All falling into place
And so starts a very interesting week for China, the Eurozone, the United States and currency markets as a whole as we wait on some particularly interesting policy. China will find out today whether the IMF deems the yuan suitable enough to become part of its Special Drawing Rights, Thursday is an ECB meeting at which additional easing is not only expected but demanded by analysts while Friday sees the final US payrolls announcement of the year and possibly the data calendar’s only real shot of derailing a December rate rise from the Federal Reserve.
Asian markets have been relatively serene overnight, allowing G10 currencies to continue their recent trends i.e. losing ground against the greenback. The euro is obviously in the firing line in the lead-up to the European Central Bank’s policy decision and Draghi’s statement, and any rallies for the single currency due to positive data will likely be sold quickly.
Yuan strengthens suddenly
The major move overnight was a sudden 3 big figure fall in USDCNH as we wait for the news from the IMF. Whether this was a move by the People’s Bank of China to quickly shut the disparity between onshore and offshore yuan prices before the announcement we may never know, but intervention in thin markets could have easily driven that move.
As we wrote on Friday, it is uncertain what impact the yuan’s inclusion in the SDR will have on pricing in the short term; there are reasonable expectations of both gains, as investors take confidence in the currency – or losses – as the People’s Bank of China once again attempts to weaken yuan to garner higher export competitiveness.
Draghi has many hurdles to jump
It is that latter reason why markets are so focused on the euro into this week. Draghi and the European Central Bank policy makers are comfortable using the euro as their first choice pressure valve for the Eurozone economy and will be wanting to drive that euro weakness ever onwards. According to the people in the know, the levels of bets on a weaker euro have not reached the extreme levels we saw in March as markets dealt with deflation and Greek issues and therefore, in theory, has further to go.
Sterling not helped by dovish talk
As probably does GBPUSD. The cross is at a seven month low this morning as the pound battles the stronger dollar and responds to comments from the newest member of the Monetary Policy Committee Gertjan Vlieghe that he is “relaxed about waiting a little longer before we start,” hiking interest rates. On the basis that the Federal Reserve will hike in a little over a fortnight’s time we are still plumping for May from the Bank of England in accordance with our ‘Federal Reserve plus six month’ rule.
German inflation will be the key number today when released at 1pm, with overall inflation expected to remain very depressed well into 2016.