess the gumption to implement this (admittedly very difficult) decision rather than kick it into the long grass? For foreign investors who understand the UK, if the government fails to press ahead with the third runway then it would be symbolic of a lack of ambition and an inability to reverse the economy’s perennial decline. Over coming months, the way the country’s politicians respond to the economy’s growth challenges will become increasingly relevant for the currency. Unfortunately, their track record to date is not reassuring.
More strife down under. There was some short-covering in the Aussie overnight in the wake of the RBA’s decision to keep rates on hold, but in the bigger picture, the Aussie still holds the baton for the worst-performing currency of recent weeks. The AUD fell to 1.0240 yesterday, having penetrated both the 50d and 200d moving averages in recent days. The bears will be encouraged by the price action, in particular the consistent pattern of lower lows witnessed in the past fortnight. A number of factors have contributed to this darker mood towards the Aussie. Firstly, retail sales for July were much weaker than expected, falling by 0.8% in the month. It was the worst month for department store sales in seven years. In addition, gross operating profits declined in Q2, a second consecutive fall. Secondly, the growth news out of Asia Sunday night was generally on the softer side, with the Chinese and Indian manufacturing PMI both softer than expected. The Aussie’s recent decline is more remarkable when one considers that the dollar has been struggling recently amidst growing speculation that the Fed will soon inject more monetary stimulant into the economy. Traders meanwhile are scurrying for the exits, have accumulated significant long positions over the summer months. Although we have been consistently bearish on the AUD in recent weeks, we do not share the Armageddon-esque forecasts being promulgated by some commentators.
Growing pain in China. Those assurances from China’s political leadership that the second half of the year would be better for the economy are looking increasingly hollow. Two measures of manufacturing released over recent days suggest that the malaise being suffered in this sector continued last month. The HSBC/Markit PMI fell to a 3yr low of 47.6, with exporters re-affirming that global headwinds are really hurting. New export orders last month fell at the fastest pace since March 2009, while the pace of jobs cuts was the most rapid for 41 months. Worryingly, despite production cutbacks over recent months, inventory levels remain high, implying that further declines in output are likely in coming months. Separately, data from the PBOC revealed that non-performing loans at the five biggest lenders surged by 27% in the first half of the year. Profits at industrial companies continue to decline, weighing heavily on share prices – the Shanghai Composite last week fell to its lowest level since early 2009. Growth expectations for the full calendar year are being rapidly pared back – the government’s 7.5% target goal is under serious threat. Policy-makers in China will closely scrutinise some critical economic releases due out at the end of the week, including industrial production and consumer prices. It would not be surprising if they implemented further monetary stimulus relatively soon because the economy surely needs it. Beijing will likely continue to sanction a gradual depreciation of the renminbi as well.
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