Morning Report: 22 September 2016

22nd September 2016 By: Ranko Berich

GBP Sterling managed to reverse its recent losing streak against USD in the wake of yesterday’s FOMC events. The only release of note yesterday was Public Sector Net Borrowing, which actually registered a smaller than expected borrowing figure for August, a rather embarrassing result for former Chancellor George Osborne, who was warning of a hole in Government finances if Britain voted to leave the EU. Of course, the long term, or even medium term, effects of Brexit remain unclear. Although Philip Hammond may not have a Brexit hole to deal with just yet, it’s still early days and adverse economic developments in 2017 could still challenge the Chancellor.

EUR The euro was there to mop up the USD weakness that resulted from last night’s FOMC, with EURUSD gaining about a percentage point from yesterday’s lows to this morning’s highs, and the effects felt on other euro crosses including GBPEUR. No euro data was released today, but it is worth noting that bull flattening was seen across euro government bond yields, which fell across the long end of maturities as investors priced in the fact that the US treasury curve is not likely to suddenly offer a strong alternative to depressed eurozone yields. This morning’s European Central Bank Bulletin contained little additional information, aside from the usual assurances that the ECB remained ready to act to achieve price stability. Mario Draghi will speak today at 14:00 BST, and eurozone Consumer Confidence will be released at 15:00.

USD Last night’s FOMC meeting was a clear signal that rate hikes were coming, and yet USD is slightly weaker this morning. Three FOMC members voted for a rate hike at this week’s meeting, but the consensus was to wait for a little more data. Member projections of rates in 2017 showed a majority of the committee expected rates to rise once. Yellen was unusually frank about why the FOMC did not go ahead and hike rates at this meeting: inflation was below target, and there was still slack in the labour market. It seems like the FOMC’s hawks have lost the debate about if the Fed should hike proactively to mitigate the risks of an upside surprise to inflation, and that caution will continue to be the Fed’s prime directive. Yesterday’s projections made it clear that the Fed’s estimation of the r* or equilibrium rate of interest has fallen drastically. This implies a lower terminal rate for policy, and a more gradual path to that terminal rate – both bringing potentially negative effects for USD in the medium term, despite the fact that a hike is probably coming in December.

CAD As expected the loonie was a major benefactor from yesterday’s USD weakness, and USDCAD has come off from the highs this week and last. Crude oil prices were also buoyed by yesterday’s events, which also included another large fall in North American Inventory levels. No Canadian data will be released today, so the question for the loonie is: how far can bump seen in crude oil prices extend?

UK News

  • Reuters. Bank of England says UK faces ‘challenging period’ for financial stability. Britain still faces a “challenging period” for financial stability despite resilience seen after the European Union referendum, and rules for banks must remain tight, the Bank of England said on Thursday.
  • FT. Fed sets stage for 2016 rate rise. A heavily divided Federal Reserve left short-term interest rates unchanged but said the case for a rate increase “has strengthened”, in a strong signal that a move is likely before the end of the year.