It was another day of trading in a tight range for the loonie as it continues to drift higher ever so slowly. Yesterday, the main news centred on the Bank of Canada’s Deputy Governor Carolyn Wilkins will not seek a second term when it expires on May 1st 2021. While this wasn’t a major market moving event, it highlights a further shift around at the central bank as another integral member opts to leave their position. Wilkins was overlooked as the next BoC Governor in favour of Tiff Macklem earlier in the year, which came somewhat as a surprise. Today, the loonie might find the source of stimulus to break out of its tight trading ranges from the release of July’s retail sales data at 13:30 BST/ 08:30 ET. Expectations sit at 1.0% MoM growth after retail sales bounced 23.7% in the month of June as the economy reopened.
After a short-lived attempt at a rally, the dollar began to weaken broadly yesterday, while US equities also came under pressure. Based off of current exchange rates, the Bloomberg Dollar Spot Index seems on track to post its weekly decline in three weeks. The Federal Reserve said in a statement yesterday that it will soon decide if restrictions on dividends and buybacks for US banks will be extended. The restrictions are a reflection of the amount of support that bank balance sheets have received from Fed measures and the likely public backlash in the event of a wave of dividends and buybacks aimed at rewarding shareholders. The Fed will be stress testing banks over the coming weeks using scenarios released yesterday. Yesterday’s data included another week of elevated weekly jobless claims, which registered 860,000. Today at 13:30 BST, current account data will be released.
The euro managed to reverse its trend against the dollar in yesterday’s early trading session and enjoyed a boost following downbeat US economic releases, while the eurozone’s Consumer Price Indices printed similar to the forecasted median and caused no market reaction. This morning, the pair held onto its gains from last night as improved risk sentiment is adding downward pressure to the greenback and other safe-haven currencies. In the eurozone itself, however, improved risk sentiment may be less justified: in France and the Netherlands, record new daily coronavirus infections are driving speculation that regional containment measures may be (re)announced, while cases in Belgium have returned to peak levels from April as well. Given the lack of meaningful data releases from the eurozone on the agenda today, the pair’s price action will depend on further developments in market mood.
Sterling weakened sharply yesterday as the Bank of England revealed an increased willingness to investigate and discuss negative interest rates as a policy option, but since then has recouped its losses against the US dollar. The Bank of England kept rates unchanged in a unanimous vote on the Monetary Policy Committee. The most interest aspect of the generally uneventful statement and meeting minutes was the news that the MPC had discussed negative interest rates as a policy tool, and that the option would be explored further by the BoE. This does not mean negative rates are being primed with the intention of imminent use, but simply that the BoE, as a major central bank, is fully investigating the option. Perhaps counter-intuitively, the fact that the UK economy is recovering faster than expected is not incompatible with the MPC eyeing negative rates. As the August Monetary Policy Report made clear, the MPC believes negative rates are best used during times when banks are less concerned about balance sheet risks – such as during a recovery. August’s MPR also made it clear that the MPC believed the two biggest issues with negative rates were possible negative effects on sentiment – because they are unusual – and transmission through the banking sector. Both risks would need to be addressed, and would presumably involve some communications effort of the sort Andrew Bailey has said would be necessary before implementing negative rates. Rates and FX markets took the comments as a sign that the likelihood of a cut into negative territory had increased, and sterling sold off accordingly. Later in the afternoon, sterling regained some of its losses rapidly after European Commission President Ursula Von Der Leyden said informal this week had been “useful”, and that she remained “convinced” a deal was possible. This morning’s data has included retail sales for the month of August, which showed a solid 0.6% monthly increase.