A mixed day for the pound

The pound had a mixed day at the start of the new trading month, hitting fresh highs against the euro, US and Canadian dollars but lost ground against the Aussie and Kiwi dollars on the back of an increase in risk appetite following better than expected Chinese manufacturing data.

In a slow news day in the UK, property website Hometrack reported that UK house prices increased by 0.5% month-on-month in November and demand for housing rose by 3% while supply of the same declined by 3.5%. This divergence has now lasted over six months where during this period, demand has grown by 10.2% while supply declined by 0.6%. Not surprisingly, the greatest imbalance and largest price gains were in London and the South East where prices were up by 4.8% and 3.2%, respectively, over the past six months.

The euro suffered yesterday after data showed that the recovery in the euro zone manufacturing sector is insufficient to halt the job destruction experienced in the sector. The data published by Markit showed that manufacturing in the euro zone grew for a fifth consecutive month with the region's manufacturing purchasing managers' index (PMI) reaching 51.6 points, up from the flash estimate of 51.5 and October's reading of 51.3. Readings above 50 indicate an expansion in the sector.

However, the rising levels of production and fuller order books were unable to put the brakes on job destruction with employment falling for the 22nd month in a row.

The US dollar was hit by news that US retail sales have disappointed in the slowest start to the Christmas shopping rush for 4 years.

Overnight, the Reserve Bank of Australia (RBA) left interest rates unchanged for the fourth month in a row. Of interest, it remains concerned about the strength of the Aussie, despite recent falls noting that economic growth in Australia has been below trend and medium-term inflation was on target.
Specifically, the RBA kept its key target rate at 2.5% and Australian central bank governor Glenn Stevens republished, word-for-word, the same monetary policy statement that he used in November.

The trading week and month started with a boost to risk appetite, temporarily strengthening the Australian and New Zealand dollars as China’s National Bureau of Statistics (NBS) reported that its manufacturing sector continued its steady expansion and beat analysts’ estimates for November.

HSBC China Chief Economist Hongbin Qu considered the growth momentum to be “relatively steady” last month commenting that “However, the renewed contraction of employment and the slower pace of restocking activities call for a continuation of accommodative (monetary) policy. The modest inflationary pressures leave room to do so”.

Later this week sees the latest policy decisions from Canada, the UK and the euro zone as well as the key US employment data published on Friday which should keep the markets in their prolonged volatile state.