News & analysis


Fresh Brexit setbacks and a refusal by Andrew Bailey to rule out negative rates put a lid on sterling strength yesterday, and the pound softened overnight against both the US dollar and the euros. Bank of England Governor Bailey appeared before the House of Commons Treasury select committee on Wednesday and acknowledged a moderate softening on the issue, which he previously said the bank was neither “planning or contemplating”. Bailey did make it clear that negative rates were more of a hypothetical tool that the Bank was not ruling out, and that at the moment the priority was assessing how the economy would respond to the current measures taken. Bailey said the Bank has been looking “very carefully” at the experience of those other central banks that have used negative rates. Elsewhere, Michel Barnier rejected aspects of recent UK proposals for trade relations with the EU, saying that Brussels would not tolerate “cherry picking”. The issue of the Northern Irish border remains a sticking point, with several sources reporting that recent UK proposals on the issue have been received poorly in Brussels. This morning updates Markit purchasing managers indices were released for May, and like the equivalent indices for the eurozone they showed that although the economy was still contracting severely, the rate of contraction had slowed somewhat.


The euro was among the best performers against the US dollar overnight, suffering only small losses as risk appetite soured slightly and the US dollar pared back some of its recent losses. Major European economies will enjoy the Ascension day holiday today, including France and Germany. This has not prevented the release of updated Markit purchasing managers indices surveys for various eurozone economies. The surveys have generally shown some improvement after the dismal initial readings for May, although they remain at very low levels. The eurozone composite PMI rose from 13.6 to 30.5. The figures still reflect the eurozone economy being stuck in the deepest downturn ever recorded by the series, but the increase in most indices suggest the rate of contraction is slowing.


The dollar suffered further losses in yesterday’s session as risk remained supported in markets. Easing of lockdown measures has been the main driver of improved risk appetite, but this has broken down overnight after the Senate overwhelmingly approved legislation that could lead to Chinese companies such as Alibaba Group Holdings Ltd and Baidu Inc being barred from listing on US stock exchanges. Last night saw the release of the latest FOMC meeting minutes. Although the minutes didn’t discuss the viability of negative interest rates in the US, it did see FOMC members analyse their use of forward guidance and the possibility of yield curve control by targeting Treasury maturities. On forward guidance, participants said that the FOMC could provide further clarity “at upcoming meetings”, with some suggesting it could be more explicit. The idea of outcome-based forward guidance, i.e. targeting a specific unemployment level or inflation level, was floated by some, as well as date-based forward guidance that promises to delay liftoff for a certain period of time. Additionally, “several” participants suggested a program which targets long-term yields, while “a few” highlighted the prospect of front-end yield curve control. Overall, the FOMC outlined that there was considerable uncertainty surrounding the near- and medium-term economic outlooks, noting that there was a “substantial” likelihood of additional waves of outbreaks. Along the lines of Tim Lane yesterday, the meeting minutes also highlighted that a strong dollar, weaker demand conditions and a lower oil price were weighing on inflation. At 14:45 BST, the preliminary PMIs for May are released and will prove key for forming expectations of the US economy’s current condition.


USDCAD fell to the bottom of its range yesterday as the loonie shrugged off data highlighting deflation and joined the G10 in rallying against the dollar. Rallying oil prices helped the loonie maintain its gains too as late in the session the Department of Energy released data that showed US inventories fell by 4.98m barrels. WTI now sits above $34 per barrel, its highest price since mid-March. With discussion rife over negative interest rates, Bank of Canada’s Deputy Governor Tim Lane set the Ottawa based Bank’s stool out. Lane, responding to a question on whether the BoC would move towards negative rates if the US Fed did, said “our decision is not to go there”. Lane’s comments suggested that the current tools used by the BoC are sufficient to drive the recovery effectively, and that further liquidity injections would be the central bank’s marginal tool for additional stimulus. Befitting with yesterday’s -0.2% headline inflation reading for April, which was predominantly driven by the near 40% drop in gasoline prices along with the collapse of social consumption due to lockdown measures, Lane also stated that downward pressure is likely to remain. “On balance, there is likely to be downward pressure on inflation”, the Deputy Governor remarked, as the impacts on business and consumer spending are likely to outweigh the supply side shocks. Today, with rising US-China tensions in focus, the loonie joins the whole of the G10 in bowing down to the dollar. Little data besides the ADP payroll data at 13:30 BST is set to be released.



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