Good morning

High Low High Low
EUR/USD 1.1339 1.1323 USD/ZAR 13.3000 13.2000
GBP/USD 1.5482 1.5456 GBP/ZAR 20.58 20.41
EUR/GBP 0.7330 0.7317 USD/RUB 64.09 61.73
GBP/EUR 1.3667 1.3643 USD/ILS 3.8679 3.8442
USD/JPY 119.55 119.40 S&P 500 2036 2030
GBP/CHF 1.4806 1.4768 Oil (Brent) 49.12 48.67
GBP/AUD 2.1354 2.1242 Gold 1172.0 1167.0

So China’s growth has dipped below 7% for the first time in 6 years….but on the flip side the number was 0.10% below the “critical” 7% and better than the 6.80% the market was expecting. The result, EURUSD stays firmly entrenched in the range with next weeks FOMC meeting the key event.

The USD is likely to remain range bound as long as there are no shocks to the system in the way of data or announcements. I am still of the opinion that the FOMC will probably stay put for now despite the calls for a rate hike by some FED members. One could strongly argue that the US economy could easily withstand a 0.25% rate hike now, but then why press the button when they could equally wait for another few months to see the US jobs market pick up (and inflation). There are fundamental issues that need to be sorted in China (and the US) before (I think) the time is right for a hike. In fact MS Yellen says the decision to hike is now firmly “data determined”. So on the basis of this the FED will hike when they SEE first hand that there has been an improvement in the data both in the US and China.

Our very good friend at UBS wrote this morning in his FX comment The U.S. Treasury published their “Report to Congress on International Economic and Exchange Rate Policies”. Regarding the CNY the reports mentions: “The core factors that have driven RMB appreciation remain in place: strong external balances which include a sizeable and growing current account surplus, sharply improved terms of trade, and ongoing net inflows of foreign direct investment. Given economic uncertainties, volatile capital flows, and prospects for slower growth in China, the near-term trajectory of the RMB is difficult to assess. However, our judgment is that the RMB remains below its appropriate medium-term valuation.” The report also mentioned that capital outflows from China topped $500 billion in the first eight months of this year, according to new calculations. I have commented many times in this commentary that the PBoC will not stand by and let the economy neutralise. They definitely have the option of reducing interest rates AND devaluing the CNY (currency).  The CNY has in fact appreciated over the past week from 6.36 to 6.34 and while the report says there is more room to appreciate I think if the data remains disappointing the PBoC will draw their “weapons” and devalue again. No doubt the reduction in rates and the devaluation has gone some way to help the economy (as we saw yesterday the GDP dropped only 0.10% while the market was expecting 0.20%). Should this trend continue the PBoC will be seen as having done the right thing at the right time to boost the economy. Q4 will no doubt be crucial to the FED’s decision as to whether they raise early or not.

Gov Carney speaks at 10am this morning. I guess he too will reiterate what we know already that rates will go up but that decision too is “data dependent”. With UK CPI dipping below 0.00% recently, the BoE will also want to sit tight until such time the data becomes more consistent and trending in the right direction. No point in triggering a rate hike and hurting the economy after the monumental terrific work they have achieved since the financial crisis started in 2008. As such I expect the GBP to remain range bound however the trend still remains DOWNWARD (weakening GBP).




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