Last week saw the Chinese stock market fall by more than 7% on several occasions. There is a circuit breaker in place which halts trading if there is such a considerable drop. The second time a drop of this size occurred last week it only took 25 minutes for the circuit breaker to cut in.
The trend was surely set to continue for the rest of the week with only a small window of opportunity for investors to sell their stocks. Thankfully common sense came into play and sanctions were placed on investors on how much they could sell and the circuit breaker was removed, restoring some stability into the market place.
Moving forward however I feel the situation is worrying, there is an enormous problem with shadow banking (unaccounted for debts) which the true extent of which is yet to emerge and growth has slowed for 10 months consecutively. Inflation figures were released on Saturday and also came in below par and I feel things could well get worse.
The Euro has strengthened significantly over the Euro of late, dropping by nearly 10 cents since the beginning of December. The Chinese situation does not bode well for Sterling. There is also the small matter of a Brexit to deal with which is sure to cause further Sterling weakness further down the road. UK inflation is also sitting very low at 0.1%, we are some way from the 2% target so don’t expect a rate hike for some time, at least 12 months.
The only respite for Sterling could be Mario Draghi the Head of the European Central Bank (ECB) increasing the the amount of funds he will pump into the Eurozone through the Quantitative Easing Program (QE). Late in 2015 he stood firm and although he elongated the time frame on QE there was no increase the amount of funds pumped in per month. He may well lose credibility were he to change his stance so quickly.
It may be wise to keep an eye on Thursday’s 12.30pm ECB Monetary Policy Meeting Accounts, this could give an indication as to monetary policy going forward.
Interest Rates rose Stateside on 16th December and Jant Yellen has indicated there will be further rate hikes in 2016. It is the currently the surest bet on the Currency Market that the Pound will weaken further against the Dollar. There may be some respite as we move toward the Presidential Election in November, political instabilty usually causes the currency in question to weaken. the problem is the damage may already have been done if a rate hike has taken place.
If I was a USD buyer I would be biting the bullet, we already are sitting at some of the lowest levels since 2010.
Australia is heavily reliant on raw material exports to China and with China’s growth dwindling I expect AUD to lose further ground against Sterling. The Reserve Bank of Australia has indicated there will no interest drop until after February, so do not expect significant Pound strength until after this point. I do however think that 2.10 could be broken in the coming weeks.
If you are an AUD seller, I would move quickly I think although you may have missed out on 2.03-2.05 of late, this could be a small window of opportunity before things get worse.
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