I hope everyone had a better weekend than the much fancied football teams of England, France and Italy. Well done to the NZ All Whites for doing their nation proud in gaining their second ever World Cup point with a 1-1 draw against Italy. Well done also to the other England team. The rugby men in white, who favour the oval ball to the round ball, edged out Australia by 1-point in Sydney to record their first win in the Southern Hemisphere for 7-years.
The big news over the weekend was the announcement from the Peoples Bank of China (PBOC) who abandoned the peg to the US dollar. The peg was installed in July 2008 to protect Chinese exporters during the worst period of the financial crisis. The PBOC now feel confident the global economic recovery is on track and the time has come for China’s domestic sector to contribute more to growth, while taking complete reliance away from the export sector.
We expect the more flexible Chinese Yuan to strengthen around 5% against the US dollar this year which should provide strength to the currencies of nations such as Australia and NZ who are big exporters of resources and commodities to China.
The US dollar continues its slide this morning partly due to the Chinese story, but this is a continuation of the past two weeks shift in risk appetite. As far as global investors are concerned the Eurozone problem has been solved, so it’s time to plough back into stocks, commodities and “riskier” currencies.
The safe haven of the US is no longer required - it’s business as usual. I wish I could share their optimism, however this move is big and I certainly won’t be standing in front of this optimism train. The momentum of this shift away from the US dollar coupled with the charts support further pressure on the greenback for now.
The US dollar has now lost 9.5% against the Aussie, 9% against the Kiwi, 6.5% against the CAD and 5% against the Euro and pound in the last few weeks.
As there are no further economic releases of note today so we continue to focus on the UK budget tomorrow. Our fingers are crossed that the tax rises and public spending cuts are tough enough to satisfy the ratings agencies and get us out of this mess, but not excessively harsh so as to stamp out growth. I am not sure if Chancellor George Osborne reads our Daily Currency Insight (it’s highly likely), so if you are out there George please consider using the machete tomorrow over the bulldozer.
The budget is going to hurt us all, but at least the sun will be shining when it's delivered - UK temperatures are forecast to exceed 25 degrees Celsius for the next 4 days+.