[Jason_Lim]

While this morning the market has been cheering the release of better UK mortgage approval data, it has not taken notice that adjusted broad money supply growth has slowed down again. The 3m annualised growth rate slipped to -1.7% in the latest month from 3.2% the prior month and 4.1% back in July. Previously, Mervin King said that M-4 is hoped to return to normal growth rates of 6-8% which is way below the current M-4 growth, suggesting that a further increase of the debt purchasing programme is likely to be announced next Thursday when the MPC meets. What makes us even more nervous concerning the structural outlook for sterling is that credit seems to be go into non-productive channels, such as housing, while corporate credit growth and non secured lending has been in decline. How will the British economy develop the surpluses required to pay back its debt when it falls back into bad habits, namely pushing funds into real estate instead of funding the corporate sector?

Meanwhile, China is moving increasingly into the limelight of the upcoming G-20 meeting on 6 November. ECB Noyer suggested that the EUR is not particularly strong against other free floating currencies with the exception of the USD, but he suggested that currencies of rising trade powers must seek higher currency valuations. Similar comments were echoed by Japan’s deputy Fin Min Noda and BoC’s Carney. So it is very likely that the RMB will be discussed at the G-20 meeting and even measures taken by Brazil and Turkey to curb local currency strength may be criticized. However, China is not yet ready to allow its exchange rate to move as it views the global economy as too fragile to expose it export sector to the challenges of a stronger RMB in an environment, where international demand may fall back again. Hence, the G-20 will have to look for the second best option which is USD stabilisation. Unfortunately, USD stabilisation is the second best option by a wide margin as the side effect of USD stabilisation are declining asset prices and a scaling back of asset prices. Since March we have seen the biggest equity market rally for 70 years and with G-20 related uncertainties looming large, liquidation in the share market will have further to go allowing the USD to march higher for now. Last night saw inflation expectations declining in line with bond market yields which is a positive sign for risk takers, but potentially not the dominant theme of the day.