August data further evidenced that China's economic growth has peaked in the first quarter. Following the sharper-than-expected slowdown in growth in July, the latest set of macroeconomic data also surprised to the downside. The moderation was a result of the government's tighter monetary policy in an attempt to curb excessive investment in certain areas, such as real estate. Renminbi's appreciation against US dollar since the beginning of the year probably has weighed on exports. This leads the PBOC to loosen capital control which has been adopted over the past years to prevent renminbi from severe depreciation.
Dollar rebounded strongly overnight on news that the so called Big Six Republicans are finally going to release the framework of tax reforms in the week of September 25. Also, there is some optimism on the White House as US President Donald Trump seems to be employing a new strategy to reach out to Democrats. Also thanks to return of risk appetite and rebound in treasury yields, the greenback is now trading as the second strongest major currency for the week, next to Sterling. Nonetheless, technically, there is no confirmation of a trend reversal in Dollar yet. Markets could remain cautious on it until something concrete is delivered. For now, focus will turn to SNB and BoE rate decisions first, US CPI next.
Dollar surges on news that the Americans will finally get the details of US President Donald Trump's tax reforms in the upcoming weeks. House Ways and Means Committee Chairman Kevin Brady, the chief house tax writer, said the tax overhaul framework will be released in the week of September 25. Brady noted that the document will include "core elements of tax reports.
Sterling's rally lost some momentum today after job data showed weaker than expected wage growth. Nonetheless, the Pound is still trading in firm tone as markets await tomorrow's BoE rate decision. Dollar also weakens mildly after producer inflation data missed expectation. On the other hand, Canadian and Aussie are trading generally higher today. Gold is trying to regain some from after this week's sharp pull back. But it's yet to break above 1340 handle yet. WTI is back above 48.50 as recent corrective trading extends. There is no sign of momentum for a break through 50 handle yet. Released from US, headline PPI jumped to 2.4% yoy in August but missed expectation of 2.5% yoy. PPI core Rose to 2.0% yoy but also missed expectation of 2.1% yoy.
Risk appetite remains strong in the markets. And the provocative response from North Korea on fresh sanctions is largely ignored. S&P 500 closed up 8.37 pts, or 0.34%, at 2496.48 overnight, making another record high. DOW also rose 61.49 pts, or 0.28%, to close at 2118.86, a record, even though it's short of intraday record at 22179.11. NASDAQ also scored a record close at 6454.28, up 0.34%. Sentiments are also positive in Asia with Nikkei trading up 0.5% at the time of writing. Gold continues to suffer as it struggles to regain 1340 handle. In the currency markets, British Pound remains the strongest one for the week as boosted by the CPI release yesterday. Commodity currencies are also firm together with Dollar. Meanwhile, Yen, Swiss Franc and Euro are trading as the weakest ones for the week.
We expect the BOE to vote 7-2 to leave the Bank rate unchanged at 0.25% and the asset purchase at 435B pound. Despite overshooting of inflation, most members would remain cautious and cite slow economic growth and Brexit uncertainty as reasons for keeping the monetary policy accommodative. However, the MPC is expected to adopt a more hawkish tone and strengthen the warning of a weak sterling. The new deputy governor Dave Ramsden would be voting for the first time. He is perceived as a dove amidst his warning of dire consequences after Brexit. He is expected to vote to maintain the status quo in the first 9-member MPC meeting since May.
The British Pound surges sharply today as boosted by strong inflation reading. BoE is still widely expected to keep bank rates and asset purchase target unchanged on Thursday. But there is now more reasons for the central bank to reiterate its stance on interest rates. That is, BoE would like to remind households and businesses that markets are under-estimating the scale of interest rate hikes in the coming years. Following Sterling, commodity currencies and Dollar are the strong ones on full return of risk appetite. But Canadian Dollar lags behind as it continues to digest recent gains. Meanwhile, Yen and Swiss Franc remain the weakest ones. Both maintains this week's loss after United Nations Security Council approved watered down sanctions on North Korea. And risks of immediate military conflicts are much reduced.
USDCNY continues to recover after the pair slumped to the lowest level since December 2015 last Friday. The rebound, long-awaited as the broad-based USD weakness has caused the pair to decline over the past 4 months, is facilitated by PBOC’s announcement to remove the requirement for banks to hold the equivalent of 20% of clients' FX forward positions as reserve for a year at 0% interest. For more than a decade, China has been implementing reforms in its currency, with the ultimate goal of achieving a floating exchange rate regime and convertibility for renminbi – a movement widely described as renminbi internationalization. However, this report seeks to explain that the government has only been moving back and forth, without making significant progress in transforming renminbi into a market-oriented exchange rate.
Risk appetite staged a strong strong return as DOW closed up 259.58 pts, or 1.19%, to close at 22057.37 overnight. S&P 500 also gained 26.68 pts, or 1.08%, to 2488.11, a record close. 10 year yield also responded positively, gaining 0.064 to 2.125. Gold, on the other hand, extended this week's sharp pull back and is back below 1330. Asian markets followed with MSCI Asian Pacific ex Japan hitting the highest level since 2007. Sentiments were given a boost after United Nation Security Council passed fresh sanctions against North Korea. It may be a slap in the face to the US as it can only get a much watered down version of the sanctions approved. But the fact that there is no outright ban on oil supplies to North Korea means the threat of an immediate military confrontation should have eased. And that was cheered by investors. IN the currency markets, Canadian Dollar and US Dollar remain the strongest ones for the week while Yen and Swiss Franc are the weakest.
Dollar recovers mildly today as risk aversion eased slightly. Hurricane Irma is weakening as it moved past Tampa, Florida. Some analysts pointed out that damage of Irma is not as catastrophic as feared, even though it's still devastating. Meanwhile, North Korea risk is temporarily eased after the weekend. The US has backed down on pushing toughest sanctions on North Korea. A watered down version will be tabled for vote in UNSC today. While the greenback trades mildly higher, it's clearly outshone by Canadian Dollar and Sterling. Meanwhile, Yen and Swiss Franc are trading as the weakest ones. Gold is also notably weaker, hitting as low as 1335.2, comparing to Friday's high at 1362.4. WTI crude oil is hovering tight range below 48 handle.
Dollar recovers broadly today as the weekend passed without any geopolitical events. But the greenback is slightly out-performed by Canadian Dollar. Meanwhile, Swiss Franc and Yen trade broadly losing, paring some of last week's risk aversion gains This pattern is also seen in other markets as gold is back pressing 1340 handle after hitting as high as 1362.4 last week. Economic calendar is rather light today and the forex markets will likely engage in some more consolidative trading. Nonetheless, more key events are scheduled for the week ahead including UK inflation, BoE and SNB meeting.
Dollar ended the weak as the weakest major currency as weighed down by a number of factors. Judging from the fact that Yen and Swiss Franc were the strongest ones, risk aversion was a key factor in driving the greenback down. There is so far no resolution to the geopolitical tension between the US and North Korea yet. While US is calling for United Nations Security Council to vote on fresh sanctions against North Korea, it's effectiveness is in heavy doubt. There were also fears that North Korea will launch another missile to celebrate its foundation day on September 9, that is today. Also, not long after hurricane Harvey left, another one Irma is expected to land this weekend too. Some estimated the dame of Irma to be as much as USD 200b, topping Katrina that slammed into New Orleans back in 2005.
Dollar's selloff accelerates today as markets are concerned of any more geopolitical risks during the week end. It will be North Korea's Foundation Day on Saturday and Pyongyang might just launch another missile to celebrate. At the same time, another hurricane Irma will likely make landfall in Florida late Saturday of early Sunday. In the background, the surprised early resignation of Fed Vice Chair Stanley Fischer created even more uncertainty in Fed as Janet Yellen's future as Fed Chair is unknown. Euro, despite being lifted against Dollar after ECB, could follow as the second weakest for the week.
Fresh selling is seen in Dollar as most of the event risks for the week are past. Weakness in Dollar is also accompanied by falling treasury yield, with 10 year yield closed down -0.047 at 2.061. USD/JPY finally takes out 108.12 key support level in Asian session, resuming medium term fall from 118.65. EUR/USD was also lifted after ECB meeting yesterday and took out near term resistance at 1.2069. But for the week, commodity currencies are particularly strong. USD/CAD also started diving early this week after BoC's rate hike. 1.2 handle is now within touching distance and Canadian Dollar will look into employment data for further strength. AUD/USD also takes out 0.8065 resistance today to resume larger rally. In other markets, gold continues to extend recent strong rise and is trading above 1360 handle now. WTI crude oil, however, is struggling to take out 50 handle again.
As widely anticipated, ECB left the policy rates unchanged in September. It also kept the QE program at a pace of 60B euro per month until end 2017, or longer if needed. At the press conference, President Mario Draghi acknowledged the improvement in the economic outlook but was cautious over inflation, warning that headline CPI could fall to the negative territory towards the end of the year. At the Q&A session of the press conference, Draghi admitted that the members began "preliminary" discussion on the adjustment of the QE program but affirmed that the "big labour market slack" is justified for the record low interest rates. On the updated economic projections, the staff upgraded the GDP growth forecasts but downgraded inflation outlooks. EURUSD broke above 1.2, attempting to retest the 2.5 year high made on August 29 after a brief pullback.
Euro jumps as ECB President Mario Draghi acknowledged in the post meeting press conference that growth in the Eurozone is solid and broad-based. At the same time Draghi also promised to "decide on the calibration" of its policy instruments beyond this Autumn. He went further to say that the "bulk of the decisions" will come at the October meeting. Regarding a recent hot topic in exchange rate, Draghi noted that a "few" members express concerned back in July. And those concerns were reiterated by "most" members this time. And recent volatility in the exchange rate is seen as a source of uncertainty that requires monitoring. Nonetheless, while financial conditions "unquestionably tightened" following Euro's rise, they remain "broadly supportive" for non-financial enterprises.
Euro recovers mildly in Asian session today but stays in red for the week except versus Dollar. Markets are cautiously awaiting the highly anticipated ECB policy decision and press conference. There were rumors flying around since last week that ECB will deliver nothing this time. The decision on tapering the asset purchase program would be delayed to October or even December. At this point, October is still a more likely option. After all, the central bank will likely maintain the rhetoric that "the net asset purchases, at the current monthly pace of EUR 60b, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". Policymakers would also warn of currency appreciation. At the Q&A session, Draghi would probably stay neutral in the tapering schedule.
In a surprising move, BOC increased the policy rate by +25 bps to 1% in September, following a rate hike in July. Policymakers cited the better-than-expected economic developments as a key reason for the removal of stimuli from the market. However, they remained cautious over a number of issues including excess capacity, subdued inflation, geopolitical risks and the strength in Canadian dollar.
Canadian Dollar soars sharply in early US session after BoC shocked the markets by raising overnight rate by 25bps to 1.00%. Correspondingly, the Bank rate is lifted to 1.25% and deposit rate to 0.75%. While there were speculations of a rate hike, markets generally believed that BoC will hold their hands till October, as it has just raised interest rate back in July. Nonetheless, after the rate hike, BoC remains open to further tightening It noted that "future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation." Meanwhile, it doesn't sound concerned with strength of the Canadian Dollar as it is "reflecting the relative strength of Canada's economy."
Dollar is trading as the weakest major currency for the week. Dovish comments from Fed officials are weighing on the greenback. Also stocks and yield played catch up after holding and suffered notable lost. DOW closed down -1.07% at 21753.31. 10 year yield dropped through last week's low, losing -0.087 to close at 2.070. 2.0 handle is starting to look vulnerable as recent decline extends.