• European equities eked out nice gains (+0.4% EuroStoxx) with Milan and Madrid lagging. US equities trade little changed (+0.1%)
  • The ECB left its policy stance unchanged. It confirmed that purchases go ahead at the current level and it confirmed its forward guidance on the APP an on interest rates. A decision about the APP after end of 2017 will follow in October. Draghi suggested there will be another re-calibration with changes to the length and the size li. The issue(r) limits are unlikely to be changed and neither is the sequence (first ending APP than hike rates).
  • The ECB upped its concerns about the strength of the euro. It is a source of uncertainty that needs monitoring. While it is no target, the currency is very important for growth and inflation and is taken into account.
  • US jobless claims surged from last week by the most since November 2012 (236k to 298k ) as tens of thousands of Texans displaced by Hurricane Harvey filed applications to collect benefits.
  • Sweden’s central bank kept its interest rates on hold as expected after its September policy meeting, and resisted calls to bring forward plans for an eventual rate rise despite the strength of the economy. EUR/SEK rose from 9.5 to an intraday high of 9.55.
  • China’s foreign exchange reserves edged up for a seventh straight month in August as a surging yuan and tighter regulations signal the tide may be turning in China’s battle against outflows. August was the best month since 1994 for the yuan, which has gained more than 6.5% against the dollar this year, erasing all of its 2016 losses.
  • Hurricane Irma is likely to be downgraded to a Category 4 storm by the time it makes landfall in Florida, the US National Hurricane Center said. Irma, at present a Category 5 storm packing maximum sustained winds of 285 km per hour, is moving off the northern coast of the Dominican Republic, the NHC said.

Rates

ECB delays key decisions to October

The ECB kept its monetary policy unchanged, including forward guidance, effectively delaying any decisions on its APP to October. Draghi and co didn’t discuss "sequencing" (rate hike will follow after ending APP) or raising the issue(r) limit. They did have very preliminary discussions on QE scenarios in 2018 (including the length and size of the programme), but leave detailed work/making a blueprint to relevant technical committees. The Bund wasn’t really impressed by Draghi’s putting off behavior. It gained modest ground during the Q&A session. At the time of writing, German yields drop around 1.5 bp with the 30-yr yield underperforming (-0.4 bp). US yields decline by 2 bps (2-yr) to 2.8 bps (5-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany are unchanged with Portugal, Spain and Italy outperforming (-4 to -5 bps).

The ECB recognized that EMU growth surprised on the upside of expectations, reflected by an upward revision of this year’s GDP forecast from 1.9% to 2.2%, the highest level since 2007. GDP estimates for 2018 and 2019 remained unchanged, respectively at 1.8% and 1.7%. Risks to the eco outlook are broadly balanced, but the ECB admitted that the economy’s positive cyclical momentum may signal a stronger upswing. A stronger euro caused a downward revision of the 2018 (1.2% from 1.3%) and 2019 (1.5% from 1.6%) HICP inflation forecasts, while the 2017 prediction remained unchanged at 1.5%. Patience on the inflation front remains necessary and core inflation still needs to show a convincing upward trend. Draghi repeated that the single currency is not a policy target, but acknowledged that is very important for GDP and CPI, thus influencing policy. Recent EUR volatility is a source of uncertainty and needs monitoring because of its potential impact on future price stability. Euro strength also caused a tightening of financial conditions, even if they still are broadly supportive.

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The French Treasury sold two on the run OAT’s (€5.21B 1% May2027 & €1.58B 1.25% May2036) and two off the run OAT’s (€1.28B 4.5% Apr2041 & €0.93B 4% Apr2060) for a combined €9B, the total amount on offer. The auction bid cover was good (1.96). The Spanish Tesoro sold three on the run bonds: 5-yr Bono 0.4% Apr2022 (€1.78B), 10-yr Obligacion 1.45% Oct2027 (€1.31B) & 15-yr Obligacion 2.35% Jul2033 (€1B). The total amount sold was slightly above the €3.5-4.5B target range with a decent 1.88 auction bid cover.

Currencies

EUR/USD rallies even as Draghi brings no news

The (run-up to) the ECB meeting was the major driver for EUR/USD trading today. The pair rallied ahead of the policy decision. Draghi didn’t bring any news on changing APP, he committed to keeping interest rates low for long and showed concern on recent ‘euro volatility’. At first, the soft ECB assessment didn’t prevent EUR/USD from coming within reach of the cycle top of 1.2070. Finally, the rally didn’t run into resistance. The pair returned to the 1.20 area.

This morning, Asian equities traded flat to modestly higher, mirroring modest WS gains. USD/JPY drifted off yesterday’s ‘top’ and returned to the low 109 area. EUR/USD changed hands in a tight 1.1915/35 corridor.

EUR/USD started a solid intraday rebound in Europe. The move was in the first place euro strength. Investors apparently didn’t want to be wrong-footed if ECB’s Draghi would have indicated that monetary policy could become less generous going forward. The EUR/USD rally coincided remarkably with good gains on European equity markets. Changes in interest rate differentials between the dollar and the euro were negligible. The EUR/USD rally was in the first place euro strength, but there was also a pinch of underlying USD softness. President Trump kicking the can further down the road on the issue of the debt ceiling clearly didn’t convince investors. Other issues that weighted on the dollar of late are also not solved (Korea, the impact of the hurricanes, uncertainty on several key policy issues of the Trump administration). USD/JPY drifted gradually below 109.

The ECB left policy rates, the amount of asset purchases and its forward guidance on APP and interest rates unchanged. The euro rally took a breather going into the press conference but soon resumed its uptrend. At the press conference, Draghi stated that the recent volatility in the euro was a source of uncertainty. The overall tone of the press conference/Q&A remained soft. The ECB president reiterated that interest rates will remain at current low levels for an extended period of time and said that discussions on changingQE were very preliminary. Whatever, the wait-and-see approach of the ECB didn’t prevent further euro gains. EUR/USD came within reach of the 1.2070 area, but a real test didn’t occur yet. Finally, the EUR/USD rally ran into resistance. The pair trades currently back below 1.20. USD/JPY is changing hands around 108.80.

Conclusion: ECB Draghi delayed its communication on reducing QE and kept a very soft assessment, including some kind of ‘warning’ on euro strength. It didn’t change the euro uptrend. Underlying USD softness remains a ‘secondary’ factor for the EUR/USD rise.

EUR/GBP driven by gyration in EUR/USD

There were no really important UK data today. Sterling trading was primarily driven by global factors, in particular the price moves of the euro in relation to the ECB’s policy decision. The rise of EUR/USD ahead and during the press conference also blocked the recent downward correction of EUR/GBP. The pair rebounded from the 0.9130 area to the 0.92 area to currently trade at around 0.9175. At the same time, cable to some extent followed the EUR/USD rebound. This might be an indication of both underlying relative sterling resilience and USD softness. We didn’t see any important news from the political debate on Brexit in the UK Parliament.

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