Plenty to think about!
The Chinese Yuan was fixed today at its lowest level for 5 years as the Chinese authorities change tack. Throughout last year the Chinese intervention in the market was almost entirely through interest reductions and liquidity pumping.
In August last year they considered devaluation but backed off as their stock market tumbled. Now they are employing the ‘crawling peg’ which has moved the Yuan to 6.55 versus the dollar from a high point in 2013 close to 6.00. They appear to be targeting 7.00 at least and in a clear indication that the market gets it, the offshore Yuan is already trading at 6.70 a 2.3% premium.
Following manufacturing PMI’S earlier in the week it is now clear that the World economy is suffering from a severe over capacity with extreme problems for China which may revert to dumping, but with less success due to intense competition and for the USA which will almost certainly enter a manufacturing recession by early February.
US Interest rates and the dollar
We have commenced the year with a view that the dollar will remain mighty and that this will be on the coat tails of 4 sign posted interest rate rises. This confidence will most likely be challenged as the year unfolds; indeed a senior economist from Morgan Stanley stated this morning that their running GDP for the US economy is down to 0.5% and contracting.
Almost a classic economic dilemma with the supply side being totally reliant on demand which is probably creating an artificial picture. The Fed funds rate will probably rise again in March but as to whether this is followed by three more rises, highly debatable. Thus we could easily see early confidence in the dollar dissipate and a surprising bounce in the Euro as the year unfolds.
Two weeks ago the UK was led to believe that a referendum regarding our continued membership of the EU would be held in September. Yesterday in a flurry of activity perception changed.
Firstly David Cameron indicated that negotiations with our EU neighbours would be completed in weeks not months. He then went on to say that once negotiations are completed and announced members of his Government would be free to join the In or Out campaigns free of government direction. The referendum could therefore be held as early as May but more likely in June so as not to compete with Mayoral and local elections. Strangely this could become a positive for sterling later this year as the boil is lanced earlier.
As we said at the beginning, plenty to be thinking about.