Yesterday the IMF endorsed the Chinese reform process by including the renminbi in its basket of reserve currencies the SDR (Special Drawing Rights). What was interesting is that the Chinese currency will be assigned a greater weight than the pound sterling and Japanese yen and rightly so, given the proportion of global trade involving China. I guess the true metric is how much of these global transactions are settled in yuan, but one thing is for sure, the Chinese government is pushing to increase the proportion settled in their home currency. It is ironic that this happens at a time when I suspect the Chinese government will be happy to see their currency weaken. One of the side effects of a de facto peg to the US dollar has been that the renminbi has strengthened greatly against its trading rivals the euro and the Japanese yen.
Elsewhere in Asia, the Indian economy goes from strength to strength with GDP growth surpassing expectations at 7.4% annualised growth to the end of Q2 (data gathering clearly not the fastest!). India can certainly feel proud of overtaking China’s high growth rates, but the Indian economy is so much smaller than China’s now that Chinese contributions to global GDP growth will still continue to dwarf that of India by some margin. For now the Chinese efforts at rebalancing their economy away from a manufacturing and export driven enterprise into a more consumer focussed one continues, and the data seems to show that this is exactly what is happening. Yet again manufacturing PMI’s from China have disappointed, but non-manufacturing is delivering. It will take years for consumption to surpass manufacturing but it is good to see that they are moving in the right direction.
The dollar is in retreat this morning, seemingly across the board, I am not surprised, after all we have had some decent trends in the last few weeks and as we approach Thursday’s ECB decision some risk reduction makes sense. This morning as German unemployment falls to record lows, the Italian unemployment rate has also surprisingly declined, and both German and Italian PMI’s have exceeded expectations, all constructive news for the Eurozone, but I’m not expecting that to have much influence on any ECB decision to expand monetary easing. The case for two sides of the ledger to sustain a narrative for EUR/USD weakness remains strong, so today’s counter-trend price action is probably a good opportunity for dollar buyers. On one side of the ledger will be ECB easing, and on the other Federal Reserve tightening. This will continue to dominate thinking in the macro community.
In Nigeria the new administration will focus on cutting the cost of running the government rather than on slashing jobs next year, and will present its 2016 budget proposals by the end of the year, the new finance minister told Reuters on Monday. This has been a difficult week for the naira as foreign investors have retreated from the market and year end demands have softened the naira. If CBN continues to deny supply of dollars to the local market things will only get tougher for the naira.
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