Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 11th of September.
The latest Chinese trade balance data released over the weekend gave one more reason to be worried over global recovery. While exports grew at 2.7 percent in August, imports fell 2.6 percent, widening the trade surplus. China is trying to rebalance its economy, focusing on investments rather than consumption to get back to the growth path.
Investment already makes up for 46 percent of China’s total economic spending and is still growing. That’s normal for economies in transition, Japan, Korea and Singapore all reached similar levels before receding as industrialisation peaked. Consumption has always trailed investment in China. Fixed-asset investment grew 20.2 percent in the Jan-Aug period while retail sales grew 13.2 percent year-on-year. As export growth slows down due to continued global weakness, government backed infrastructure spending offers the best prospect for a quick fiscal boost.
Shrinking the investment pie would make little sense even though it may please the purists. Beijing already invests less than it saves, producing huge trade surpluses. If investments are cut further, all other things being equal, China would export more capital, widening the capital account deficit. While the govt. allowed the yuan to lose 0.7 percent in 2012 against the USD to help exports, vis-a-vis a 4.7 percent gain in 2011, incomes have rose driving up consumption.
China has made investment errors in the past, relying heavily on real-estate, steel and aluminium. Investments are required in utilities and city transport projects as China continues to urbanise rapidly. If it can manage its investments correctly, the economy can reverse further slowdown soon.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2511
GBP/US$ – 1.6014
GBP/CHF – 1.5127
GBP/CAN$ – 1.5616
GBP/AUS$ – 1.5486
GBP/ZAR – 13.0882
GBP/JPY – 125.26
GBP/HKD – 12.4226
GBP/NZD – 1.9778
GBP/SEK – 10.6110
EUR: The single continued to consolidate over the past 24 hours with the EUR/USD pair trading in a narrow range of 1.2760 and 1.2800. The GBP /EUR pair has also remained nearly flat due to lack of any market moving economic news. French industrial production data however provided some relief, showing a growth of 0.2 percent while European investor confidence, though extremely weak, showed some improvement. Elsewhere, Italian Q2 GDP came in weaker than anticipated, showing the economy stuck is in deeper rut than previously thought. French employment and German inflation data is expected to attract some attention today even though tomorrow’s German constitutional court ruling on the ESM is what the markets are looking forward to. The GBP/EUR pair opens at 1.2515 this morning.
USD: Cable remained range-bound against the greenback on Monday ahead of Wednesday’s German court ruling, consolidating around the 1.6020 level. Investors have moved to the sidelines, waiting for the events that are set to unfold this week, including Dutch elections, US CPI number and the US FOMC statement. We also have the US trade balance data due for release along with consumer confidence later in the day while UK trade balance is due today morning. The GBP/USD pair is expected to trade in a narrow range of 1.5960 and 1.6040 today.
Have a great day!
