Chinese property developer problems infect other markets

Central banks are front and centre in the perception of foreign exchange markets players right now. However, there are other stories to be aware of. For example, 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.

GBPAUD rate spiked to AUD 1.8425 yesterday. It had 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. We have seen further loss in this pair after the Bank of England failed to meet some market participants’ expectations of an early interest rate hike. By Thursday afternoon, this rate was down again to AUD 1.8260.

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. With Sterling being hit after the BOE ‘on hold’ decision, GBPCAD dropped again to CAD 1.6800.

The GBPEUR rate was up to €1.1800 this morning and looking like it may have further to run. This level has been quite pivotal for short-term trading in the past, so we were watching it with interest. A disappointing 1.3% rise in German factory orders didn’t help the Euro and Sterling was lifted by anticipation of this afternoon’s Bank of England interest rate decision. In the end, the BOE disappointed some in the markets and failed to raise the base rate, so Sterling capitulated. GBPEUR was down below €1.17 by early afternoon and, unless the BOE can calm the markets, it will fall further.

Sterling drops after BOE leaves rates on hold

Having taken a tumble after the Bank of England’s decision today, the Pound looks vulnerable. You can see the impact of the UK central bank’s decision not to raise rates in the other exchange rates in this report. UK traders will now brace themselves for the UK GDP (economic growth) data, due for release on Thursday 11th November. The data has every chance of being very positive and therefore positive for the Pound but there are no guarantees in this strange new world.

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 was just above NZD 1.91 this morning but had been a tad higher overnight. By the afternoon, post-BOE, that rate had fallen again to NZD 1.9015 and could well fall further. That fall would be enhanced if the European Central Bank decided to act early when they meet on the 10th of November.

US Fed prepping for tighter monetary policy

We saw the US 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. That accelerated in later trade, after the Bank of England’s decision, and by mid-afternoon on Thursday, this pair was down to $1.3520, All eyes are now on the US employment report on Friday and next week’s US consumer and producer price inflation.

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