There are three broader themes to consider in FX this week. Firstly, China is in the frame once again as the yuan weakens to a 4 week low. As always, there is not necessarily a specific trigger to the latest bout of CNY weakness, but as always concerns regarding loan quality in both the bank and non-bank sectors are never far from the minds of markets participants. USDCNY is back above the 6.2550 level for the first time in 4 weeks, this coming after a period of reversal of the yuan weakness that dominated February to April of this year.
The other theme is sterling. The latest speech from BoE governor Mark Carney last night did not go into policy details (focusing on wider issues around capitalism), but the pressure is likely to grow in the coming weeks for the Bank to start considering a move higher in interest rates. This may come towards the tail end of this year. We wrote last week about the need for central banks in general to start ditching forward guidance (see “Killing Forward Guidance”) and the issue the bank faces is that if they leave it too late and are forced to hike rates more aggressively, the UK could be faces with huge affordability issues in the mortgage market. So for sterling, the scope for more gains as a rate hike moves closer is gaining credence.
The final issue is the ECB. The central bank meets next week and there is little doubt that some policy action will be taken. The two unknowns are the form and the impact. In terms of the form, given that no one measure is likely to have a meaningful impact on the economy, we would expect to see a combination of measures, such as negative deposit rate, some form of quantitative easing, with perhaps a further rate cut on the main refinancing rate. The initial impact is likely to be felt on the currency, especially if Draghi chooses is words carefully so as to keep the currency on the defensive, but the longer-term implications are probably going to be less dramatic as the ultimate impact of the measures on lending rates to households and businesses is likely to be far less dramatic.
Further reading:
Mistakes, I Love You! Why Forex Traders Keep Doing The Same Mistakes?
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