Week to end on a currency high?

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Our predictions over the state of the global manufacturing sector proved to be about right yesterday with even the powerhouses of China and Germany going through a pall. Growth in manufacturing had been strong in the early part of the year but as businesses have restocked inventories they have found little demand in the simultaneous consumer slowdown and have therefore cut their orders. Indeed, the new orders constituent part of each manufacturing number was pretty dire.

In the UK it’s now three consecutive months of contraction in the manufacturing sector. There’s no real surprise to this however as, apart from Germany, China and the US, every other nation who reported manufacturing sector activity figures today showed that the industry is contracting. For the UK however there has been a worrying fall in export demand and this will lead to further downgrades of Q3 UK GDP prospects. The fact is that the 2 largest export markets for the UK manufacturing sector are Europe and the US. Anyone with half a brain will be able to make the leap that given the problems in those economies it is unlikely that demand will magically reappear for British goods (unless someone does a tie-up with Pippa Middleton or something.)

The manufacturing picture took some of the focus away from the debt crisis in Europe for a minute but, as we had feared, there seems to be no end to the slide in peripheral debt. The Spanish government managed to sell EUR3.6bn of 5 year debt versus a target of EUR4bn. Demand had fallen from the previous auction from 1.76 to 2.85 while the yield on debt had also decreased from 4.871% to 4.489%. Now that seems ok doesn’t it? Falling yields are good right? Well, if you actually compare the auction yield to that of the market at the time (4.322%) you will see that it is higher; a sign that regardless of ECB buying and other yield suppression tools the market is still very wary of the European debt market.

The auction, combined with some stinking manufacturing PMI numbers from the likes of Spain and Italy, sent the euro lower over the day against all of its crosses.

The US Non-Farm Payrolls announcement is the cherry on top of a very busy week for economic data and will be the key number, we would expect that the FOMC will be looking at when it comes to its next monetary policy meeting on September 20th. It is becoming increasingly more likely that, given the extension allowed in the Jackson Hole speech, that the September meeting will afford some type of new policy.

The US economy is expected to have added 68,000 jobs in the month of August, lower than at the beginning of the week as a result of the poor consumer confidence and other US data. Anything below consensus and risky assets will likely remain in the firing line. The US unemployment rate is expected to hold at 9.1% in August as hiring remained modest.

Good luck and have a great weekend.

Indicative Rates Sell Buy
GBPEUR 1.1373 1.1400
GBPUSD 1.6173 1.6197
EURUSD 1.4203 1.4227
GBPJPY 124.19 124.35
GBPAUD 1.5135 1.5161
GBPNZD 1.9033 1.9063
GBPCAD 1.5820 1.5850
NZDUSD 0.8487 0.8507
GBPZAR 11.34 11.39
USDZAR 7.0060 7.0385
GBPPLN 4.7320 4.7648
EURJPY 109.07 109.34

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