Rates: End to Summer trading lull
Yesterday’s US Labour Day traditionally marks the end of the Summer trading lull with volumes set to increase again from now onwards. Risks to the US manufacturing ISM are on the upside of expectations. US Treasuries could suffer with this month’s FOMC meeting and new dot plot in mind. Or will stress on EM or Trump’s trade war interfere again.
Currencies: Dollar going nowhere. Uncertainty provides tentative downside protection
Today, the US manufacturing ISM and the next steps in the trade conflict might turn out to be a tentative positive for the dollar. However, the US currency doesn’t look like preparing a clear directional break-out. Sterling reversed a big part of last week’s rebound as the political rift on brexit persists and as UK eco data are unconvincing
The Sunrise Headlines
- US stock markets were closed yesterday due to a national holiday (Labour Day), but are back in business today. Asian markets opened all but some in the negative this morning, with Japan underperforming.
- Argentina’s president Macri has admitted his country faces an “emergency’ in the wake of market panic after the collapse of the peso. He unveiled a new austerity programme to win over international investors and bailout lenders.
- Italy’s Deputy Prime Minister Matteo Salvini and his League party will commence budget talks today. On Sunday he said the deficit will ‘touch’ EU’s 3%-limit, but yesterday he announced to respect all the rules.
- The Reserve Bank of Australia kept its policy rate at a record low of 1.5% today, as expected. The Australian dollar dropped 10% since February but showed little sign of recovery on the news.
- Japan’s Prime Minister Shinzo Abe repeated yesterday that he will continue “by all means” with next year’s scheduled sales tax hike and take steps to soften an expected hit to consumption from the higher levy.
- US President Trump has yesterday abruptly cancelled his Labour day plans to “make some calls on trade and other international issues”. The president is preparing the continuation of trade talks with China and Canada this week.
- Today’s eco calendar contains the August manufacturing ISM. Bank of England’s Carney, Haldane, Tenreyro and Saunders speak in London. Germany taps the (I/L) bond market.
Currencies: Dollar Going Nowhere. Uncertainty Provides Tentative Downside Protection
Dollar awaiting next steps on trade spat
On Monday, the dollar held tight ranges and in low volume trading as US markets were closed. There was little news on the global trade issues. The EMU manufacturing PMI was confirmed at 54.6, but details from individual countries, especially Italy, were unconvincing. Still they didn’t hurt the euro. EUR/USD hovered in a tight range mostly slightly north of 1.16. USD/JPY (close at 111.07) reversed an earlier dip. This morning, Asian markets are trading little changed. Markets especially look out for the next steps in the US trade policy. Caution prevails on most EM. EUR/USD is going nowhere (1.16 area). USD/JPY reversed an earlier dip as the BOJ step up the amount of JGBS purchases with short maturities. The RBA left its policy rate unchanged at 1.5%. The Bank kept a constructive tone on the economy but maintains a neutral policy bias. Today, the EMU calendar is thin. US investors receive the ISM manufacturing as they return from a long weekend. The headline ISM is expected to hold at a solid 57.6 (from 58.1). However, FX markets reacted only modestly to US data of late. The focus remains on US trade policy. Investors are looking out whether a constructive deal can be found with Canada and whether the president Trump will impose additional tariffs on Chinese imports. Uncertainty on trade recently weighed on markets outside the US and was tentatively supportive for the dollar. The USD correction from late August slowed last week. The EUR/USD rebound was blocked in the low 1.17 area. Eco fundamentals and uncertainty on trade are in theory USD supportive. We assume a EUR/USD break beyond 1.1791/1.1850 to be difficult as long as trade tensions persist. We keep a cautious negative bias on EUR/USD.
Yesterday, sterling came again under pressure as UK domestic discord on brexit returned to the forefront and as the UK manufacturing PMI unexpectedly declined to 52.6. EUR/GBP jumped back above 0.90. Overnight, BRC like for like sales slowed to 0.2% Y/Y (from 0.5%). Later today, BoE’s Carney and other MPC members will testify on the August BoE inflation report and policy decision before parliament. One can expect the BoE to give a balanced assessment defending the rate hike. However, the next BoE step is probably still quite far away. We expect little support for sterling. The 0.91 area remains the next point of reference in case sentiment on sterling deteriorates further
EUR/USD awaiting guidance from next steps in US trade policy
