Good morning

Day has started well. The PBoC has surprised the market and fixed the CNY stronger this morning.

I quote a good friend from an EU bank (smart FX trader): “Back from the Golden Week holidays and New year celebration, the PBOC (China’s central bank) has set the pre-opening USCNY fixing at 6.5118 which is 0.3% lower than the previous one (5^th of feb). Instantaneously the USDCNY has moved from its Friday close (6,5743) to 6,4950. Such a big move down had not been seen for years. And USD/CNH has converged towards USD/CNY spot. Whatever reason lies behind that fact (china trade figures were out this week-end, the trade balance has positively improved, but both exports and imports have contracted, imports faster than exports, this is not that a great situation) it has generated a positive risk-on rally with stocks fully in the green in Asia (currently the Nikkei is up 7% and Hong Kong 3%) and long term interest rates up (10y sovereign UK is up 4bps, Germany is up 3bps)”. The PBoC have certainly surprised us this morning. After all, for the past few months I have been saying the PBoC will in all likelihood let the currency devalue. They did let it go for a while, then this. I guess only they know what and why they felt this was a good idea. Needless to say, the markets have lapped up the news and stocks in Asia and Europe have rallied from the open. Let’s hope this was indeed a super idea that gives the market the push.

US holiday today – thin markets could see unfamiliar moves once Europe closes for the day.

The USD has had mixed fortunes, rallying vs the EUR but holding firm vs the GBP. As a result EURGBP has rallied from 0.7830(1.2770) to 0.7720(1.2950) at time of writing. Please do not be under any illusion that this represents a change in sentiment for the GBP. There is still that small matter of a referendum later this year but the hope is despite the advantages of BREXIT, BRIN (Britain In) has MORE advantages and therefore it is my own opinion that voters see that the UK is better off being part of the EU than standing alone. Granted there will be negotiations to get us a better deal and PM Cameron is currently on the war path to succeed in attaining this. Germany fired a warning shot over the weekend that the UK must stay in the EU in order to avoid a trade war (given Germany’s #1 standing amongst EUR members). Having said this, I believe while the GBP is facing a tricky period (UK growth ain’t what the authorities were hoping for) perhaps things won’t turn out to be so bad. Time will tell.

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