The Canadian dollar traded on the back foot in the afternoon of yesterday’s European session as US oil inventories rose by 2.033m barrels and the Bank of Canada’s Governor, Tiff Macklem, highlighted that the central bank will step up its QE programme in the coming months. Oil markets barely budged on the inventory build, suggesting the loonie paid closer attention to Governor Macklem’s appearance at the Canadian Chamber of Commerce. Just a day after the BoC’s policy statement, Macklem’s appearance was a de facto press conference for markets, as the governor gave further clarity on policy. Macklem stated that the current stagnation in the Bank’s balance sheet was due to the maturation in Treasury bill purchases, which the central bank allowed to roll off of its balance sheet as the liquidity provision was no longer necessary in that market. Throughout the recuperation phase, the period of slow and choppy growth, Macklem highlighted that the QE programme would be more active in driving the recovery. In our view, the areas of focus are on the housing market with the purchases of mortgage-backed securities and the governing council’s reaction to the scaling back of labour market support measures. In addition to this, Macklem highlighted that the Bank is keeping an eye on the strength of the loonie, which could disrupt the recovery via less competitive exports. On inflation, questions arose due to the Fed’s latest switch towards an average inflation targeting framework, which Macklem stated the BoC is keeping a close eye on. With regards to its own framework review, set for completion in 2022, the Governor stated that there was no clear alternative to its current regime. This was to be expected seeing as inflation expectations actually rose in Q2 to 2.8% for the one-year period, whereas in the US they have been steadily declining away from the 2% target – hence the need to shift its inflation framework. Today, the loonie is enjoying the rally against the dollar along with the rest of the G10, sitting 0.18% higher as of writing.
The US dollar enjoyed another day out of the limelight yesterday, strengthening against sterling and weakening to the euro as markets focused on the European Central Bank and Brexit. Some of these moves have been pared back overnight. The US labour market recovery showed signs of stalling, as weekly jobless claims remained exceptionally high at 884,0000. Although net job creation has been robust in recent non-farm payrolls reports, with total employment still some 11 million jobs below its pre-crisis levels any slowdown in the recovery has the potential to create a very significant drag on aggregate demand in the economy. Senate Republicans failed to advance further stimulus measures, highlighting the risks of fiscal support being withdrawn until after the Presidential election. Today, the data calendar is light in the US with only the final reading of August’s CPI measure set for release.
The euro surged during yesterday’s ECB press conference, immediately regaining much of its recent losses against the dollar. Since then, the single currency has pared back some of its gains. The contents of yesterday’s press conference indicated the ECB was mildly optimistic, and no further expansions to asset purchases were imminent. Expansion of the current PEPP asset purchase program was not discussed, while inflation forecasts for next year were actually upgraded. Members discussed the exchange rate, but Christine Lagarde was quick to emphasize it was not a target of policy. These cookie-cutter statements would not be out of place in any central bank press conference. What was extraordinary about yesterday was the release, at about 13:31 BST, of an incendiary headline by Bloomberg that the ECB had agreed not to overreact to recent euro gains. This headline prompted yesterday’s rapid euro rally – at the time it was released and the euro rallied, Lagarde had barely begun her opening statement. This begs the question – should market participants watch ECB press conferences, or will market-moving information be released to selected media on an ad-hoc basis?
In yesterday’s session, sterling picked up where it left off on Tuesday and continued its nosedive with a 1.5% decline against the dollar and 1.61% fall against the euro. Brexit developments came thick and fast yesterday, with both domestic politics and relations with the EU remaining in a state of turmoil over the UK internal markets bill published by the Government this week. On the international front, the EU continued to mobilise against the elements of the bill that breach last year’s withdrawal agreement, with the European Commission threatening legal action unless they are withdrawn. Cabinet Office Minister Michael Gove said the bill would not be withdrawn – but did not comment on possible removal of the offending clauses. This week’s trade talks concluded with no progress. On the domestic front, opposition with the Conservative party continued to build to the clauses, with The Times estimating that as many as 30 MPs could join a rebellion to amend the bill. With a majority of 80 in the House of Commons, the Johnson Government would need to lose more than 40 MPs to lose control of the process. The Bill will reportedly also face opposition in the House of Lords, with well-known pro-Brexit MPs Normal Lamont and Michael Howard speaking against the clauses. Data released this morning showed the UK economy expanding a solid 6.6% in July, the third consecutive month of recovery from the sharp contraction seen early in the second quarter. Despite the solid expansion, less than half of Q2’s output loss has been recovered.