Markets
The spotlight was on dollar cross rates today after yesterday’s technical breaks through support levels. The audience wasn’t rewarded with a spectacular act though. The greenback’s sell-off didn’t accelerate, but the US currency failed to strengthen its back as well. The outcome was a narrow-range sideways trading session near yesterday’s lows (in USD terms). The trade-weighted dollar for example gyrated between 92.20 and 92.40, holding below 92.52 (previous) support. The mirror image for EUR/USD was flipflopping roughly between 1.1925 and 1.1950, nevertheless holding above (previous) EUR/USD 1.1916 resistance. Cable was exception to the rule. The cross rate outperformed yesterday, causing sterling to return some of those gains. The combination of GBP/USD losses and EUR/USD’s flatline triggered some technical gains in EUR/GBP with the pair rising from 0.9010 to 0.9040. Investors ignored higher-than-expected UK July inflation data. Headline (1% Y/Y) and core inflation’s (1.8% Y/Y) increase is probably short-lived. An absence of seasonal sales and higher fuel costs caused the July increase. A sales tax cut and meal discount scheme will kick in from next month. Market thus rightly so didn’t draw conclusion from higher CPI data about the Bank of England’s future policy stance. The BoE remains firmly in easing mode.
The dollar’s breathing space came even as US (real) yields continued their decline. The US 10-yr yield falls from -1.02% to -1.05% and nears the recent (and historic) low of -1.08%. Nominal yield changes vary between 0.8 bps (2-yr) and 3.8 bps (30-yr), bull flattening the yield curve. US Treasuries outperform German Bunds today. Daily changes on the German yield curve range between flat (2-yr) and -1.1 bp (30-yr). The very long end of the German curve is well bid after a stellar German 30-yr Bund auction. The 2.9 bid cover (€1.25bn: yield -0.05%) was the highest for at least 20 years. US Treasuries’ outperformance is probably related to tonight’s publication of FOMC Minutes of the July meeting when the Fed tied the path of the recovery to the path of the coronavirus. Powell suggested further support by adjusting forward guidance or asset purchases. In this respect, Minutes could give us some flavor of potential upcoming action. August data weren’t really shiny (apart from housing market) up until now while governors warned for a W-recovery. Possibilities include the introduction of explicit yield caps (curve control) or coupling forward guidance to explicit targets for employment and/or inflation. (US) bond markets are in any case positioned for a period of slow/no growth coupled with an extended (liquidity) presence by the Fed. Positive risk sentiment on stock markets was a second factor which in theory could have hurt the dollar, but in practice didn’t. European stock market gain up to 1%. US stock markets open marginally positive.
News Headlines
The World Trade Organization said today its goods trade barometer plunged to a record low (84.5 where 100 represents in-line trend growth) in June. The reading suggests trade registered an equally unprecedented fall of world trade in the second quarter. The WTO also said that additional, high-frequency indicators point at upticks in world trade and output Q3, adding however that the strength of such a recovery remains highly uncertain.
Canadian inflation stagnated July, coming in at 0% m/m vs. 0.8% in June and 0.4% expected. The year-on-year measure again dipped to 0.1% as low oil prices dragged the headline index down. Core measures were little changed with the median core CPI stabilizing at 1.9% y/y. The Canadian loonie reacted muted in the USD/CAD 1.315 area.
WH Chief of Staff Meadows repeated comments overnight from US senior officials there’s a possibility for a smaller stimulus deal with the Democrats, totaling $500 billion. The deal would only encompass issues where an agreement can be found such as school funding and unemployment benefits. Speaker of the House Pelosi earlier suggested to compromise on the Democrats’ $3.5 tn proposal and come back after the elections to discuss areas of disagreement.
