China’s property bond abyss gets deeper

Aside from what’s happening – or not – in Glasgow, the other two big stories are the worsening situation in China’s financial markets and the re-emergence of the US economy from ultra-loose monetary policy.

On the Chinese question, since May, we have seen a 26% drop in the index of China’s Dollar junk bonds (a very popular investor tool) which is heavily influenced by the property sector. That decline accelerated yesterday. To put it into context, the offshore element of that market is (or was) worth nearly £900 billion. The reason this is important in a foreign exchange context is that problems in China infect the whole Asia-Pacific region and have repercussions in commodity markets as well as other equities markets due to the international nature of investing.

It is perhaps no surprise then that the GBPAUD rate spiked to AUD 1.8425 yesterday. It has dropped back to the AUD 1.8360 area this morning though after Australian retail sales rose 1.3% on the year and their trade surplus beat expectations.

The GBPNZD rate is in a narrowing pennant-shaped range, which is a sure sign of indecision amongst traders and investors. We did see a decent rise in New Zealand’s commodity index overnight but that was fairly obvious to anyone who watches commodities. The GBPNZD rate is just above NZD 1.91 this morning but had been a tad higher overnight.

CAD breaking to fresh lows

It looks like the GBPCAD rate is breaking below a support level that has held this pair up for over 22 months. The trend line was broken at CAD 1. 71 or thereabouts (there is a bit of variance in how lines are drawn on the charts). Having dropped through there and having failed to regain the level, this pair could well be heading for CAD 1.67 before it recovers or falls again. Why? Well, higher commodity prices – especially oil and gas – and the expectations of earlier Bank of Canada rate hikes than most other industrialised countries have combined to make the loonie an attractive bet to investors.

The US story saw the Dollar strengthen a little in late trade yesterday after the US Federal Reserve confirmed they will start a reduction of their bond-buying program this month and may consider a rate hike sooner than expected. Traders are pricing in a small hike before the end of next year; sooner than previously thought. So it was somewhat surprising that the GBPUSD rate only came down a third of a cent to this morning’s $1.3650 and the EURUSD rate dropped less than half a cent to $1.1575.

Sterling up ahead of BOE meeting

You may have spotted in those changes that the GBPEUR rate mush ae risen. That is up to €1.1800 this morning and looks like it may have further to run. This level has been quite pivotal for short-term trading in the past, so we will watch with interest. Part of the upward momentum is due to a disappointing 1.3% rise in German factory orders and partly this is about the anticipation of this afternoon’s Bank of England interest rate decision. I suspect we would all have palpations if the BOE shocked us with a rate hike but they are expected to talk about tightening monetary policy. The nature and timing of those plans are what we all want to hear. Whether we’ll get that from the meeting minutes or the press conference is anyone’s guess though.

Another lively day awaits. That’s fine because it is international ‘Use Your Common Sense Day. Who knew? However, as we all know, some people won’t know what to do with that information and will probably ask for your opinion before they act.

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