Manufacturing calls for central bank easing

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Expectations of looser monetary policy, via increased QE or cuts in interest rates, are keeping world equity markets in the green so far this week. This is made all the more true by the lack of strong data once again from Western economies when looking at their manufacturing sectors. Growth slipped sharply in the US to over a 3 year low while the wider European measure also declined heavily driven by large falls in Germany, France, Italy, Greece and Spain. The UK figure surprised analyst’s estimates to the high side but still remained below 50.0 and therefore denoting contraction.

As a whole it means that global manufacturing is now contracting for the first time since November indicating that a further downturn in economic output is on its way.

Hence the increased chatter around looser monetary policy by the central banks making their decisions this week. As we stated yesterday, we believe in the Bank of England’s case that it is a question of how much additional QE is needed and not whether it is needed. Given these asset purchases are made to increase the money supply today’s M4 money supply reading may reinforce whether the Bank will be looking towards the top or bottom of the scale. It is due at 09.30.

Overnight the Reserve Bank of Australia have left their rates unchanged at 3.5%. There was little chance that they would do anything last night and AUD stayed calm as a result. They did cut rates earlier in the year and the accompanying statement seems to suggest that they will be looking to see how those help the economy before doing any more. We are looking for two more cuts by the RBA by the end of the year.

Price action in the FX space was fairly muted yesterday although sterling had a good day following strong buying out of the Middle East. Increased poor news from the global economy is likely to keep this trend going with risk (GBPUSD and EURUSD) gradually grinding higher although we do not expect anything to drastic.

What news there was from Europe was also poor with Eurozone wide unemployment rising to a new record of 11.1%. This follows the uptick in German and Spanish joblessness in the previous month.

UK construction PMI is due this morning at 09.30 and although this is the least important of the PMIs for the UK, given the falls in construction output and their effect on Q1 GDP we should get further confirmation that Q2’s number is unlikely to be much better. Elsewhere we get US factory orders due at 15.00 which are expected to increase by 0.1% against a previous fall of 0.6%

US trade is likely to be quiet ahead of the July 4th holiday tomorrow.

Summer months are typically quiet but with everything rocking from Italy to Spain via the US and UK there is little belief 2012 will follow in the same vein. As we move into the 2nd half of the year we will outline our beliefs of where the pain and pleasure will be found in the next 6 months while taking you through the latest measures designed to help the world economy.

Join us for this Thursday’s run down with World First’s award winning Chief Economist Jeremy Cook also deciphers the impact of the morning’s Bank of England and ECB announcements.

Indicative Rates Sell Buy
GBPEUR 1.2461 1.2489
GBPUSD 1.5689 1.5713
EURUSD 1.2576 1.2599
GBPJPY 125.17 125.38
GBPAUD 1.5285 1.5311
GBPNZD 1.9515 1.9543
GBPCAD 1.5926 1.5955
NZDUSD 0.8024 0.8047
GBPZAR 12.71 12.76
USDZAR 8.1023 8.1329
GBPPLN 5.2360 5.2626
EURJPY 100.26 100.52

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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