The loonie has defied the broad G10 move this week, reversing early gains to drop close to last Friday’s open despite the broad US dollar weakness. The mid-week sell-off in oil reversed the loonie’s upward momentum, and with crude markets continuing to weaken, the path downwards for the Canadian dollar has been greased up.
The dollar mostly sold off against the major currencies yesterday and faced heavy pressure against most emerging market currencies. Most of the focus yesterday afternoon was firmly on the European Central Bank’s historic move back to monetary easing – and the euro strength that paradoxically resulted. News flow on trade remained positive on the whole, with Donald Trump saying that a partial or interim trade deal was a possibility after various news outlets reported on rumours that White House advisors were looking into the possibility of more tariff delays or an interim deal. Yesterday’s data included higher than expected Core Consumer Price Index inflation, which was 0.3% in August. Today’s main release will be Retail Sales at 13:30 BST.
The euro had a wild ride yesterday, driven by adjusting fixed income markets following a historic last monetary policy meeting for President Mario Draghi of the European Central Bank. Following the announcement of the restart in Quantitative Easing, by a scalar of €20bn a month starting from November, and another 10 basis point cut to the deposit rate, bringing it down to -0.5%, the euro sold off and began to test fresh 2-year lows against the dollar. The big man then took to the stage and discussed heavily the need for expansionary fiscal policy from Eurozone members as the central bank’s tool kit begins to look empty. Draghi stated that much of the post-2007 recovery has been driven by accommodative monetary policy, and some market reforms by member states, but the amount in which the bank can stimulate the economy any further is beginning to reduce dramatically. During which time, German, Dutch and French front-end yields began to rally as markets expected a more expansive QE programme of around €30bn a month. Back end yields were falling too, as Draghi stressed the slowing momentum of the Eurozone economy and the downward adjustment to the bank’s inflation forecast. EURUSD was near flat on the day at this point and then surplus material on the central bank’s tiering system was released at 14:30 BST. The news that the central bank will allow financial institutions to park 6 times the required 1% of liabilities in the monetary authority’s vault with a rate of 0% instead of the negative rate charged to deposits prior, all under the premise of protecting bank’s profitability as they aim to reach the 1% reserve requirement on average over a 6-month period, sent sovereign yields higher across the curve. The multiple of 6 was greater than the market’s expectation of 4 and the resulting rally in yields facilitated the euro’s rally. It was a busy afternoon in market’s and at the end of the day, EURUSD closed 0.49% higher. Today, the positivity continues as the US dollar broadly softens and the sterling drags the single currency higher via the GBPEUR cross.
Sterling had another day of closing near its open yesterday but the intra-day trading range was much wider than the previous few days due to movements in GBPEUR following a dramatic ECB meeting. Today, the pound has started off on a good footing against the US dollar as the Times paper breaks that the DUP is willing to agree to Northern Ireland accepting some EU rules as the government seeks to find a way around the Irish backstop. On top of this, the unnamed sources story suggested that the Northern Irish party, which previously held up the Conservative party’s majority, will drop any objections to regulatory checks in the Irish sea. This would enable the hard border in the Irish sea, should no trade facilitation mechanism be agreed upon post-Brexit. Arlene Foster, leader of the DUP, was quick to deny allegations from the Times story, with the DUP spokesperson Sammy Wilson whittling this down to “bad journalism”. Foster stated last night on Twitter that the party won’t accept a “backstop by any other name”. Wilson followed on from this by saying that the DUP will only accept arrangements of Northern Ireland accepting some of the EU legislation post-Brexit if the Northern Ireland assembly had “total scrutiny” of it. Despite water being thrown on the fire, sterling shorts have been shaken and the pound is up on the day. Today’s highs haven’t been seen since July 29th, with sterling helped along by a broad slide in the US dollar also.