A subdued Chinese session, with the yuan little changed and local equities securing minor gains, let market participants look elsewhere for directional cues. The new lows in oil, near $30 a barrel, and the bankruptcy filing of Glencore (L:GLEN)'s US subsidiary Sherwin Alumina seemed to weigh on the dollar-bloc currencies.
However, it is sterling today that has the distinction of being the weakest of the majors. It is off about 0.4% near midday in London following disappointing BRC sales (0.1 vs. 0.5% expectations) and then a dreadful industrial production report.
Like Germany and France, the UK reported an unexpected drop in November industrial output. The 0.7% drop compares with a flat consensus expectation and is the largest fall since January 2013. Adding insult to injury, the October gain of 0.1% was revised away. This means that the year-over-year pace is half of what it was (0.9% vs. 1.7%).
Ironically, and this may be picked up in the US industrial report for December due later this week, the unseasonably warm weather weighed on energy output. Electricity, gas and steam output fell 2.1%. This is not to minimize the negative impulse emanating from the manufacturing sector. Manufacturing output fell 0.4% for the second consecutive month. UK manufacturing on a year-over-year basis has been contracting since July (-1.2% vs. -0.2% in October). We note that there appeared little in the manufacturing PMI that prepared investors for the disappointment. The November reading of 52.5 matched the six-month average.
The Bank of England meets later this week. No change in policy or guidance is expected, even if McCafferty, the lone advocate of an immediate rate hike, abandons his dissent and rejoins the fold. The economy is slowing, and inflation has yet to show upward pressure. The pendulum of market expectations continues to swing away from a rate hike this year.
The December short-sterling futures (3-month deposit) has rallied to new contract highs, implying 78 bp three-month yields in 11.5 months time. This is a 26 bp decline since the end of last year. Sterling has lost 1.8% this year, only outdone by the dollar-bloc among the majors. It is trading at a new 5.5 year low near $1.4465. The next chart point of note is another cent lower though the 2010 low is found near $1.4230.
The US dollar is trading slightly firmer against the other major currencies. Emerging market currencies are enjoying a firmer tone, perhaps encouraged by the lack of disturbance from China, where officials have denied seeking a large devaluation. Both Fed officials that spoke yesterday (Kaplan and Lockhart) explained that while the labor market enjoys favorable momentum, the four rate hikes of the dot plot are not a promise or commitment. Yesterday, the implied yield on the December Eurodollar futures contract fell to 101.5 bp, the lowest since early November.
Many reports cite the not very hidden hand of Chinese officials behind the powerful short-squeeze in CNH (offshore yuan) today that followed a similar move yesterday. This has succeeded in nearly closing the gap between the onshore and offshore markets. It is not clear that this can be sustained in a stronger US dollar environment.