Only one story dominated markets yesterday and it wasn’t the pontificating of Monetary Policy Committee members on interest rates and the state of the UK economy. The news that a Russian jet had been downed by Turkish forces set markets on edge and hyped up fears that the mishmash of coalition forces, the Free Syrian Army and the Russians are not able to bring about a sufficient level of coordinated violence against ISIS with a disparate command and control structure.
The strength of the USD was all apparent yesterday as it pressed EURUSD below the 1.06 level for the first time since April. The greenback also gained against sterling as investors bet on GBP weakness ahead of a testimony by Mark Carney and three other members of the Monetary Policy Committee.
This weekend was certainly the quietest in a while with little market-moving news.
That lack of news has been echoed through the overnight session and as we open up in Europe a very familiar sight is on show. The US dollar is running higher across the board as investors and traders – who had let the currency weaken towards the end of last week – now choose to pick up the Greenback.
Lost ground last week as the ECB reaffirmed the possibility of further stimulus at the upcoming December meeting and the FOMC Meeting Minutes showed division on a number of issues among members. The week began with the rate selling off on Monday after ECB President Draghi stated that, “If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate”. Monday data had Eurozone Final CPI increase +0.1% y/y compared to 0.0% expected, while the U.S. Empire State Manufacturing Index printed at -10.7 versus -5.3 anticipated. The pair extended its losses on Tuesday despite German ZEW Economic Sentiment printing at 10.4 versus expectation of 6.7, nevertheless, Eurozone ZEW Economic Sentiment printed at 28.3 compared to an expected reading of 35.2. Tuesday’s U.S. numbers had CPI and Core CPI, which both increased +0.2% m/m, in line with expectations.
Hiking into a period of calm
The dollar sell off that was expected following Wednesday’s Federal Reserve minutes continued yesterday and through the Asian session overnight. This is not a sudden fearful jettisoning of the dollar as a result of collapsing inflation or interest rate expectations but more of a slimming of the positioning that has so marked currency markets for months now.
Dovish hike is coming
The US dollar is on the back foot this morning as markets have begun to look past what will take place at the Federal Reserve’s meeting on December 16th and have now moved to focus on the shift in policy that will occur in the coming years i.e. how quickly subsequent rate rises are also added to the pot.
In minute detail
The dollar’s rise and the euro’s fall continued yesterday as markets prepared themselves for the publication of the most recent set of Federal Reserve minutes.
ECB comments keep pressure on EUR
As the world continues to focus on Paris, Belgium and the Western response to Friday’s terrorist attack, the impact on financial markets is already starting to fall away somewhat. That being said, the euro is very much on the back foot as we open up this Tuesday morning.
Paris overshadows everything
Friday’s events in Paris have thrown a lot into sharp focus. The airwaves and front pages of our national dialogue are set to remain tuned to the prospects of fear, suspicion and, perhaps, retaliation, but for now we must continue to remember those who perished on Friday night while simply trying to enjoy a night with friends and family.
Gained a fraction last week as ECB President Mario Draghi acknowledged the chance of further stimulus in December and as the Greenback consolidated at a slightly lower level after last week’s positive employment numbers. The rate began the week on a positive note, gaining a fraction on Monday in the absence of any significant economic data out of either economy. The pair then made its weekly low of 1.0673 on Tuesday after comments from ECB governing council member Erkki Liikanen, who said that the governing council “is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation.”
Sterling has managed to retrace its Quarterly Inflation Report losses in the past week despite a poor wage number in its most recent report of the jobs market.
Unemployment as a measure continued its recent declines to 5.3% – the lowest level since May 2008 – but wages, on which so much depends heading into 2016, saw their growth slow.
The actual internals of the UK jobs market remains strong and I’m pretty comfortable in our belief that what little slack is left in the UK economy will be taken up within the first six months of 2016 as GDP continues to expand.
The fall in pay is a concern, however, and will certainly add fuel to the fire that GDP slowed through the third quarter of this year. In the short term, and certainly between now and the first Bank of England rate rise – whenever that may be – wages are being used by macroeconomists as a good proxy for future inflation and spending growth. With low inflation from a strong pound and a weak oil price, wages can start an inflationary move higher through 2016 – or that is the hope anyway.
There was nothing in this release that makes me want to change our thoughts of a change in interest rates at the May Monetary Policy Committee meeting but a continuation of a soft wage pattern will have a delaying effect.
Unfortunately, the effects of what happened in Paris last Friday night are set to loom over the UK in the short term as well. It is not insensible to think that the events of November 13th will see a shift in opinion polls on the EU referendum and therefore could see a delay to any vote in 2016 by Cameron if he feels that he is fighting a losing battle.
That being said, there is an argument to suggest that the EU may feel the need to allow Cameron further concessions on Britain’s membership of the European Union at a time where stability and cohesion is valued increasingly more.
Pricing the risk of the European referendum is a thankless task at the moment. It is an obvious weight on sterling over the next two years but assigning that to the price is almost impossible in the short term.
The uncertainty has started to bleed through to options markets with the cost of protecting against sterling downside increasingly becoming more expensive. The Bank of England’s dovishness within its Quarterly Inflation Report started the decline but the referendum will continue it. Of course, without a date for the actual referendum there will be a general increased cost of protecting against sterling downside. Once a date is announced, hedges set up for after that date will become more expensive.
For now sterling remains the slave of two masters; higher employment and increasing wages that will stoke the flames of the economy and should lead to a tightening of monetary policy from the Bank of England will have to battle against fiscal tightening from the Conservative government in the form of spending cuts. The referendum will only weigh further.
Have a great week.
Dropped sharply last week as the ECB gave indications of further easing and the United States reported a better than expected Non-Farm Payrolls number. The NFP number drove expectations of a Fed December rate hike up to 70% on Fed Funds rate futures. The week began on a soft note, with the pair declining off its weekly high of 1.1052 on Monday after Spanish Manufacturing PMI printed at 51.3 compared to an expected reading of 51.9, also, U.S. ISM Manufacturing PMI printed at 50.1, in line with expectations. The rate extended its loss on Tuesday despite U.S. Factory Orders, which declined -1.0% m/m versus -0.8% expected and after comments from ECB President Draghi, who stated, “the degree of monetary policy accommodation will need to be re-examined at the Governing Council”s December meeting,” adding that, “The Governing Council is willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation.”.
Lost a fraction last week as the FOMC released a more hawkish than expected statement and with mixed economic numbers out of both economies. The week began with the pair gaining on Monday after German Ifo Business Climate edged expectations printing at 108.2 compared to 108.1 forecast, also, U.S. New Home Sales declined to an annualized 468K versus 546K expected. The rate then lost a fraction on Tuesday despite U.S. Core Durable Goods Orders, which declined -0.4% m/m compared to an expected flat reading, while Durable Goods Orders fell -1.2% m/m versus -1.1% anticipated. On Wednesday, the pair tumbled, making both its weekly high of 1.1095 and its weekly low of 1.0896 after the FOMC left its benchmark Fed Funds Rate at the historical low of 0<0.25% as widely anticipated.
Declined sharply last week after the ECB left rates unchanged, and despite mostly positive economic numbers out of the Eurozone. The week began with the pair losing a fraction on Monday in the absence of any significant data out of either economy. The rate then made its weekly high of 1.1386 on Tuesday after U.S. Building Permits printed at 1.10M compared to 1.16M expected, but Housing Starts expanded to 1.21M versus 1.14M expected. On Wednesday, the pair consolidated at a slightly lower level ahead of the ECB rate decision.
EUR/USD Lost a fraction last week as the ECB left rates unchanged and the United States reported a lower than expected Non-Farm Payrolls number and Unemployment Rate. The week began on a positive note, with the pair gaining on Monday after German Retail Sales increased +1.4% m/m compared to a previous reading of -1.0 downwardly revised from -2.3%. Also out were EZ CPI Flash Estimate, which increased +0.2% y/y and Core CPI Flash Estimate, which increased +1.0% y/y, both as widely anticipated. The rate continued higher on Tuesday, making its weekly high of 1.1331 after the Eurozone Unemployment Rate declined to 10.9% from 11.1% and German Unemployment Change, which came out at -7K versus -3K expected. U.S. numbers had ISM Manufacturing PMI print at 51.1 compared to an expected reading of 52.6. On Wednesday, the pair weakened despite U.S.
Protect your International Currency Transfer from Events like ‘Black Monday’ with Risk Management Strategies
Just as financial markets began to recover from months of ‘Grexit’ fears and investors started focusing on rate hike speculation again, there was another asset-shaking shift in the form of ‘Black Monday’.
The state of China’s economy and the slowing pace of growth in the nation has been a growing cause of concern, but a six-year low Manufacturing PMI proved the catalyst for a dramatic tumble in Chinese stocks. The over 8% slide in the Shanghai Stock Exchange triggered losses in European and US stock markets so extensive that traders were reminded forcibly of the early stages of the global financial crisis.
Heavy selling in financial markets saw the AUDUSD fall more than 2% overnight as global financial markets experienced heavy selling.
The steep losses in Chinese markets yesterday were the main driver of the Aussie’s fall as equity markets around the globe collapsed.
The largest losses were against the lowest-yielding currencies like the euro and Japanese yen. The AUDEUR fell 4.0% yesterday while the AUDJPY fell an incredible 8.3%.
In the near term, a continuation of the panic selling could easily see the AUDUSD trade below 0.7000.
Over the medium term, however, the Aussie could drift back higher – especially if the US Federal Reserve decides the global panic warrants a delay to any US interest rate increase.
Two charts that show the woe for emerging market currencies despite a pause in the devaluation of the renminbi, the cause of turmoil across global currencies.
The implications — among them a more troubled Chinese economy than previously thought, deflationary strains in western countries and falling equity stocks — are being felt mostly by China’s regional trading neighbours and other emerging markets.
xtended its previous week’s gains last week as the world economic situation — which began with China’s Yuan devaluation and subsequent stock market crash — and the FOMC Meeting Minutes further reduced the possibility of a September rate hike by the Fed. The rate began the week on a soft note, declining on Monday despite the U.S. Empire State Manufacturing Index, which declined -14.9, significantly worse than the expected increase of +5.0 that was expected. The pair made its weekly low of 1.1016 on Tuesday after unofficial reports that the Greek government was to announce a confidence vote, which could raise uncertainty on the bailout deal with international creditors.
FX markets remain skittish a few hours after New York traders walked in. Oil prices are trading heavy, US stock futures are soft and there aren’t any US data releases to put a bridge over troubled waters. That should keep USDCAD pointing higher for the balance of the day. So much for a sleepy Monday morning.
It was a panic driven overnight market. USDCAD smashed through resistance in the 1.3200-10 area and continued to climb, finally running out of gas at 1.3270. The Shanghai Composite Index plunged 8.5%, sparking a risk-aversion stampede which boosted EUR and JPY while crushing commodity bloc currencies.
Gained ground last week as the Greenback and commodity currencies were negatively affected by the Chinese Yuan devaluation, while the Euro and Sterling ended the week as the strongest major currencies. The week began with the rate rallying after making its weekly low of 1.0925 on Monday after comments from the Fed’s Stanley Fischer, saying that, “Employment has been rising pretty fast relative to previous performance, and yet inflation is very low, and the concern about this situation is not to move before we see inflation, as well as employment, returning to more normal levels.”
China’s central bank has raised the value of the yuan against the US dollar by 0.05%, ending three days of falls in a surprise series of devaluations.
The daily reference rate was set at 6.3975 yuan to $1.0, from 6.4010 the previous day, the China Foreign Exchange Trade System said. That was also slightly stronger than Thursday’s close of 6.3982 yuan.
The higher fixing for the yuan came after the People’s Bank of China (PBoC) sought to reassure financial markets by pledging to seek a stable currency after a shock devaluation of nearly 2% on Tuesday.
The cut, and two subsequent reductions, rattled global financial markets – raising questions over the health of the world’s second-largest economy and sparking fears of a possible currency war.
Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan, also known as the renminbi (RMB).
Previously authorities based the rate on a poll of market-makers, but will now also take into account the previous day’s close, foreign exchange supply and demand and the rates of major currencies.
The yuan is still only allowed to fluctuate up or down 2% on either side of the reference rate.
“Currently there is no basis for the renminbi exchange rate to continue to depreciate,” PBoC assistant governor Zhang Xiaohui said on Thursday.
“The central bank has the ability to keep the renminbi basically stable at a reasonable and balanced level,” she said.
Speaking earlier this week another PBoC official said the central bank could directly intervene in the market, after reports it bought yuan on Wednesday to prop up the unit.
“The central bank, if necessary, is fully capable of stabilising the exchange rate through direct intervention in the foreign exchange market,” PBoC economist Ma Jun said.
China keeps a tight grip on its currency on worries sudden fund outflows or inflows could cause more financial risk and challenge its control, but it has also pledged to move towards more flexibility.
Beijing is pushing for the yuan to become one of the reserve currencies in the International Monetary Fund’s special drawing rights (SDR) group.
China surprised markets and devalued the yuan by 2%, the first devaluation in 20 years. Asia FX traders bought dollars across the board but those moves started to retrace in Europe, except for the Commodity bloc). As of 6:15 am PDT, Aussie was the biggest loser (down 1.2%) followed by kiwi (0.75%) and then the Canadian dollar.(0.60%)
The move, coming as economic growth has flagged and the currency has been under upward pressure from its informal peg to the rising dollar, is in sharp contrast to policy during earlier times of stress when Beijing resisted pressure to devalue. It should help combat an unexpectedly large fall in China’s exports fuelled by the renminbi’s relative strength.
Declined fractionally last week as the United States reported a slightly lower than expected Non-Farm Payrolls number with both economies reporting mixed economic data. The rate began the week on a soft note, declining from its weekly high of 1.0995 on Monday after Spanish Manufacturing PMI printed at 53.6 versus 54.2 expected, while U.S. ISM Manufacturing PMI printed at 52.7 compared to an expected reading of 53.6. The pair continued lower on Tuesday despite Spanish Unemployment Change, which declined -74.0K compared to an expected -45.6K. U.S. data included an increase in Factory Orders of +1.8% m/m, which was widely anticipated. On Wednesday, the rate consolidated at a slightly higher level after U.S. ADP Non-Farm Employment Change increased +185K compared to an expected +216K, also, the U.S. Trade Balance showed a deficit of -43.8B versus an expected -42.8B and ISM Non-Manufacturing PMI, which printed at 60.3 versus 56.3 anticipated.
USDCAD Range 1.3115-1.3210
USDCAD touched 1.3210 in Asia, hovered around 1.3200 throughout the European session and collapsed in early New York trading on a combination of soft ADP employment data and a surprisingly strong Canadian Merchandise Trade report. June exports soared 7.1% and the trade deficit declined to a mere $500 million from the May deficit of $3.34 billion.
There is no doubt that the Canadian data is strong which suggests that maybe the expected recovery in the 2nd half isn’t a fantasy but a real possibility. Having said that, USDCAD isn’t trading like anyone actually believes that a Canadian recovery is close. The drop from 1.3180 to 1.3115 was more a factor of weak long dollar positions getting squeezed than anything else.
The Asian session saw a continuation of the New York afternoon US dollar strength due to The Wall Street Journal’s story that Atlanta Fed President, Lockhart, a doveish, but non-voting member of the FOMC turned hawkish and championed a rate hike in September.
The European session was quieter. Perhaps those traders weren’t nearly impressed with Lockhart’s comments as everyone else. He has said similar things before and there are still two NFP reports ahead of the September FOMC.
Today’s softer than expected ADP data may temper bullish NFP calls and lead to a bit of US dollar profit taking. If so, USDCAD will likely consolidate within a 1.3050-1.3200 range.
The intraday technicals are bearish following the retreat from 1.3210 and the subsequent break of minor support at 1.3150. A break below 1.3100-10 would lead to a test of 1.3050. Meanwhile, the short term uptrend is still intact while trading above 1.3000. For today, USDCAD support is at 1.3110, 1.3080 and 1.3050. Resistance is at 1.3160 and 1.3210
Today’s Range 1.3080-1.3160