Chinese growth fears shade strong US data

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We received some clarification yesterday on the level of participation in the Greek debt swap due Thursday. Members of the IIF steering committee making up 20% of the private sector investment in Greek debt committed to using the swap facility. 66% is needed for the deal to go ahead and is also the level with which the Greek government can impose CACs on the bondholders who are holding out. These banks’ commitment has allowed the euro to stabilise so far but this will not last if other investors announce a decision to hold off.

The euro, and other risky assets, also stabilised after decent data from the US economy yesterday afternoon. Services ISM, the US version of a PMI, increased to the highest level in 12 months while factory orders only decreased by 1% in January against expectations of a 1.5% decline.

This bullishness has been squeezed from the market overnight and through the Asian session as Far East investors remain worried as a result of the cutting of Chinese growth prospects. It seems to be that investors are looking at the fact that growth is slowing and not the absolute figure remaining high when making decisions. AUD and NZD have been the main casualties of this given their reliance on the Chinese growth engine for their own prosperity.

Overnight the Reserve Bank of Australia left rates on hold at 4.25% as was widely expected. The accompanying statement repeated hints that the next rate move is likely to be lower but only “should demand conditions weaken materially”. AUDUSD has fallen around 2bf in the past few sessions and could be in for further should investors remain scared by China’s expectations.

Sterling was able to recover against the dollar yesterday afternoon and held its own against the euro following its services PMI figure. Although it missed expectations (53.8 vs 55.0 expected) it is still positive news and the services sector has continued to expand for the 14th consecutive month; a much better performance than the service sectors of the EU. The expectations component rose to the highest in a year and I think even the most bearish of commentators will concede that a double-dip recession is unlikely in the UK. This does not eliminate fears of a slow grind through 2012 however, and we must watch the impact of oil price shocks on demand carefully.

While we still have to receive a lot of news on the economy through Q1, expectations for UK GDP through the first 3 months of the year are currently sitting at 0.2%.

Today is the quietest day of the week although we still have the final EU GDP reading for the 4th quarter due at 10am. It is certain to confirm that the last 3 months of last year were the first of a double dip recession. We also have short-term debt auctions from Greece and the EFSF.

Indicative Rates Sell Buy
GBPEUR 1.1986 1.2012
GBPUSD 1.5810 1.5835
EURUSD 1.3177 1.3201
GBPJPY 128.52 128.79
GBPAUD 1.4891 1.4918
GBPNZD 1.9388 1.9417
GBPCAD 1.5760 1.5789
NZDUSD 0.8145 0.8167
GBPZAR 12.01 12.06
USDZAR 7.5849 7.6201
GBPPLN 4.9651 4.9926
EURJPY 107.09 107.35

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