I have a confession to make. I may have spoken too quickly on the Greek debt crisis being over. Headlines yesterday from the German newspaper Bild suggested that the German government was once again taking issue with the Greek bailout deal, calling it insufficient. The role of the IMF within any new bailout deal remains in a state of flux. Germany wants the IMF to be part of any bailout – doing so lowers the risk for German taxpayers – but the IMF will not join unless there is some form of debt write-off, something that Berlin and Helsinki both oppose.
Euro remains higher, however, on the China moves and the cessation of carry trades selling the single currency. The Greek Parliament is expected to vote on the bailout deal today.
Yuan lower once more in Asian trade
The Chinese yuan has continued to fall overnight after another, albeit smaller, move lower in the reference rate by the People’s Bank of China in Beijing. While the pace of the declines of the yuan is starting to slow, the impact is still being felt on a global scale.
Obviously, emerging market currencies have taken the brunt of the move. The Malaysian ringgit hit the lowest levels it has seen since the tail end of the Asian financial crisis. Likewise, South African rand, Aussie dollar, Kiwi dollar and other commodity currencies remain very volatile.
Dollar doubts creeping in
Yesterday’s moves also hit the dollar quite hard as analysts continued to debate whether the moves out of the People’s Bank of China would be enough to dissuade the Federal Reserve from a September rate rise. Both Goldman Sachs and Bank of America Merril Lynch expressed doubts yesterday given the increase in deflation risks and overall uncertainty for global output.
As I told Bloomberg yesterday – link available here – the dust has yet to settle on these moves and the last thing that the Federal Reserve will want to do is try and guide markets into a tightening monetary policy stance to have to then guide away. I am still looking at a rate rise in September, though market expectations have dropped from 50/50 yes/no on Monday to 46/54.
Currency war chatter has picked up this morning once again following comments from an advisor to the Japanese Prime Minister. Koichi Hamada told reporters overnight that “the effect of Chinese devaluation can be offset by monetary policy easing”.
UK jobs market maturing nicely
Yesterday’s jobs report from the UK was a bit of a damp squib. The jobs recovery in the UK looks to have paused somewhat in the past few months in the UK but we remain optimistic that the increase in unemployment in June was a temporary blip.
Reports from the services, construction and industrial sectors have all shown that employment has continued to increase but at a slowing rate – a natural function of a tightening labour market. Wage growth is solid but not spectacular and can only be seen as such in light of the poor inflation outlook in the UK. It certainly seems unlikely that wages are in any position to materially drive CPI higher through the remainder of the year just yet.