Good morning and welcome to today’s foreign exchange market commentary on Friday, the 24th of August.
China’s manufacturing number came in the lowest in nine months yesterday with the HSBC-Markit PMI reading for Aug. showing yet another month of contraction. While the argument for another hard landing by Beijing seems to have weakened as the economy managed to keep cash and credit growing despite slowing GDP growth, falling property prices and weak corporate profits. But the world’s second largest economy seems to be following the Japanese path and risks to witness slump for a protracted period.
A correction in the credit-driven and overinflated property market triggered the current slowdown. When such bubbles burst, lenders withdraw from the market fast creating a negative loop of defaults, weakening credit, lower economic output and bank losses.
China has managed to avert a credit crunch in the short term. The money supply is growing at over 13 percent while loan growth has recovered to about 40 percent even though annual mortgage growth has slowed to 12.5 percent from more than 50 percent in 2010. Real-estate development, which accounts for more than 10 percent of GDP, slipped 16.3 percent in the first half of 2012.
But Beijing’s banks lend the way the government wants. That probably explains why the economy expanded at the lowest rate in a decade in 2008 despite new bank loans soaring 1500 percent. Opening the credit floodgates will slowdown a bubble burst, but it also crowds out credit for healthy firms and props up sick enterprises.
Even though loans are growing, they are mostly short-term in nature with loans with more than one year maturity actually shrinking 25 percent this year, meaning new lending may be crowded out due to refinancing surge.
China must choose between strong growth and fast structural adjustment, but can’t have both at the same time. However, the current growth slowdown to 7.8 percent in H1, 2012 possibly doesn’t warrant a large stimulus package just yet.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2628
GBP/US$ – 1.5856
GBP/CHF – 1.5182
GBP/CAN$ – 1.5762
GBP/AUS$ – 1.5226
GBP/ZAR – 13.1804
GBP/JPY – 124.69
GBP/HKD – 12.304
GBP/NZD – 1.9532
GBP/SEK – 10.4634
EUR: The single currency gained traction against its peers yesterday on the back of renewed optimism that the US Fed would soon announce another round of assets purchase program in Sep. Reports of Spain discussing the conditions for a sovereign bailout with European members also lifted spirits even though Spain is yet to request a full blown rescue package officially. Also there was a chatter of Greek managing an extension for its deficit reduction targets even though the joint statement by Merkel and Hollande suggested otherwise. The EUR/USD hit a new 7-week high of 1.2588 while the GBP/EUR pair dropped to a two-week low 1.2615. European powerhouse Germany also lifted the mood as GDP for the quarter came in at 0.3 percent. The euro is expected to be range-bound today in the absence of any worthwhile economic data from Europe. GBP/EUR opens at 1.2630 this morning.
USD: The effect of the US Fed’s dovish FOMC minutes on late Wednesday continued till Thursday with the GBP/USD pair climbing to a near three-month high of 1.5910 in early London trading. However, the cable failed to sustain the momentum on the back of profit taking by USD short traders and tracked back to end the day at 1.5859. Following upward revision of UK Q2 GDP to -0.5 percent from the earlier iteration of -0.7 percent in July, the GBP/USD pair has fallen back somewhat today morning even though traders expect the cable to find support around the 1.5800 level. The GBP/USD pair opens at 1.5827 this morning.
Have a great weekend!
