News & analysis

USD

The dollar is weaker across the board this morning after last night’s meeting minutes from the Federal Open Market Committee highlighted downside risks to the US economy and trade headlines have hinted at concessions from China ahead of today’s talks between senior officials. Last night’s meeting minutes painted a picture of an FOMC that was clearly behind the curve and attempting to work out how deep its current cutting cycle is likely to be, amid a darkening economic outlook. Members observed that the outcome of the trade war was far more important for market expectations of rates than the FOMC’s own signalling. Although based on current economic circumstances a deep cutting cycle is not the expectation of the FOMC, further escalation of the trade war is highly likely to slow the US economy and require more cuts – something fixed income markets are actively pricing. The expansion of the Fed’s balance sheet announced by Jerome Powell earlier this week was also discussed by members, who were very keen to stress that the asset purchases were part of normal central bank business and should not be viewed as quantitative easing. Senior US and Chinese officials will meet in Washington today, with news reports yesterday citing anonymous sources claiming that China will offer increased agricultural purchases. Speculation continues that both sides may be interested in a narrow trade deal covering goods, which is one possible route to an improvement in trade tensions in the near future. Overnight headlines were little more than noise, with confusion over the exact time the Chinese delegation will leave Washington causing some volatility.

EUR

The euro is trading marginally higher against the US dollar this morning, as news reports have once again laid bare the divisions within the European Central Bank around asset purchases, ahead of today’s release of meeting minutes from the Bank’s most recent decision. The Financial Times is reporting that no less than three members of the ECB’s Monetary Policy Council have said – anonymously – that the Council’s advice was not to restart asset purchases at the most recent Governing Council meeting. The Committee’s opinion is not binding and has been ignored on at least four occasions in the past four years. However, the fact that members are briefing the press ahead of the minutes release, combined with the vociferous public opposition to the easing programme from central bank heads such as Klaas Knot and Jens Weidman, highlights the extent to which further expansions in asset purchases by incoming ECB President Christine Lagarde will be heavily opposed by many elements within the Bank. This morning’s data has included a miss for French Industrial Production, and the ECB’s latest meeting minutes will be released at 12:30 BST.

GBP

Yesterday morning saw sterling shoot 0.7% higher as the Times reported that the EU was about to give major concessions to increase the likelihood of securing a deal prior to the October deadline. According to the Times reporter, the EU was ready to make concessions on consent by allowing a double majority in the Northern Ireland assembly to leave the backstop, proposed by May in the Withdrawal Treaty, around 2025 as a proposed date. The article suggested that the EU were in fact looking to include a time limit to the Irish backstop, a key feature Theresa May couldn’t achieve back in March to appease the Eurosceptic faction of her party to allow the passage of the meaningful vote. However, DUP officials soon rejected the postulated idea of a double majority in the assembly. The DUP statements were backed up by EU diplomats saying the EU report was “not true” and to dismiss it as a “spin” in EU-UK negotiations. Ultimately the pound closed lower on the day as a fresh round of dollar strength in the afternoon pushed GBPUSD into the red. Today, PM Johnson will meet his Irish counterpart, Leo Varadkar, in Liverpool at around lunchtime. This morning, August’s GDP reading is released along with construction, manufacturing and industrial production data at 0930 BST.

CAD

With the USD soggy across the board today, the loonie takes note and rallies back towards Monday’s opening price. The question for USDCAD now is what the Bank of Canada does in response to the Federal Reserve cutting rates as front-end yield differentials begin to favour CAD strength.

 

 

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