Morning Report: 29 September 2016

29th September 2016 By: Ranko Berich

GBP Sterling had a relatively uneventful day yesterday, as it was out of the spotlight amidst major developments in other markets. Sterling did get a slight surprise however when the Monetary Policy Committee’s Minouche Shafik said in a speech that she thought interest rates probably needed to fall further, contradicting the relatively hawkish views of her colleague Kristen Forbes. The fact that two high profile MPC members have issued opposing opinions on the issue in recent weeks suggests the Committee as a whole is divided as to whether or not the economy will require further easing. Fundamental data, especially relating to growth, employment and inflation, will therefore remain crucial for sterling over the coming months. Today at 09:30 BST monthly Money Supply data will be released by the Bank of England, and MPC member Forbes will again speak at 14:00.

EUR Euro volatility remained rather low yesterday, with EURUSD breaking below Tuesday’s lows before rallying slightly. Although the euro was unaffected, Deutsche Bank’s ongoing woes remain firmly in focus. European Central Bank President Mario Draghi’s testimony to German lawmakers seeing Draghi refusing to comment on the issue, telling reporters afterwards the ECB’s low rates are not to blame for the Bank’s problems. German government officials, in the meantime, were forced to deny they were preparing a bailout. Spanish CPI was released this morning finally breaking above 0% on a year-on-year basis.

USD Yesterday’s moves in crude oil prices did not trigger a significant reaction in the US dollar, which has historically had an inverse relationship with crude oil prices. This may be because yesterday’s production cuts by OPEC open the door for higher crude oil prices, and, therefore, could prompt increased domestic production from shale oil producers in North America. Fed Chair Janet Yellen testified to lawmakers on banking supervision yesterday, but the session quickly deteriorated into political grandstanding as republican lawmakers once again attacked the Fed’s impartiality. This time Fed Governor Lael Brainard’s donations to Hillary Clinton’s campaign were in focus, with Yellen being forced to assert that the Fed’s decisions were made impartially and it was legal for Fed members to make political donations. In the past, republican Presidential candidate Donald Trump has accused the Fed of keeping rates low to favour the Obama administration . Trump has also spoken in favour of low rates, saying “I am a low interest-rate person. If we raise interest rates and if the dollar starts getting too strong, we’re going to have some very major problems”. Today at 13:30 BST the final revision to US Gross Domestic Product Growth in Q2 will be released, and there will be non-monetary policy themes speeches from Powell and Yellen at 15:00 and 21:00.

CAD The loonie strengthened yesterday as global markets were caught off guard by OPEC announcing an agreement to cut crude oil production at an informal meeting in Algiers. The move was not expected by market participants, and so saw a sharp reaction in crude oil prices and oil linked currencies, although the Brent crude oil benchmark struggled to breach the $50 level that has acted as stubborn resistance. This may be because the size of the proposed cut pales in comparison to overall OPEC production. The cartel’s caution is understandable, given that a sharp increase in prices would encourage investment in unconventional production, especially in North America. The real significance of yesterday’s announcement is symbolic, as it shows the oil producing cartel is taking the current slump in oil prices seriously and remains willing to act, albeit cautiously.

UK News

  • Reuters. UK mortgage approvals sink to lowest since November 2014 in August – BoE. British mortgage approvals fell to their lowest level since November 2014 last month as the housing market continued to slow after June’s vote to leave the European Union, Bank of England data showed on Thursday.
  • FT. Opec agrees on oil output cut at Algiers meeting. Crude prices climb more than 6% as cartel ministers reach consensus on production curbs. Some of the world’s biggest oil producers have agreed to cut production for the first time in eight years, sending crude prices higher by more than 6 per cent and sparking big gains for energy stocks.