ECB hawks derailed and out of the picture
June 7, 2019
The euro saw some wild swings of volatility yesterday around the European Central Bank meeting as a hawkish rate statement was followed by moments of dovish reckoning during the press conference. The issued rate statement disclosed a higher rate than expected on the the Long Term Refinancing Operations ECB loan program. The rate was set 10 basis points above the deposit rate, which made for less generous LTRO lending conditions than markets originally betted on. Simultaneously, the press document said the ECB would keep rates “at their present levels” until the first half of 2020, which created the impression rate cuts were off the table for the near future. However, during the press conference, it turned out that not one, but several Governing Council members, had raised the topic of cutting rates and/or restarting the Asset Purchasing Programme. This was a slap in the face for the hubristic euro that so buoyantly rallied after the statement. The single currency consequently dropped quickly, although some gains it managed to hold on to in the end. This morning the euro finds itself under renewed pressure after Germany’s Industrial production fell by 1.8% month on month in April, sending off a strong signal this sector will likely contribute negatively to Q2 economic growth.
Sterling continues to sit relatively flat against the dollar, not following big movements seen elsewhere in the G10 FX space against the greenback. The pounds standstill can also be attributed to slow political developments. Theresa May is expected to submit her resignation letter to the 1922 committee today, but remain acting Prime Minister until a new leader of the Conservative party is announced on the week commencing July 22nd. In Peterborough’s by-election, things arguably got worse for the Tory party, who came third behind Labour and the Brexit party. Over the weekend, the political newsflow is expected to speed up as nominee’s for the leadership race scramble for the support from 8 MPs before the list of nominations closes on Monday.
It has been a big week for the US dollar after remaining under pressure from the slew of dovish Federal Reserve speakers. The DXY index has fallen over half a percentage point this week, driven by aggressive repricing of the US yield curve in the Fixed Income space. This week’s dollar move has built up to today’s nonfarm payroll release, which is arguably the most significant US labour market release in years. With soft production indices declining, inflationary pressures moderating and trade tensions rising, many analysts are calling for an insurance rate cut by the Fed to soften the likely slowdown of the US economy. How the US labour market withstands the external pressures will prove key. Today’s release may be too early to tell how the US economy is holding up, but it has increased market attention regardless. Thus far this week, the ADP measure of employment shocked significantly to the downside suggesting the American economy only added 27k jobs in May, whereas the Fed’s beige book pointed towards resilient business conditions in light of increasing trade tensions. Today’s release will prove pivotal for the dollar, however, as the market seeks further guidance through the stormy conditions whipped up by the Trump administration. Has the market got ahead of itself in pricing an insurance rate cut from the Fed, or is it completely justified as economic conditions begin to show signs of deteriorating? All we know for now is that today’s NFP release will add another piece to a puzzle which has many gaps before the true picture is revealed.
The loonie nested comfortably in the middle of the G10 currency board yesterday, just like the day before, but nevertheless managed to slowly creep to the front and is now the second best performing G10 currency this week so far. Yesterday Canada’s trade deficit turned out to have further narrowed to $966 million in April, from $2.3 billion in March. The drivers behind this were higher exports, led by gold exports, while imports declined simultaneously. Today Labour market data will be out at 13:30 BST, with the Employment Change, Unemployment rate and Average Hourly Earnings. This data will tell us more about whether the dovish bias that markets currently price in for the Bank of Canada is sustainable. A rate cut by October is currently priced in for more than 50% by futures markets.