A Look At The Week’s Global Economic Events

global-news logoWe take a look at two global economic updates or interesting key developments that happened last week. First, we take a look at the increased optimism surrounding UK as we head towards 2014 . Next, we’ll zoom in to the China’s sliding of money rate where China Yuan also hit a record high against the US dollar.

U.K. economic recovery spurs increase in Sterling and possible interest rate hike in 2014

The pound rose 1% the past week to $1.6495 against the USD, the biggest gain since the period ended Oct 18 as confidence in Britain’s economic recovery was boosted by a revival in the housing market and falling unemployment.

The pound has gained 6.7% in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as a strengthening economy boosted speculation the Bank of England will raise interest rates sooner than it forecasts.

“We can understand the long position in sterling,” said Peter Rosenstreich, chief foreign-exchange analyst at Swissquote Bank SA in Zurich, referring to a bet that an asset will rise. “The U.K. economy may grow at a faster pace than forecast by policy makers. The prospect of Bank of England tightening getting pulled forward is increasing.”

At the time in August 2013, Bank of England Governor Mark Carney’s has announced the so-called “forward guidance” policy, implying that the Bank of England would not consider raising its interest rate from the record-low 0.5% until the UK unemployment fell below a 7% threshold. Based on the Bank’s forecasts, this will likely take three years.

However, with the U.K. economy appearing to fire on all cylinders, analysts do not rule out the possibility of the threshold being attained more quickly than expected, meaning an interest rates hike could be sooner. In November the Bank of England slashed its forecast to say unemployment may hit 7% at the end of 2014.

Official figures from the Office for National Statistics (ONS) shows the unemployment rate falling to a 4.5 year low of 7.4% in the three months through October while GDP increased 0.8% in the 3rd quarter.

As we enter 2014, markets and mortgage holders with repayments linked to the interest rate will nervously watch the path of unemployment and movements from monetary policymakers. The same goes for two local developers Oxley Holdings (SGX: 5UX) and Lum Chang (SGX: L19) due to their recent acquisitions in prime London properties.

China’s central bank may tighten policy due to soaring Chinese residential property prices

According to the prices shown by China Foreign Exchange Trade System, the yuan rose to a record level against the U.S. dollar Friday after trading in a narrow range for almost three weeks, before trading 0.1% higher at 6.0686.

This is due to the surprise move by People’s Bank of China (PBOC) as it pushed the yuan’s reference rate by 0.17% to 6.1050 per dollar today, the strongest since a peg to the greenback ended in July 2005. The benchmark money-market rate also posted its biggest weekly drop since 2011 with the central bank’s cash injections and fiscal fund transfers.

“The investor perception of the Chinese currency is that it’s stable with limited downside risks, and it gives a much higher yield compared to the U.S. dollar,” said Sim Moh Siong, a foreign-exchange strategist at the Bank of Singapore.

In fact, the actions by PBOC were to allay fears of a liquidity credit crunch and amid signs of tensions caused by an earlier tightening of policy by the central bank, aimed at reducing the risk of cheap credit causing asset bubbles. China’s policymakers are expecting its economic growth to hover at 7.6% in 2013, a notch above the government’s target of 7.5% and slightly below last year’s 7.7% growth rate.

UBS said in a note to clients: “We expect Asia to continue to grow fastest, at more than 6% in 2014 from 5.5% in 2013. Much will depend, of course, on the performance of China. Its trend growth has begun declining from the 10% pace of recent decades, and for 2014 we expect its GDP to expand by 7.8%.”

“Rapidly rising Chinese residential property prices and/or broad inflation would force the central bank to tighten policy, which would hurt growth. But we think the government’s policy fine-tuning will keep a lid on new credit and inflation.”

Retail investors who want to gain exposure to the Chinese market can opt for locally listed ETFs such as Lyxor ChinaH 10US$ (SGX: P58) or DBXT CSI300 10US$ (SGX: KT4). The former  aims to provide investment results that closely correspond to the performance of the HSCEI Index and is made up of 37 Hong Kong listed H Shares of Chinese companies. The latter measures the performance of all 300 stocks with the largest market capitalization traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo does not own shares in any companies mentioned.