Rates: ECB straightjacketed, Turkish CB could influence risk sentiment
The ECB meets today, but normally won’t deliver fireworks. Rumours suggest small downward revision to the growth scenario, but that’s probably insufficient to really boost Bunds. Italian BTP’s might return in the fire line as FM Tria threatened to quit over the 2019 budget. The Turkish central bank meeting could influence global risk sentiment via EM FX.
Currencies: Dollar and sterling still lack a clear story
Yesterday, EUR/USD rebounded temporarily on easing trade tensions. However, multiple sources of (global and EMU) uncertainty continue to provide downside protection to the dollar. Today’s ECB and BoE meetings probably won’t change the picture for USD and GBP trading. USD traders will continue to look for guidance from global risk sentiment.
The Sunrise Headlines
- US equity markets could just hold their head above water on Wednesday with the exception of NASDAQ (-0.23%). Asian markets opened mixed today, with Japan outperforming the bunch and China noting losses.
- US Treasury secretary Steven Mnuchin is pushing to meet Liu He, a top Chinese economic official, in an attempt to defuse further escalation of the trade war before President Trump imposes tariffs on another $200bn of Chinese imports.
- Federal Reserve Governor Brainard has indicated that the Fed could maintain gradual interest rate hikes for the next year or two, possibly to more than 3%. She said the labour market is very strong and growth is likely to remain solid.
- Canada’s Freeland will not return to Washington today to continue negotiations over a renewal of Nafta, as more preparations are needed. Mexico repeated it is prepared to pursue a trade deal with the US without Canada.
- UK Brexit Minister Dominic Raab said yesterday that a deal between the UK and EU is within reach. He also confirmed that if a ‘no deal’ scenario would take place, the UK would not pay the terms of the financial settlement.
- Australia’s labour market remains very strong in August, with 44k new jobs. The rise in full time jobs (+34k) is the biggest contributor. Unemployment rate remains at record low (5.3%) and participation rate rises to 65.7%.
- Today’s US eco calendar is interesting, with CPI’s and unemployment numbers in the US. Central banks in the UK (BoE), in Europe (ECB) and in Turkey are holding their September meeting. Fed’s Bostic speeches tonight.
Currencies: Dollar And Sterling Still Lack A Clear Story
US CPI data and CB’s to guide global FX trading
Yesterday, there was no dominant story for global trading. European equities outperformed Asia and the US but gains remained modest. EMU July production was weak. US PPI was also softer than expected. EUR/USD initially lost a few ticks. Later, markets outside the US were supported by headlines that the US and China might resume trade talks. The dollar weakened. EUR/USD closed at 1.1626. USD/JPY traded in line with overall USD softness and closed at 111.26. In a broader perspective, EUR/USD and USD/JPY are holding recent tight ranges. Overnight, the hope of a restart of the US-China trade talks caused a rebound of Asian equities on recent steep decline. The move was supported by strong Japanese machinery orders. EM currencies also succeed a broad-based rebound. EUR/USD (1.1630 area) maintains yesterday’s gain. USD/JPY (111.40) is trading marginally higher on the risk rebound. AUD/USD rebounded to the high 0.71 area, on overall dollar weakness and on very strong August job growth in Australia.
Today, the US CPI data will be published (headline expected 2.8Y/Y from 2.9%; core stable at 2.4%). An upward surprise probably wouldn’t go unnoticed on (FX) markets. However, the focus might be on the ECB policy meeting. The decision of the Turkish central bank might have consequences for broader FX. ECB staff economic forecast might bring a mixed story (tentative lower growth but higher inflation). We don’t expect the ECB to change policy guidance in a profound way. Budget talks in Italy and headlines on global trade remain wildcards for global (FX) trading. Of late, the USD, including EUR/USD, mostly held tight ranges. Overnight, global trends (EM, trade talks) turned slightly in the disadvantage of the USD, but we are not convinced that this more positive global sentiment (and thus a softer USD) will persist. EUR/USD is locked in a tight 1.1520/ 1.1750 consolidation pattern. We don’t anticipate a break of this range yet. MT we assume that fundamentals continue give the USD downside protection.
Yesterday, EUR/GBP hovered close to, mostly slightly north of 0.89 as investors faced conflicting headlines on Brexit (positive tone from the EU, ongoing opposition for May from headline Brexiteers). We expect this pattern to continue today. The BOE will announce its policy decision. However, no change is expected after last month’s rate hike. We maintain the view that ‘real’ brexit progress is needed to justify a sustained comeback of sterling
EUR/USD: no market theme dominant enough to break EUR/USD stalemate
