Morning Report: 28 June 2017

28th June 2017 By: Ranko Berich

GBP Sterling was able to benefit from the broad sell pressure seen on USD yesterday, but sold off against the euro. The Bank of England’s Financial Policy Committee released the findings of its latest Financial Stability Report, and raised the capital requirements for banks as it warned debt levels were becoming elevated to the point where they required precautions. Rapid growth in car loans and other consumer debt items were areas of particular concern. Mark Carney steered well clear of discussing the monetary policy implications of rising debt levels, but with several high profile Monetary Policy Committee members now dissenting to the BoE’s current low levels of interest rates a reassessment is looking increasingly possible. This morning’s data has included a strong print for the Nationwide House Price Index, which rose 1.1% in June, erasing the previous three months of contractions. Today at 14:30, Mark Carney will participate in a panel discussion with a veritable super group of central banking stars, including Canada’s Stephen Poloz, the eurozone’s Mario Draghi, and Japans Haruhiko Kuroda.

EUR The euro had an absolute cracker of a day yesterday, smashing through psychological resistance levels to reach a 10 month high against the US dollar. The catalyst was a speech from Mario Draghi, which featured the word “reflationary”. The context of the word was almost beside the point – simply the fact the European Central Bank President had uttered it seemed to be all the market needed to hear to send the euro higher. It is worth noting that other words also featured in yesterday’s speech, and that Draghi did say that although reflationary forces have replaced deflationary ones, he also made it abundantly clear that in his view the ECB’s accommodative policy remained necessary to sustain said reflationary forces. The speech nonetheless seems to indicate that the market views any hint of possible ECB policy normalisation as strongly euro positive, and that further such hints may well have the same effect. This morning’s data has included a 1.0% contraction in German Import Prices. Italian inflation data will be released today at 10:00.

USD USD remains under pressure this morning, selling off against commodity currencies on higher prices and against the euro on potential policy tightening in the single currency. Support for legislative cuts to healthcare floundered in the Senate yesterday, resulting in majority leader Mitch McConnell pushing back a vote on the legislation. The current bill was estimated by the Congressional Budget Office to increase the number of uninsured by 22 million by 2026. President Trump, speaking to GOP senators, said “This will be great if we get it done and if we don’t get it done it’s just going to be something that we’re not going to like, and that’s OK and I understand that very well”. Yesterday’s data included a very, very strong reading on the CB Consumer Confidence Index, which soared to almost a 16 year high, and a similarly upbeat reading for the Richmond Manufacturing Index.

CAD The loonie made further inroads against the US dollar yesterday, despite crude oil prices stalling their recent progress. No Canadian data was released, and today’s calendar is similarly sparse, but today at 14:30 BST Bank of Canada Governor Stephen Poloz will speak on a panel discussion with other Central Bankers.

UK news

  • FT: Trump suffers setback with healthcare bill delay. Senate majority leader McConnell pushes back vote as Republican support falls short. Republican leaders postponed a Senate vote on a bill to replace Barack Obama’s healthcare reforms, dealing a significant blow to Donald Trump who is desperate for his first big legislative victory. Mitch McConnell, the Republican Senate majority leader, on Tuesday pushed back a vote after it became clear that deep divisions in his party meant he would be unable to generate the 50 votes needed to pass the healthcare bill in the chamber where the GOP holds a thin 52-48 majority. While some conservative Republicans, including Texas senator Ted Cruz, oppose the bill because they say it does not go far enough to dismantling Obamacare — the 2010 healthcare law signed by Barack Obama — moderates are concerned about voter backlash.
  • Reuters: Now is not the time to raise interest rates – BoE’s Cunliffe. Bank of England Deputy Governor Jon Cunliffe on Wednesday signalled that now is not the time to raise interest rates, siding with his boss Mark Carney in a deepening split between officials on the need for higher borrowing costs. Speculation mounted last week that Governor Carney’s grip on decision-making at the BoE was weakening when chief economist Andy Haldane said he might break ranks and join dissenters who voted this month for Britain’s first rate hike in a decade. But Cunliffe said he wanted more time to see how improvements in business investment and exports could compensate for a consumer slowdown before deciding to raise interest rates from their record low 0.25 percent.
  • FT: Draghi optimism on inflation sends euro higher. ECB president’s remarks will bolster expectations over talks on monetary stimulus withdrawal. Mario Draghi has said he is “confident” that the European Central Bank’s policies would restore inflationary pressures in the eurozone and that the scars inflicted by the crisis will fully heal. The bullish assessment of the eurozone recovery will fuel speculation that monetary policymakers could soon begin discussing a withdrawal of stimulus. “All the signs now point to a strengthening and broadening recovery in the euro area,” the ECB president told the bank’s annual conference in Sintra, Portugal, on Tuesday. “Deflationary forces have been replaced by reflationary ones.”