Markets
US Labour Day Holiday paralyzed trading yesterday. EUR/USD extended its slow slide lower towards the September low (EUR/USD 1.1781), but remains above the 1.18 big figure. FX traders eye Thursday’s ECB meeting. Chief Economist Lane last week raised the importance of that gathering by stressing that the euro-dollar rate matters when setting policy. Euro strength will trigger a downgrade of ECB inflation projections. Actual headline (negative for the first time since 2016) and core inflation (lowest since creation EMU) printed at depressing levels. Those unusual FX comments by an ECB heavy weight prevented EUR/USD from piercing through 1.20. ECB Chair Lagarde will be grilled on the matter during the Q&A-session, but the ECB probably has little room left to stop the euro’s rise. They refrained from cutting the deposit rate deeper into negative territory at several occasions, they cast doubt on using PEPP’s full fire power and want emergency support to be scaled back as soon as the COVID-19 crisis ends. The Euribor 3m forward curve trades around 5 bps below the current deposit rate, highlighting slim odds of an additional cut. Since the ECB addressed the coronacrisis with its PELTRO’s (pandemic emergency longer-term refinancing operations), actual 3M Euribor rates declined from -0.2% in May to an all-time low of nearly -0.5% at the end of August. The actual 3m Euribor rate even trades below EONIA at the moment.
The US Treasury’s mid-month refinancing operation could offer some counterweight for EUR/USD. Last month around, the 3-10-30y auction series caused bear steepening of the US yield curve, granting some support for the greenback. The Treasury starts tonight with a $50bn 3-yr Note sale. The US 10-yr yield in those circumstance could move towards the upper end of its sideways trading band (0.8% area). Apart from US supply, the eco calendar only contains US NFIB Small Business Optimism (August).
Asian stock markets eke out gains of around 0.5% this morning. US President Trump makes the headlines once more. On the one hand, he is campaigning on decoupling the US economy from China. On the other hand, he raised the prospect of rolling out a COVID-19 vaccine as early as October. The dollar trades a tad stronger this morning. EUR/GBP treads water in the high 0.89-area. UK chief Brexit negotiator Frost warned that time is running short to get a trade agreement by the October 15 EU Summit. He meets with his European counterpart Barnier in London this week. Lack of progress could propel EUR/GBP back to where it more fundamentally belongs, above EUR/GBP 0.90.
News Headlines
US President Trump at a Labour Day News conference at the White House stepped up his rhetoric against China. The President again embraced the idea of a decoupling between the US and China economy. Trump indicated that in the future, his administration would prohibit federal contracts with companies that outsource to China. “Whether it’s decoupling, or putting in massive tariffs like I’ve been doing already, we will end our reliance in China, because we can’t rely on China,” Trump said. On the other side, China announced an initiative on Tuesday to establish global standards on data security, saying it wanted to promote multilateralism in the area at a time when “individual countries” were “bullying” others and “hunting” companies.
The Japanese economy in Q2 contracted by an annualized 28.1%, making it the steepest postwar decline in activity. Other data released today also indicate that the recovery at the start of the third quarter might be slow. July household spending declined by a bigger than expected -7.6% Y/Y. Recent rather soft data might put additional pressure on the New PM to take additional action to support the economy.
