Inflation in China dropped to lowest level in two years

Inflation in China dropped to lowest level in two years

By Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 10th of July.

The latest inflation reading from China yesterday that showed inflation dropped to its lowest level in two years in June set the alarm bells ringing. A low inflation rate invariably leads to lower economic growth, and a slowing Chinese import is the last thing that the global economy needs now.

There’s a perennial argument between the people who want inflation and those who oppose it. Europe and Japan were in the anti-inflation group while the US and UK supported it, striking a fine balance between the two groups. However, that balance may soon change as Europe and Japan braces for inflation.

Although no politician and central banker openly favor inflation, the US and the UK have been the camp for some time now. Both have high debt levels and real estate is mostly their primary asset. While the value of their assets go up in real terms, the value of debts fall which explains why people don’t get very upset with inflation since it makes them better off ultimately. However, there has been a subtle change in the trend in America recently. Personal savings have started rising while individual debts have declined, although government debt is still rising. It will be however, interesting to see if the recent trend lasts long. In all likelihood, once the US economy recovers, Americans may go back to their old days of borrowing and spending. As US economy moves away from inflation, UK has shown little inclination to bring down its debts. On the contrary Europeans have been conservative. They are big savers and have usually high cash savings, making them anti-inflationary. They mostly kept their money in banks and bonds and borrowed little to buy large houses.

However, the present crisis has changed all that. Spain is a high debt society now with debt equal to 90 percent of GDP and increasing. Italy is also on the same path and once debt spirals out of control, inflation will be the only remedy to bring it down.

Japan is also witnessing reverses in its fortunes. A traditionally high saving country, its household saving rate has fallen to 7.3 percent from over 20 percent in the 80s when the country was booming.

The net outcome of all this? There will be a global consensus on inflation in the next decade. Central bankers will have to print just enough money!

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2606
GBP/US$ – 1.5505
GBP/CHF – 1.5147
GBP/CAN$ – 1.5822
GBP/AUS$ – 1.5224
GBP/ZAR – 12.7521
GBP/JPY – 123.12
GBP/HKD – 12.0278
GBP/NZD – 1.9524
GBP/SEK – 10.8672

EUR: As investors kept away from the euro in an attempt to diversify their currency holdings, the cable remained close to its 3-1/2 year high against the single currency posted on Friday. The movement of the single currency was predictably muted given the lack of Tier 1 economic news from the EU region. Also comments from ECB’s Draghi did little to lift the euro on Monday after the European Central Bank President reiterated the bank’s view that there will be heightened uncertainty and weak growth in the coming months. With chances of any significant development taking place in the ongoing EU finance ministers meeting today looking remote, the single currency is expected to remain under pressure today. The GBP/EUR pair opens at 1.2613.

USD: The markets remained fairly tepid on Monday in the absence of any Tier 1 economic data and the GBP/USD pair could only marginally rise to 1.5534, holding above the monthly low of 1.5460 posted on Friday. The Industrial and manufacturing numbers for May from the UK is due today and they are expected to be on the lower side, supporting the Bank of England’s move last week to extend its assets purchase program by £50 billion. With little to expect from the EU finance minister’s meeting currently underway, markets will be watching for the minutes of the Fed’s June policy meeting. GBP/USD opens at 1.5505 this morning.

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