Overnight the CBI raised their UK growth outlook, with GDP now expected at 2.6% this year, up from 2.4%. The CBI also suggested that the Bank of England would raise interest rates in the first quarter of next year. Cable has been relatively unchanged going into and over the weekend, but it is GBPEUR that has lost all the ground. Regardless of longer term outlook, it seems that global risk factors have taken charge for now and unless that abates in the near term then traders will very quickly have to start reassessing growth and monetary policy forecasts. There is no major data out today so we can look to equities to dictate, meaning the themes from the end of last week are likely to continue.
The S&P experienced its worst week for four years, driving home a feeling of true risk aversion that, even with the volatility experienced throughout this year, we haven’t experienced in such a way for a number of years. The concerns about the Chinese slowdown have caused capitulation on the Asian stock exchanges but the sea of red has spread across all the major indices worldwide. Interestingly, the dollar has been hammered with it; so often the haven at times like this, the US currency has been victim of its recent success as speculators deleverage and flows head back to the Japanese yen and, interestingly, the euro.
At times of extreme risk aversion the market reaction is to sell risky exposures and buy designated “safe-haven” currencies. Typically, these have been the yen, dollar, Swiss franc. Due to the long-running Greek situation and especially given the fact only last week has the Greek prime minister suggested he would be resigning, it is a little counter-intuitive that the single currency is currently enjoying its longest bull-run for years. Yet, with the rout of global stocks continuing today, the single currency remains on the front foot. The argument for this comes from the fact that for a long time now traders have been using the euro as a funding currency – that is, selling the euro to buy into yield, emerging markets, commodities etc. As fear takes hold the first reaction is to get out of these trades which involves the flow back into that “funding currency”. How long this benefit will continue remains to be seen, with the concern that the longer this risk sentiment lasts the lesser the influence it will have on strengthening the euro.
The Times- CBI upgrades growth on the back of rising investment.
FT- China stock market rout intensifies.
Telegraph- UK manufacturers fear lagging behind global competition.
Pound Sterling (GBP), Euro Currency (EUR), US Dollar (USD) exchange rates commentary is provided by Argentex (Ag-Fx.com)