Morning Report: 27 October 2017

October 27, 2017

GBP  Sterling remained out of the spotlight yesterday, as markets were focused on developments elsewhere. Nonetheless, sterling is downbeat today as Brexit negotiations talks in the UK are not showing signs of improvement, and broad inflation keeps biting real wages. No data will be released today in the UK, thus the pound’s movements are likely to be led by sentiment on other currencies.

EUR EURUSD has finally broken beyond the low of the last three months, as markets digested the European Central Banks announcement yesterday that they would actually increase the overall size of its monetary policy easing programme in the Eurozone. Although the ECB met markets expectations regarding the size of reduction of assets purchased per month, the extension of the termination date of the programme from March 2018 to September 2018 increases the overall spending commitments from €180bn to €270bn. Furthermore, the ECB also left the door open for further extensions of size and duration should the economy worsen in the euro area next year. The overall message was that the ECB are far less confident in the eurozones economic recovery than markets had assumed, and as a result, the euro is on the back foot against almost all major crosses this morning.

USD The dollar continues to strengthen against all other G10 crosses, as the US tax cut programme moved one step closer, giving markets confidence that the US economy is set for a medium term boost. Tech stocks in the US also moved sharply higher, after earnings sessions showed profits and sales beating expectations massively. This attracts flows to the US. Gross Domestic Product data will be released today at 13.30 BST. Markets expect a 2.6% reading in Q3, which would yet signal a further acceleration of economic growth in the US.

CAD The Bank of Canada’s concerns regarding the NAFTA negotiations could be well justified. Canadian Foreign Minister Chrystia Freeland said it will be difficult for NAFTA negotiators to reach a deal to renew the pact if certain parties press for a “winner take all” approach, without elaborating. The loonie continues to fall against the US dollar.

UK news

  • FT: Sturgeon calls on May to clarify Brexit transition deal Businesses making plans that will be ‘deeply damaging’ for Scotland’s economy. Nicola Sturgeon has demanded that Theresa May urgently clarify her plans for a Brexit transition deal, saying she is deeply concerned that businesses will soon start implementing contingency plans that would be “deeply damaging” for the Scottish economy. In an interview with the Financial Times, Scotland’s first minister said she was sending a letter to Mrs May asking whether the UK government was working to secure a transition deal maintaining current EU rules for at least two years by the end of the year. Ms Sturgeon has long opposed Britain leaving the EU, but she insisted that her intervention was not an attempt to obstruct Brexit. She said she was motivated to write the letter after hearing directly and indirectly of numerous companies who say they will need to act soon to mitigate Brexit-related risks.
  • FT: ECB’s slow retreat from QE buoys risk appetite. Central bank remains dovish as it struggles to hit inflation target while scaling back stimulus. At the very end of 2015, the European Central Bank clarified a seemingly mundane detail about the historic bond-buying programme it had begun earlier that year: the central bank would reinvest proceeds from maturing bonds. At the time, there was “basically no reaction”, president Mario Draghi recalled on Thursday that it was considered to be totally marginal. On Thursday, that detail was far from marginal. With the ECB having hovered up over €2tn of bonds under QE, its reinvestments of maturing debt — which Mr Draghi drew attention to at his press conference — will amount to hundreds of billions of euros over coming years and underlined just how entrenched asset purchases have become for the continent’s financial markets. “The fact that the ECB will continue to reinvest proceeds for some time after QE ends adds to the dovish read and in turn should be supportive for risk assets,” said Charlie Diebel, head of rates at Aviva Investors.
  • Market Watch: European stocks climb as ECB delivers open-ended tapering of bond purchases. ‘Dove camp is the clear winner’ at the ECB as Draghi says QE won’t suddenly stop, says Monex analyst. The ECB said it would reduce its monthly bond purchases by half to €30 billion starting in January, and extend the quantitative-easing program to at least September 2018. The reduction was anticipated as the eurozone economy continues to recover, but the bank is still dealing with stubbornly low inflation. ECB President Mario Draghi said during his news conference the decision reflects an “open-ended” program that won’t stop suddenly.“It turns out the dove camp is the clear winner here in the sense that they got the flexible or open-end of the QE program. That is why the euro is falling and equity markets are reacting so positively,” said Manuel Ortiz-Olave, FX market analyst at Monex Europe.

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