Daily Market Report - 18/01/2016

GBP

Sterling hit a 5-1/2 year low against the dollar on Friday, putting it on track for its third straight week of losses, as investors grew increasingly concerned about Britain's economic outlook and pushed back chances of a rate hike to early 2017. Worries about a referendum on Britain's membership of the European Union have also intensified and weighed on sterling in recent weeks. Prime Minister David Cameron has promised a referendum by the end of 2017, though it may come as early as June this year. With the outcome unclear, investors are bracing for volatility and these concerns have also been central to sterling's weakness since the start of December.

USD

The dollar tumbled to a near five-month low against the yen and a 2-1/2-week trough versus the euro on Friday, hammered by a combination of poor risk appetite arising from a renewed drop in oil prices and weak U.S. economic data. The downbeat economic numbers along with the meltdown in oil and stocks could further slow the pace of the Federal Reserve's already gradual tightening policy, a negative scenario for the dollar. Many feel the Fed is going to be reluctant to raise interest rates any time soon, with too much uncertainty emanating from weak U.S. data, and equity markets getting clobbered, effecting US growth. Data showed on Friday that U.S. retail sales fell in December as unseasonably warm weather curbed purchases of winter apparel and cheaper gasoline weighed on receipts at service stations.

U.S. producer prices were also lower last month due to weak energy costs, while the country's industrial output declined for a third straight month. Following the poor U.S. economic data, the interest rate futures market has now priced in just one additional rate move by the Federal Reserve this year, compared with previous expectations of three hikes.

CNH

China's yuan firmed on Monday as the central bank announced what appeared to be its latest attempt to deter offshore speculation in the currency, while stocks steadied close to levels last seen at the depths of last year's summer crash. The People's Bank of China (PBOC) said it would start implementing a reserve requirement ratio (RRR) for some banks involved in the offshore yuan market, in a move that seemed intended to soak up additional liquidity.

It appears that the Chinese authorities want to dampen the speculative flows that bet on a fast depreciation of its currency. Setting an RRR - requiring banks to hold a certain level of currency in reserves - could tighten liquidity leaving less yuan for banks to lend and so making it more expensive for speculators to bet against it.

Oil

Oil prices hit their lowest since 2003 on Monday, as the market braced for a jump in Iranian exports after the lifting of sanctions against the country over the weekend. The U.N. nuclear watchdog on Saturday said Tehran had met its commitments to curtail its nuclear programme, and the United States immediately revoked sanctions that had slashed Iran's oil exports by around 2 million barrels per day (bpd) since its pre-sanctions 2011 peak to little more than 1 million bpd. On Sunday, Iran - a member of the Organization of the Petroleum Exporting Countries (OPEC) - said it was ready to increase its exports by 500,000 bpd.

Key Announcements

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