Ok. So Bloomberg reported fake news? Sterling is hammered down as a German government spokesman cleared the air and said the position on Brexit is unchanged. Also, the spokesman said Germany has full trust in EU chief negotiator Michel Barnier.
Here is a quick glance on GBP/USD, EUR/GBP and GBP/JPY.
St. Louis Fed President James Bullard gave remarks titled “How to Extend the U.S. Expansion: A Suggestion” today. There he argued that empirical Phillips curve relationships have largely broken down in the last two decades. That is, the relationship between inflation and unemployment “began to disappear”. He suggested Fed to consider financial market information in its monetary policy setting. The yield curve is taken as a good predictor of future real economic activity. The Treasury Inflation-Protected Securities (TIPS) provides indications on inflation expectations.
Bullard said:
Combined, theses two market indicators argued that “current monetary policy stance is already neutral or possibly somewhat restrictive.”
Full release and presentation.
BoC kept overnight rate target unchanged at 1.50%. Tightening bias is maintained as “higher interest rates will be warranted to achieve the inflation target”.
Overall economy evolved “closely in line” with BoC’s July projections. Q3 GDP is expected to “slow temporarily” due to “further fluctuations in energy production and exports.” The surge in July CPI to 3% was “higher than expected” but “in large part because of a jump in the airfare component”. BoC maintained that CPI will move back to 2% in early 2019.
BoC also talked down trade threats as “demand towards business investment and exports is proceeding”.
Overall, BoC sounds rather confident on the economy and it’s on course for another rate hike in October.
Full statement below.
Bank of Canada maintains overnight rate target at 1 ½ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 ½ per cent. The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent.
CPI inflation moved up to 3 per cent in July. This was higher than expected, in large part because of a jump in the airfare component of the consumer price index. The Bank expects CPI inflation to move back towards 2 per cent in early 2019, as the effects of past increases in gasoline prices dissipate. The Bank’s core measures of inflation remain firmly around 2 per cent, consistent with an economy that has been operating near capacity for some time. Wage growth remains moderate.
Recent data on the global economy have been consistent with the Bank’s July Monetary Policy Report (MPR) projections. The US economy is particularly robust, with strong consumer spending and business investment. Elevated trade tensions remain a key risk to the global outlook and are pulling some commodity prices lower. Meanwhile, financial stresses have intensified in certain emerging market economies, but with limited spillovers to other countries.
The Canadian economy is evolving closely in line with the Bank’s July projection for growth to average near potential. Following growth of 1.4 per cent in the first quarter, GDP rebounded by 2.9 per cent in the second quarter, as the Bank had forecast. GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports.
While uncertainty about trade policies continues to weigh on businesses, the rotation of demand towards business investment and exports is proceeding. Despite choppiness in the data, both business investment and exports have been growing solidly for several quarters. Meanwhile, activity in the housing market is beginning to stabilize as households adjust to higher interest rates and changes in housing policies. Continuing gains in employment and labour income are helping to support consumption. As past interest rate increases work their way through the economy, credit growth has moderated and the household debt-to-income ratio is beginning to edge down.
Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.
The next scheduled date for announcing the overnight rate target is October 24, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
Sterling rebounds strongly as Bloomberg reports that both Germany and UK have dropped key Brexit demands, citing unnamed source. Additionally, there are signs of progress on the key sticky issue of Irish border.
In short, Germany is said to accept a less detailed agreement regarding the future relationship. Meanwhile, UK is also prepared to accept a more vague statement of intent on the relationship too.
Most importantly, EU’s chief Brexit negotiator Michel Barnier has openly said he strong opposed to the Chequer’s plan. That’s the trigger for Sterling’s selloff this week. But Bloomberg’s source said that such opposition isn’t necessarily an obstacle for the agreement.
That could finally ease the path to a Brexit deal to be concluded in October, or may be later in November.
Entering into US session, Sterling is trading as the weakest one today, followed by Japan Japanese Yen. On other hand, New Zealand Dollar and Canadian Dollar are generally higher. The forex markets seem to have decoupled from risk sentiments today. But we’d reckon recoupling soon. BoC rate decision will be a focus in US session and it’s widely expected to save bullet for October. US-Canada trade negotiation will resume in Washington today and that will also catch some attention.
In other markets, major European indices are in red today, with FTSE down -0.33%, DAX down -0.58%, CAC down -0.85%. Earlier today, Hong Kong HSI closed down -2.61%, China Shanghai SSE down -1.68%, Nikkei down -0.51% while Singapore Strait Times fell -1.69%. WTI crude oil once again failed to stay above 70 handle and is now back below 69. Gold is now defending 1190 as near term consolidation extends.
Italian 10 year bond yield drops sharply today as, Deputy Prime Minister Matteo Salvini reiterated the pledge not to blow up public accounts ahead of budget meeting. Salvini, leader of the far right League, said in a newspaper interview that “clearly we will not do everything in one shot, not even Italians expect that from us… If we want to run the country for a long period we cannot blow up its public accounts.”
10 year Italian yield drops -0.088 to 2.943 so far today. It hit as high as 3.281 last week. The development suggests that investors concern over Italian budget is eased.
UK PMI services rose to 54.3 in August, up from 53.5, and beat expectation of 53.9. Markit noted in the released that there were stronger rises in business activity and new work. At the same time, input cost inflation accelerated, led by fuel prices and wage pressures. However, optimism towards the year-ahead business outlook was at lowest level since March.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:
“Faster service sector growth comes as much-needed welcome news after disappointing manufacturing and construction PMI surveys in August. The survey data indicate that the economy is on course to expand by 0.4% in the third quarter, a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month.
“Faster service sector order book and employment growth also offset slowdowns of both in the manufacturing and construction sectors, but also highlights the extent to which the economy has become more reliant on services to support growth, and in particular an especially strong financial service sector. Financial services have outperformed all other sectors so far this year.
“Business expectations for the year ahead meanwhile sank markedly lower, down across all three sectors to one of the lowest levels seen since the EU referendum, largely reflecting increased anxiety over Brexit negotiations.
“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside.”
Eurozone PMI services was finalized at 54.4 in August, unrevised, up from July’s 54.2. PMI composite was revised up to 54.5, up from July’s 54.3. Among the countries, Ireland PMI composite hit 7-month high of 58.4. German PMI composite hit 6-month high at 55.6. However, Italy PMI composite hit 22-month low at 51.7.
Chris Williamson, Chief Business Economist at IHS Markit said:
“The Eurozone PMI shows the recent run of robust growth of business activity, new orders and employment extending into August. However, the expansion is looking increasingly uneven and the business mood has become more unsettled during the summer.
“The survey data for the third quarter so far suggest the single currency area is on course to at least match the 0.4% expansion of GDP seen in the second quarter, yet the downturn in optimism raises questions over whether this pace of growth can be sustained into the fourth quarter.
“Business expectations about activity levels in the year ahead dropped to the lowest for almost two years amid growing concerns about the impact of trade wars and heightened political uncertainty.
“Growth also looks worryingly unbalanced. Although all of the largest euro countries have seen growth moderate so far this year, solid expansion is still being signalled for Germany and, to a lesser extent, France.
“But Italy saw growth slow sharply in August to suggest the region’s third largest economy on course for its weakest expansion for nearly two years, while in Spain the third quarter could be the worst for almost five years, barring a noticeable pick of business activity during September.
“Price trends are also varied across the region, ranging from near-record inflation in Germany to falling prices in Italy, serving as a reminder that deflationary pressures, it appears, have not completely disappeared from the euro area.”
Bank of Canada rate decision is a major focus today. Speculation of a September hike cooled drastically as NAFTA negotiation stalled last week. Markets are now generally expecting BoC to hold the overnight rate unchanged at 1.50% today. Instead, markets are expecting BoC to signal a move in October. That signal is a key to Canadian Dollar’s near term movement. Meanwhile, negotiation with US will also resume today. But based on Prime Minister Justin Trudeau’s firm stance on Chapter 19 dispute resolution mechanism, it’s unlikely to a break through any time soon.
Suggested readings on BoC and Loonie:
Canadian Dollar recovers mildly today but remains the weakest one for the week, in particular against Dollar and Euro. EUR/CAD’s firm break of 55 day EMA and medium term falling trend line suggests that decline from 1.6151 has completed with three waves down to 1.4798. Immediate focus is now on 38.2% retracement of 1.6151 to 1.4798 at 1.5315. Sustained break there should confirm bullish reversal and bring stronger rally to 61.8% retracement at 1.5634 and above.
Australian Dollar was lifted notably by better than expected GDP data in Asian session. Q2 GDP rose 0.9% qoq, 3.4% yoy, comparing to expectation of 0.8% qoq, 2.8% yoy. That’s marked the 27th year without recession, and it’s the strongest in almost six years. Chief Economist for the ABS, Bruce Hockman, said: “Growth in domestic demand accounts for over half the growth in GDP, and reflected strength in household expenditure.”
Looking at the details, domestic demand rose 0.6% qoq, government expenditure rose 1.0% qoq, new dwelling investments rose 3.6% qoq. However, employee compensation grew only 0.7% qoq “due to a rises in the number of wage and salary earners and wage rates.”
The lift to Aussie is relatively brief however. While the GDP figure was strong, it’s not enough to trigger even a rethink of interest path of RBA. Policymakers are looking for sign of pick up of wage growth.
Also released, Australia AiG performance of services index dropped -1.4 to 52.2 in August. New Zealand ANZ commodity price dropped -1.1% in August. China PMI services dropped to 51.5 in August, down from 52.8.
In a note titled “U.S. Corporations’ Repatriation of Offshore Profits“, Fed studied how companies used the cash holdings outside the US after the Tax Cuts and Jobs Act. Under the new act, tax disincentives on the repatriation of foreign earnings were eliminated. Fed found that US firms repatriated just over USD 300B in Q1 2018, roughly 30% of the estimated stock of offshore cash holdings. However, funds repatriated in Q1 have been associated with a dramatic increase in share buybacks only. And, evidence of an increase in investment is less clear at this stage.
After the passage of the TCJA, hare buybacks spiked dramatically for the top 15 cash holders, which accounted for roughly 80% of total offshore cash holdings.
However, there is no obvious spike in investment among the top 15 cash holders in Q1 relative to the previous quarter.
And, the top 15 cash holders were net sellers in 2018:Q1, with their total securities holdings, mostly in US fixed-income securities, falling by about 3 percent of their total assets.
In an interview with MarketPlace, Minneapolis Fed President Neel Kashkari openly reiterated his view that Fed is “raising interest rates too aggressively”. And he warned that “we might keep raising interest rates and the economy can’t take it and we put the country into recession.” And for now, he added that “I don’t see any indication that we’re running above potential so let’s let it keep running and if we start to see signs that it’s overheating we can always raise rates then.” Kashkari admitted there an “honest disagreement about this very fundamental question” with his Fed colleagues.
He also pointed out Fed got “scarring” from financial crisis. And the bigger one was from the “inflation of the 1970s”. The scarring is the reason so biased towards high inflation. While Fed said it’s having a “a symmetric view of inflation”, in what it actually does, Kashkari said, “we are much more worried about high inflation than we are low inflation.”
On the cause of the next financial crisis, Kashkari said it could be “a spark in emerging markets” like Turkey. Or it could be Fed, overdueing interest rates or overdoing interest rates. And, “it could be something coming from the trade battles that are being taken right now.
Canada-US trade talk is set to resume today. Ahead of that, Canadian Prime Minister Justin Trudeau appears to be firm on his negotiation stance. He reiterated that “No NAFTA is better than a bad NAFTA deal for Canadians and that’s what we are going to stay with.” And to him, “there are a number of things we absolutely must see in a renegotiated NAFTA.”
One of them is the Chapter 19 dispute resolution mechanism, which Trump is keen to scrap. Trudeau said “we will not sign a deal that is bad for Canadians, and quiet frankly, not having a Chapter 19 to ensure the rules are followed would be bad for Canadians.”
Separately, Mexican Economy Minister Ildefonso Guajardo said he hope there will be “white smoke” for this Friday, as there will be an agreement between the US and Canada. That would pave the way to completing the original trilateral NAFTA.
Dollar remains the strongest one today , followed by Yen and then Sterling. On the other hand, New Zealand Dollar is the weakest one, followed by Canadian Dollar and then Swiss Franc. The greenback attempted to extend recent rise after super strong ISM manufacturing index. However, firstly, EUR/USD managed to rebound after touching 1.529 minor support. USD/JPY showed no reaction and stays in range of 110.68/111.82. USD/CHF is also held blow 0.9775 minor resistance. For now, there is no confirmation of underlying strength in the greenback yet. More is needed to trigger a decisive rally, possibly NFP later this week.
In other markets, a notable development in the surge in US treasury yields. At the time of writing, 30 year yield is up 0.051, 10 year yield up 0.044, and five year yield is up 0.035. That is, yields rise more in the long end. That’s a development that Fed hawk would like to see. in the stock markets, US indices are in red with DOW down -0.34%, S&P 500 down -0.4% and NASDAQ down -0.56%. Declines in the European markets were much more serious, with CAC down -1.13%, DAX down -1.1% and FTSE down -0.62%.
Dollar rally accelerates on much stronger than expected manufacturing data. ISM manufacturing index rose to 61.3 in August, up from 58.1 and beat expectation of 57.8. That’s also the highest level since May 2004. Prices paid index dropped to 72.1, down from 73.2 and missed expectation of 74. Employment component improved 2 points from 56.5 to 58.5.
ISM noted in the released that
At the Inflation Report at the UK Parliament, BoE Governor Mark Carney indicated that he’s willing to stay longer at the central bank. He said it’s a “critical period” and it is “important that everyone does everything they can to help with the transition of exiting the European Union”.
He added that “even though I have already agreed to extend my time to support a smooth Brexit, I am willing to do whatever else I can in order to promote both a smooth Brexit and an effective transition at the Bank of England.”.
Carney also indicated that he has already discussed this issue with the Chancellor, Philip Hammond, and he expects an announcement to be made in due course. It’s generally taken as a hint that Carney will stay beyond June 2019, when the current term expires.
On Brexit, Carney said it’s unlikely for exiting EU without a deal. And, for now the UK economy is operating as if there will be a deal, with less than 20% of business putting in contingency plans.
Regarding impact of “no-deal” Brexit, Chief Economist Andy Haldane says it would be a “material rise in the cost of things in the shops”, particularly imported products. And that would be due to a weaker pound and higher tariffs. Haldane added that the impact could last for a few years, as history shows.
RBA Governor Philip Lowe warned of a number of international uncertainties at in his remarks at the RBA board dinner today.
He said escalation in trade disputes would “materially affect trade flows and investment plans around the world.”. And he emphasized that “as a country that has benefited greatly from an open rules-based international system, Australia has a strong interest in this not happening.”
Another risk is “material lift in inflation” in the US. Past experience of “large fiscal stimulus” when economy is at full employment with fast growth suggests that could “lead to inflation increasing significantly.”
Also, RBA is monitoring carefully the financial and economic problems in a number of emerging market economies with structural or institutional weaknesses, including Turkey, Brazil and Argentina.
ECB Governing Council member Klaas Knot urged that risk must be reduced before the Eurozone banking union is shared more widely among member states. The measures under the union include bank deposit insurance scheme and streamlining liquidity provision for banks under resolution. Knot argued that “these elements all imply more public risk-sharing in (the European Monetary Union) as liability for bank failures in other countries is shared at the European level.” And he emphasized that ” risk-sharing should be preceded by sufficient risk-reduction.”
Separately, another Governing Council member Vitas Vasiliauskas reiterated the call for an “EU-wide banking union”. And he said that “allow for a centralized supervisory approach for all of the EU’s largest systemically important banks, regardless of host-country membership in the monetary union.” Also, he added that “we need to do a better job at convincing decision-makers in non-euro area countries to enter into the “close cooperation” regime (with the ECB).”
Entering into US session, Dollar is trading as the strongest one for today. A wave of buying flushed into markets in European session. But the greenback’s rally somewhat stalled quickly. Yen is trading as the second strongest while Sterling is the third. On the other hand, New Zealand Dollar’s selloff resumes today. Canadian Dollar and Euro are the second and third weakest ones.
In other markets, European stocks are are trading generally lower. DAX is down -1.35% while CAC is down -1.57% at the time of writing. FTSE is down -0.54%. Earlier today, Asian markets strengthened towards the end of the session as led by China. The Chinese SSE rose 1.1% to close at 2750.58. Hong Kong HSI rose 0.94% and Singapore Strait Times rose 0.10%. Nikkei closed much earlier and didn’t catch the ride, closed down -0.05%.
Immediate focus in early US session as BoE Governor Mark Carney’s parliamentary hearing. The most interesting question is whether he’ll stay after his term expires next year. US ISM manufacturing will catch a lot of attention too.
ActionForex.com was set up back in 2004 with the aim to provide insightful analysis to forex traders, serving the trading community for over a decade. Empowering the individual traders was, is, and will always be our motto going forward.
Contact us: contact@actionforex.com
© ActionForex.com © 2024 All rights reserved.
Mid-US update: Sterling stays up after fake Brexit news volatility
Sterling had a wild wide today. It’s firstly lifted by a Bloomberg report that Germany and UK dropped key Brexit demand, paving the way for a deal. But then, the Pound was knocked down after a German government spokesman said that the stance was not changed. After all the volatility, the Pound is trading as the second strongest one for the day so far, next to Kiwi and better than Euro. Euro is clearly supported by sharply narrowed Italian-German yield spread. Italian politician’s promise for not blowing up the public account was well taken by investors.
On the other hand, Dollar is trading as the weakest one for today after yesterday’s rally attempt failed. Canadian Dollar followed as the second weakest. BoC’s standing pat was widely expected. The statement showed much confidence in policymakers and BoC is still on track for an October hike. But the Loonie is troubled by the deadlock in trade negotiation with the US. Yen got little support from risk aversion and is trading as third weakest. Rebound in German yield is a factor contributing to Yen’s sluggishness.
In other markets, US stocks are rather steady. DOW is up 0.04% at the time of writing, S&P 500 down -0.37% and NASDAQ down -1.06%. That’s nothing comparing to -1.0% fall in FTSE, -1.39% in DAX and -1.54% in CAC.