There was a month end feel to the pattern of trading yesterday. Sterling found some strength towards the end of the European session, although in comparison to the losses seen over the past four weeks, the moves at best represented a “dead-cat bounce” at best. Data released yesterday showed that overseas investors sold UK government bonds (Gilts) by the biggest amount since March 2014. This fits with the de-coupling of sterling from rate differentials that was seen during the month (see “Will Brexit Break Sterling”). There could be more of this to come, depending how the polls go between now and the referendum in June. At present, they are not giving a decisive view one way or the other, hence the continued prevailing uncertainty.
The timing of the PBOC’s cut in the RRR (required reserve ratio) yesterday was interesting, coming the weekend after the G20 meeting. Make of that what you will. For today, there is the usual hand-waving at the China PMI data, with the manufacturing data seeing the seventh consecutive decline (from 48.4 to 48.0). The reaction in equities and elsewhere was muted, perhaps because we are now seeing a policy reaction from the Chinese authorities, so we’ve seeing the Aussie recover and equities reversing most of the losses seen through yesterday. Aussie rates were kept on hold after the interest rate meeting today, with the accompanying statement acknowledging that the domestic and global environment were likely to keep inflation low over the next two years. They re-iterated that “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”. The market continues to price in some risk of a cut in rates later this year, although this is not yet fully priced for the year as a whole. We have more PMI data in the Eurozone up to 09:00 GMT, with UK data at 09:30 GMT and then ISM manufacturing (the US PMI equivalent at 15:00 GMT).