China dominates Pound the loser

8 January, 2016

Tom Arnold

The week began fairly positively for Sterling with rates for buying Euros managing to claw back some of the festive losses, and gains of a couple of cents seen by Tuesday. However the remainder of the week’s trading then became completely dominated by events in the Far East, with the Chinese stock market being shut down after just 29 minutes yesterday. This was the second time this week that the “circuit-breakers” had been triggered due to massive drops in the price of stocks. 

The main reason for the problems in China is a massive slow down in their manufacturing growth, which impacts the value of their manufacturers stocks and critically makes investors less inclined to put their positions in those Chinese stocks. So these investors moved into a risk averse stance and piled into safer positions such as the US Dollar, which saw significant strengthening across the board as the week progressed, including against the Pound where for those of you looking to purchase Dollars, you are now looking at the lowest levels since April last year.

The Euro also managed to make some gains which was quite surprising given the expectations of possible European interest rate cuts in the coming months, and a selection of mixed data out this week. This strength enabled the Euro to push back significantly against Sterling and the rates for buying Euros are now the worst seen since October last year.

The Pound was unfortunately the loser out of the majors in this upheaval, which on the face of it doesn’t necessarily add up. You would expect the Dollar to do well given the recent interest rate rise and the continued positive performance of the US economy, but the Euro, as already mentioned should really be weak, and the Pound should really be Ok off the back of continued discussions of UK interest rate rises and relatively good data performance. This should be sounding significant alarm bells in the minds of anyone with an upcoming currency purchase, who has Sterling in hand, because it points to a more intrinsic problem in the UK economy or simply a lack of trust in the UK from those market-moving investors. Either way these multi-month lows could be just the beginning for the Pound, so it may well be a good plan to consider biting the bullet on your upcoming purchase before things deteriorate further.

Today the Chinese stock market has managed to stay open, albeit in a “recovery mode” giving everyone cause for some positivity that the world economy isn’t about to implode! On the data front it is another busy day on the markets with various European industrial figures already released, UK trade balance figures due out this morning and critically the US Non-Farm Payrolls numbers out at lunchtime. NFP is expected to post another positive number, continuing the good run of form the US jobs market has delivered over the last few months. So assuming this comes to pass we can expect the US Dollar to continue to make hay.

During these volatile and often hard to read times, please make sure you stay in close contact with your Currency Index account manager to be kept informed of exactly what is happening and what your options are to try and get the very best from the market.