China to join an elite club
As we come to the end of the week, G10 markets are rather quiet with Thanksgiving bloat making itself felt at Friday’s open. With little to focus on within developed economies, most currency pairs are happily trading sideways. Next week is a very interesting one from a currency perspective.
Monday should see China’s renminbi finally join the USD, EUR, GBP and JPY as a member of the International Monetary Fund’s SDR basket. In essence this allows China to become part of a global currency elite – a major boon for a country still eager for status on the global stage. The barriers to entry have been numerous but the knowledge that China’s economy is still the world’s largest exporting economy, while the use of the yuan and its trade is becoming easier means that on Monday it is expected to join this club.
It is the after effects that are most important to us, however, as with this ‘badge of honour’, further changes to the Chinese currency regime can be made. In the short term, this may increase the desire globally to invest in the yuan prompting valuable capital inflows – something that the Chinese authorities will be eager for given recent capital outflow as a result of emerging market instability and the desire of Chinese investors to diversify away from one economy.
Doesn’t mean that further weakness will not be seen
In the short term, given the weakness that we are seeing in Chinese growth numbers and forward looking indicators, there is a lot to be said for another weakening of the yuan by the People’s Bank of China. Inflation is difficult to come by at the moment even with a weak currency – you can’t steal it from someone if nobody’s got it – and recent export numbers have been better but nowhere near good enough.
I’d be very interested to see whether the authorities in China decide that, to prevent heightened flows out of the country in the short term, they may pull the drawbridge up by tightening capital controls before this devaluation. We may know as soon as next week.
ECB policy may not be enough to knock the euro
What we will have a clearer idea of is the plans and policy of the European Central Bank following its policy meeting next Thursday. My thoughts remain that we will see the European Central Bank use a 20bps cut in the deposit rate and additional QE spending of around EUR30bn a month for until March 2017.
As it stands, I do not believe that that in itself is enough to send the euro drastically lower and language from Draghi and Constancio in the their roles as President and Vice-President respectively will be all important.
The Day Ahead
While the entire market is focused on euro weakness next week we have to council just how high GBP/EUR could run given the Bank of England’s concerns over a strong pound. I would have to say that 1.47 is likely an absolute top and would bring out BOE policymakers to make moves to bring sterling lower.
GBP watchers will do well to monitor today’s GDP announcement at 09.30. As it is the second reading of the numbers we will gain a better insight as to what drove growth in Q3.