Short covering

One day at a time

The presidents of France, Germany and Italy met yesterday to chat about the future of the EU and look at each another's holiday snaps. To get one over on Britain's prime minister they held the meeting on an aircraft carrier. Sterling was unfazed, coming second among the major currencies.

The pound was already looking bid as London began its week and it made further upward progress over the next couple of hours. In mid-afternoon it took another step higher and it continued to be well-supported overnight. There were no data to justify the move, which appeared to be the result of investors covering more of their speculative short positions. And it isn't as if there is any scarcity of short positions: official figures from the US financial futures market show that the number of shorts has increased every week since the referendum. 

So the pound went up by an average of 0.3% on Monday, beating every major currency except the NZ dollar. Its smallest gain was a dozen or so ticks against the Japanese yen: its biggest were against the US and Canadian dollars, where the pound was up by 0.8%.

Kiwi flies on rate outlook

The NZ dollar moved higher overnight after Graeme Wheeler, the governor of the Reserve Bank of New Zealand wrote of further interest rate cuts. At the same time the US dollar was fading even though investors expect higher American rates.

Mr Wheeler reiterated his expectation of "35 basis points of further interest rate cuts", surprising some investors who had been expecting a more dovish line. A literal interpretation of his comment would eventually put the Official Cash Rate at 1.65%, a little above Australia's 1.5% and appreciably higher than the -0.75% to 0.5% benchmarks seen in Europe and North America. The Kiwi strengthened by half a cent on the news and made a net gain of one cent on the day.

The US dollar's problem was that investors still doubt that rates will go up this year. They doubt it less than they did - financial futures pricing now puts the chance of a September increase at 27% where a week ago it was 20% - but they still doubt it. The dollar lost half a cent to the euro and one cent to sterling.

PMI preview

Preliminary purchasing managers' index readings from Europe and the United States will be the main focus for investors today. Supporting roles will be played by UK manufacturing orders, US new home sales and the Richmond Fed's manufacturing index.

The only PMI predicted to be in the sub-50 contraction zone is French manufacturing. No preliminary figures will be published for the UK: last month's were apparently a one-off.

The sole UK statistic will be the CBI's industrial trends survey, which looks at manufacturers' order books. After scoring a -4 in July today's reading for August is pencilled in at -9. A -1.9% fall is expected for US new home sales.