This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
China appears to have discovered a love for active FX intervention. Once is an experiment, but twice makes it a trend. The spectre of currency wars was worrying enough yesterday, but today it looks real enough to touch. A single move might have passed without reaction from China’s trading partners, but now it looks like a tit-for-tat move by others in the region is certain. When such moves are on the cards, the logical reaction from investors is to seek shelter in bonds, which is exactly what is happening now.
What is also taking place is a rapid unwinding of the long dollar play that seemed to be the one sure thing for August. A weakening yuan hits US exports to China, putting the brakes on US economic growth, and thus potentially causing the Federal Reserve to stay its hand. September’s rate hike looks much less likely this morning than it did just 48 hours ago.
UK wage data provided an unpleasant surprise for sterling watchers, as growth in earnings slowed in the three months to June, sparking a rapid drop in the pound versus the dollar and the euro. Expectations of a move by the Bank of England are also rapidly being pared back, and both the Fed and the Bank of England can now point to China’s move as a reason why interest rates should stay precisely where they are.
Ahead of the open, we expect the Dow Jones to open at 17,232, down 170 points from yesterday’s close.