Sterling and the yen are gaining against the dollar while the other major currencies are little changed, and emerging currencies are mixed. Sterling’s has gained about 0.35%, mostly in the European morning, and appears largely driven by demand on the crosses, especially the euro. It is still within the pre-weekend ranges against the US dollar and euro.
The main thrust of our bullish US dollar outlook is the divergence in monetary policy trajectories. We do not think the divergence has peaked and anticipate it to persist through next year and into 2017.
While many Americans breathed a sigh of relief after the US Federal Reserve (Fed) announced that it would not be increasing the prime rate this month, the decision also had ramifications for other nations. As a result, the head of the World Bank praised the Federal Reserve’s decision, saying it will grant a temporary reprieve to developing nations and struggling economies around the world.
The Fed’s Chair seemed to have surprised the market with her comments after North American markets closed yesterday. She reiterated what the Fed said last week. It is still on the path to hike rates before the end of the year, barring a significant economic surprise. She did put the concerns about the global environment in a larger perspective, suggesting that, based on current information, if does not look like developments abroad will have a material impact on policy.
The results of the China–US summit between Presidents’ Xi Jinping and Barack Obama come at a critical turning point in the relationship. They will reshape the direction of the Asia Pacific region and even global politics. In the interests of both countries and the world, the two leaders must find ways to neutralise security tensions and build cooperative momentum with core initiatives, such as climate change talks, a potential investment treaty and mutual work around the forthcoming Chinese G20 presidency.
Chancellor Angela Merkel has shown great compassion in allowing hundreds of thousands of refugees to enter Germany. Nevertheless, she has to avoid playing into the hands of the far right, as well as placating angry Eastern European neighbours.
China and Europe are seeing lower manufacturing activity, with the sector declining in China and expanding weaker than expected in Europe.
According to the Caixin China purchasing managers’ index, demand for manufactured goods is shrinking. The PMI fell to 47, the lowest level in over six years. The Caixin PMI, which tracks small and mid-sized companies, is a crucial indicator of broader activity in the country, where small businesses are more susceptible to weakness in local aggregate demand.
Government Intervention, Analyst Downgrades
The world economy has seen many changes this year. Interestingly, in many cases theory seemed far from what happened practically in the global financial markets. While many questioned the effect China on various economies, Eurozone was going through its own tough phases with Greece in turmoil and an ongoing refugee crisis.
The US dollar is trading heavier after extending its post-FOMC gains that saw the euro and sterling record two-week lows yesterday. The euro extended its recovery that was marked by yesterday’s outside session. Its gains have stalled in front of the 20-day moving average (~$1.1235) and the first retracement objective of its decline since last Thursday.
Evidence of a strain in the diplomatic relationship between China and Japan over the past few years has been most apparent in the absence of summits between top government leaders, which has in turn affected routine meetings at the ministerial level. It seems that Beijing still has not overcome its diplomatic ‘Noda shock’. What hope, then, is there for an improvement in this relationship?
