- Rates: Draghi will deliver, but might not reach the bar
Spotlights are on ECB President Draghi. He’ll normally deliver on his July “promise” to add monetary stimulus, but will he be able to meet high expectations? Whether or not asset purchases will be part of his monetary boost is the big question mark. We see room for disappointment given current market positioning. Next resistance for the GE 10-yr yield stands at -0.4%. - Currencies: Will a ‘not-too-soft’ Draghi put a floor for EUR/USD?
EUR/USD stabilized near recent lows lately. Today, the ECB is expected to ease policy further. If Draghi doesn’t meet expectations or if markets feel that the ECB is running out of ammunition to take further action, the euro might gradually bottom out. USD/JPY continues to profit from a better risk sentiment.
The Sunrise Headlines
- US stocks advanced amid easing (geo)political signs. The Nasdaq (+1.06%) outperformed. Asian markets edge higher in the wake of Wall Street’s performance. Japan (+1%) outperforms.
- Oil prices tanked yesterday on news that US president Trump would have discussed easing Iranian sanctions in order to secure a meeting with president Rouhani. Brent crude currently trades at $61.2/b vs. $63 yesterday.
- The US postponed the 5% tariff increase on Chinese imports due to kick in on October 1st by two weeks as a sign of goodwill, Trump said. As its own goodwill gesture, China might allow companies to resume imports of US farm goods.
- The Polish central bank kept rates at 1.50%. Governor Glapinski isn’t worried about the inflation and the government’s plan to almost double minimum wages. Instead he reiterated there’s room to cut rates as global growth slows.
- In a worst-case scenario in the event of a no-deal Brexit, the UK foresees disruptions in trade, public unrest and food and fuel hoarding. Medicine delivery is “particularly vulnerable”, the document published yesterday said.
- Mexico’s $5bn cash injection and bond swap to ease debt repayments is not enough to alter the outlook of the troubled state-owned oil company Pemex, rating agency Fitch said. Fitch cut Pemex’ rating to junk in June.
- Today’s economic calendar contains August US CPI. The ECB’s policy meeting however is likely to be in the spotlights. A deposit rate cut is all but certain. Italy and the US tap the bond market
Currencies: Will A ‘Not-Too-Soft’ Draghi Put A Floor For EUR/USD?
ECB to put a floor for EUR/USD?
Global markets showed a diffuse picture yesterday and this also applied FX trading. USD/JPY continued to profit from higher core yields and a positive risk sentiment (constructive headlines from the US trade talks). The pair closed at 107.82 (from 107.54). The euro, however, didn’t profit from the risk rally. At least for now, the reflation trade supported the dollar more than the euro. We consider the move mainly as last-minute repositioning ahead of the ECB meeting rather than anything else. EUR/USD dropped temporarily below 1.10, to close at 1.1010.
Overnight, president Trump announced a brief delay in the upcoming rise in US tariffs as a gesture for goodwill to facilitate the next round of trade talks. The yuan (USD/CNY 7.085), and the likes of the Aussie dollar (AUD/USD 0.688) rose. USD/JPY surpassed the 108 barrier, but the announcement left hardly any traces on EUR/USD (1.1010/15 area).
Today, the positive headlines on trade will continue to work through in global FX trading. The US CPI and a US 30-y bond auction are interesting, too. However, the ECB policy decision evidently will be the key driver, especially for EUR/USD trading. We expect a 10 bp deposit rate cut, probably in a tiered system (markets discount chances for a bigger cut). Markets also see a chance of a restart of QE, but this isn’t our base scenario. Draghi delivering less easing than expect in theory would be a euro positive. The prospect for potential further easing (or the absence of it) is also important as is the Fed reaction function. The EUR/USD decline halted last week, and the pair regained 1.10. Some more profound euro bottoming might develop if the ECB doesn’t deliver on high expectations or if the market feels that the bank has limited ammunition left. Technically, the EUR/USD 1.0926 correction low should provide solid support. A return north of 1.11 would call off the ST negative alert for EUR/USD.
EUR/GBP initially traded with a slightly negative bias yesterday. EUR/USD weakness was in play. Maybe sterling also still profited slightly from headlines that the UK might consider a ‘North Ireland’ backstop. However, the flow of (concrete) news on Brexit is gradually becoming thinner. EUR/GBP apparently found ST equilibrium in the lower 0.89 area. For now, we expect more technical trading, waiting for next steps in the Brexit process, probably early October.
EUR/USD hovers near 1.10. Will a ‘not too soft’ Draghi put a floor for the euro?
