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The announcement by the Chinese of an end to a fixed foreign exchange rates regime, allowing the remminbi to appreciate, has given stocks, commodities and risk-on currencies a boost in early trading. Investors moved out of the safe haven USD with Cable reaching 1.49 before falling back slightly and the Aussie Dollar also performing well on the back of the news. The move by the Chinese is wildly seen to be a political rather than economic one. With the G20 meeting coming up shortly and the current ‘currency manipulation’ bill working it’s way through the US congress, the decision to let the Yuan have a much greater degree of flexibility sends a positive message to the Americans. The markets have open higher as the announcement has released some of the pressure that was building and any potential trade dispute between the US and China is much less likely. As well as the G20 meeting, the Chinese may have had one eye on pre-empting the forthcoming US Treasury report on FX polices and international money transfer of US trading partners. Tim Geithner may have been ready to single out China explicitly – not something the ruling party in China needs or wants as it tries to gradually integrate China into the world economy.
The Euro has also performed well this morning, the successful Spanish bond auction last week and the announcement that the EU will release the results of stress tests on 25 European banks, has helped the single currency exchange rates move towards 1.25 against the USD and 1.19 versus Sterling. EU president Herman Van Rompuy said data on any institution that failed or performed poorly in the stress tests (published in July) will be publicly available. Such a strong commitment to transparency has gone down well in markets, but there are still doubts around. Such confidence by EU leaders on the strength of its banks (some of which are quite clearly struggling to raise funds in the market) either shows serious confidence in the figures banking chiefs are giving them, or that the tests are designed a priori to show banks strength to the markets. Call me a cynic, but the latter rather than the former seems much more plausible, until we get greater detail on the underlying assumptions of the tests will cannot know for sure quite what the stress tests are telling us.
The weekend before any budget is always marked by wild speculation on what might happen to taxes or spending over the next year. The theme this time is universally negative as one would expect. What is going to get cut (child tax credits, public sector numbers & public sector pensions if the papers are to believed) and how fast (straight away) has dominated thinking ahead of tomorrow emergency budget. A hike in VAT to 20% along with the anticipated rise in capital gains tax and also significant increases in taxes on items such as alcohol and cigarettes seems likely. However, it remains speculation and Sterling will likely tread water in the run up to the announcement at midday tomorrow. Whatever happens, it is the most important budget in the UK for many years and investors will be looking to the Chancellor to create the right balance between reducing the deficit and maintaining economic growth.
