Draghi remains confident about eurozone economy

The first signs of an impending global financial crisis were clear long before Lehamn Brothers collapsed, European Central Bank (ECB) President Mario Draghi said on Thursday.

Speaking at a post-policy meeting press conference in Frankfurt, Draghi told reporters: “For us, the crisis actually started before Lehman. The first serious signs of an impending crisis actually date back to September 2007.”

“What I remember of that incident was the extraordinary effort of international cooperation at world level. In other words, even before Lehman it was quite clear that the financial crisis was coming. And it would have unprecedented proportions and was worldwide,” he added.

CNBC

CBRT takes the focus off BoE and ECB meetings

Turkish central bank needs aggressive hike to settle investors

Markets are trading relatively flat ahead of a slew of central bank meetings on Thursday, with the BoE, ECB and CBRT all scheduled to make interest rate decisions.

While the Bank of England and European Central Bank would typically steal the spotlight, it’s actually the Central Bank of the Republic of Turkey that will likely steal the headlines today. With inflation in Turkey close to 18% and the currency having repeatedly fallen to all-time lows against the dollar, it’s become quite clear to all that the central bank needs to step in with a substantial hike and its unexpected pledge last week that its monetary stance will be adjusted, suggests it will do just that.

This would be quite controversial though with President Recep Tayyip Erdogan having been very clear about his opposition to higher rates. Having made his desire for control clear, investors will be monitoring today’s decision very closely to see just how independent the central bank really is. A rate hike looks obvious but how aggressive they’ll be will give a strong indication of how much influence Erdogan has over them.

USDTRY Daily Chart

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Traders will be very quick to express their disapproval if the central bank is seen to be not responding aggressively enough which could result in a substantial decline in the Turkish lira. There is currently an expectation of a more than 4% increase in interest rates and it may take more to satisfy investors and avoid such a depreciation. Anything short of this could be bad news for the lira both in the near and long-term.

BoE unlikely to change message as Brexit negotiations enter crucial stage

The ECB and BoE decisions will likely be relative non-events compared to the CBRT. Both central banks have recently announced some monetary tightening – BoE raising interest rates and ECB tapering QE and announcing its end date – and are in no rush to speed the process up.

With Brexit negotiations heating up, the BoE will more than happy to drift into the background having come under fire for its views in the past. With the outlook so uncertain and hanging on the outcome of these negotiations, there’s little upside to the central bank making any changes to its policy message between now and the end of the year and I expect that to come across over the next few meetings.

ECB expected to maintain slight tightening plans

While the ECB may be less affected by the Brexit negotiations, it has set out a path for the next year that will see it slowly exit its easing program and with the economy experiencing a slight slowdown, it’s going to be in no rush to change course in the near-term. The first rate hike may be a little more delayed than it previously alluded to but I don’t expect it to hint at that until QE has ended.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Asia market midday market note

Hang Seng Index

After a positive start during the morning trading session, risk continues to wobble on the heavily subscribed HSI. Don’t mistake short side profit-taking for a reverse in negative sentiment as this market is far from bullish on Asia risk. Despite positive developments on the US-China trade front, the playbook remains unchanged, and it would be a total surprise for many market participants if the Trump administration didn’t follow through with 200 billion in tariffs.

Currency Markets

Much of today’ price action, outside of the Australian Dollar, could be a function of paring risk ahead of the hugely busy day with BOE, ECB,  German, French and US CPIs to navigate. But everyone across the currency world is also watching to see just how definitive a signal the Turkish Central Bank will deliver to quell emerging markets bloodletting.

Australian Dollar

Positions are much cleaner now after the short squeeze on the back of last night CNH move, and today stable domestic jobs report. While there is interest to sell between .7190-7200 levels, in the absence of greater participation, we could set into a consolidation pattern ahead of the critical US CPI data. However, .7200 AUDUSD  a desirable standard for Aussie bear and ultimately they will re-engage  as longer-term interest rate differentials will continue to weigh on AUD and eventually led to a convincing break of .7100 level

Aussie rallies after strong jobs data

The Euro

Participation was meagre again in Asia, but if Draghi sounds all the right dovish tones ahead of the politically contentious Italian budgets, and with the Feds on  Dot Plot autopilot gave the run robust US economic data the Euro bears could be rewarded. Its way too quiet and something has to give on the Euro post.

The Chinese Yuan

CNY fixing at 6.8488, slightly lower than market expectation.

Traders were buying the overnight dip as there remains a high-level uncertainty that any progress will come from these possible trade negotiations. The market was pricing in the US midterm election as a likely timeline for development on the US-China trade front, so the overnight move does look like the unwinding of long USD hedges may have exacerbated it and compounded by stop loss triggers. Fundamentally, the CNH remains, and we could see some topside follow through on a stronger than expected CPI print later this evening.

Canadian Dollar
The market is not making to much of a meal of this headline.
There was some news on the NAFTA front that Minister Freeland want to be attending Thursday trade discussion but reinforce the notion that the intent is to work towards a deal there was no ‘stalemate’. It’s not even registering on my pessimistic ire monitor that would sound alarms if this was a case of where their smoke there’s fire. But until there is a breakthrough in these negotiations the Canadian dollar ” permabans” will put up a good defence around 1.3000. And trust me after cutting my chops trading the CAD on Bay Street back in the day, most CAD traders are Fairweather players at best!!

 

Oil markets 

Despite the favourable convergence of bullish near-term signals, Iran sanctions and sinking US crude inventories, which should keep oil prices supported for the remainder of the week. Oil markets continue to trade rather poorly in Asia.

Asia risk continues to wane as traders remain acutely focused on possible trade fall out, which could weigh negatively on regional crude demand. Brent and WTI have slipped throughout today’s Asia trading session despite the US offering an olive branch by formally inviting China to resume trade discussion.

Southeast Asia risk is an entirely different kettle of fish and one look at the weakening currency profile of one of South East Asia major crude importers, India, does suggest the weaker Rupee could dent  Oil demand as real fuel cost factored directly through the seriously weaker currency profile.

Will we get fireworks from BoE and ECB?

What to expect from a not-so-super Thursday

Thursday has the potential to be another interesting day in the markets, with interest rate decisions due from both the Bank of England and the European Central Bank.

It’s not often that we hear from two major central banks on the same day, let alone around the same time, but when we do there’s always the potential for some turbulence.

Both central banks are in the early days of their respective tightening cycles, with the BoE having recently raised interest rates above 0.5% for the first time since the financial crisis and the ECB drawing its quantitative easing program to a close at the end of this year.

While there’ll still be plenty of cash sloshing around the financial system until they start the process of reducing their balance sheets – as the Federal Reserve is currently experimenting with – the moves being undertaken represent a very cautious and gradual tightening that traders are monitoring very closely for any signs that they may lose their nerve.

This is particularly true in the current environment with the UK and EU locked in Brexit negotiations as the 31 March deadline draws ever near. Protectionism is another key risk factor with US President Donald Trump threatening tariffs on the block. Add to that the struggles being experienced in emerging markets at the moment – a major trade partner of Europe – and the jobs of the central banks become that much harder.

We already appear to be seeing a slowdown in numerous economies across Europe due to a combination of these factors, something the central banks don’t appear to concerned about just yet but may do should they persist.

USD/JPY – Japanese yen gains ground

What should I be looking at?

The obvious chart is EURGBP given that these are the two currencies most sensitive to what the BoE and ECB do. The closely linked nature of the two economies can mean we see less powerful swings in this pair though than we do certain others which can make it more or less appealing, depending on preferences.

EURGBP Daily Chart

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The euro has definitely had the better of things throughout the summer, with no deal Brexit being viewed as a far greater risk for the UK than the eurozone, which is understandable. What this means though is that if the two sides do start to find common ground, we may see this trend reverse course, as we have over the last couple of weeks when we’ve had some more positive news flow.

That trend may already have changed, with last week’s sell-off taking us below the rising trend line and potentially signalling a shift in sentiment in the market. Obviously that won’t change the outcome of the meetings, or press conference in the case of the ECB, but it does give a sense of bias heading into it.

Sterling Pauses on Reports of Leadership Challenge

Both currencies have found some form against the US dollar over the last month following a rough summer but are yet to see the spark that gives some confidence that they’ve broken into a more sustainable uptrend. They’ll definitely be ones to watch heading into the meetings.

EURUSD Daily Chart

GBPUSD Daily Chart

What can we expect from the meetings?

My expectations are actually quite low for the meetings. The reason why is that it seems to suit both central banks to stay under the radar for now. Both have made important first steps towards normalization and are in no rush and with Brexit on the horizon, now is not a good time to be changing course, especially as they don’t have to.

Both have laid out quite clear plans for the next year and even if they don’t stick to them – which there’s a good chance they don’t given the amount of unknowns and risks – the important thing is that investors are largely on board and the economies are doing ok. I don’t think they’ll want to mess with that.

So I don’t expect any changes in interest rates or QE this month and we can probably expect ECB President Mario Draghi’s press conference to be a rather dull affair.

Famous last words eh….

Will ECB offer any surprises on Thursday?

Euro climbs ahead of ECB meeting

While we may not look back at the ECB meeting on Thursday as one of the defining moments in the eurozone’s long recovery from the global financial and debt crises, or even remember it much at all for that matter, that doesn’t mean there won’t be anything to take away from it, or that markets won’t react.

  • ECB left little to the imagination in June
  • Never a good idea to assume an uneventful meeting
  • Will Draghi succeed in talking down the euro again?

At its meeting last month, the ECB laid out plans for its bond buying program (quantitative easing) beyond the current expiry date of September, opting to extend it until the end of the year at half the pace – €15 billion – and warned that interest rates will remain at present levels “at least through the summer of 2019”.

In providing such a clear path for asset purchases and interest rates for the next year, the central bank effectively covered all bases and barring a significant shift in the data or a change in the global landscape, left few questions if any to be answered, making this meeting a potential non-event.

Juncker/Trump Meeting Eyed as Tariffs Hit Outlook

Should we ever anticipate a “non-event”?

One thing we’ve learned in the past though is not to become complacent when the central banks are involved and in the current environment of trade conflicts and Brexit, things can change very quickly. We have to remember that while the recovery is gathering momentum and making encouraging progress, it is still fragile and could be derailed by a number of events which would require the ECB to step back in and offer its support.

Only this week it has been reported that US President Donald Trump intends to slap 25% tariffs on European auto imports and significantly escalate the trade conflict between the US and EU. Jean-Claude Juncker is currently in Washington looking to calm the growing tensions between the two but it seems that unless he is offering concessions, he may not get very far.

What’s more, the UK and EU don’t appear to be getting much closer to agreeing on the divorce and with eight months to go until exit day, this is a notable downside risk for both economies, with the IMF recently warning that a no-deal Brexit that sees the two revert to WTO rules could wipe 1.5% and 4% off EU and UK output, respectively, by 2030.

In terms of the data, the ECB will likely be relatively content, with unemployment continuing to drop – now at 8.4%, the lowest since December 2008 – the economy growing well despite the dip in the first quarter and inflation gradually increasing, albeit less so on from a core perspective. Nothing has really changed on this front since the last meeting that will concern policy makers.

EURUSD Daily Chart

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While the euro has been climbing over the course of the last month, after falling following the ECB announcement and very dovish accompanying statements, it’s now only trading back where it was before the meeting which will be a relief to policy makers. It will be interesting to see if anything they say changes this or if Draghi focuses on talking it lower once again.

Live FX Market Analysis – 24 July 2018

In this week’s FX webinar, Senior Market Analyst Craig Erlam discusses the latest events that are moving financial markets – Trump attacks the Fed, Brexit plans widely criticized etc – and previews the week ahead.

Craig also gives his live analysis on EURUSD (9:22), GBPUSD (11:48), EURGBP (18:45), AUDUSD (19:34), USDCAD (21:04), GBPCAD (22:14), NZDUSD (23:31), USDJPY (24:38), GBPJPY (27:41) and EURJPY (29:09).

OANDA Market Insights podcast (episode 24)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump attacks Fed over rate rise, UK inflation figures hit sterling, Barnier dismisses Brexit white paper , Google fined record sum.

USD Weaker After Trump Interest Rate Comments

Canada: Inflation Hit Six-Year-Plus High

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

 

USD/JPY advances to six month high post-testimony

Economy faces years of strong jobs growth in a low inflation environment

The dollar continued to push higher in Asian trading, building on gains made in the previous session after Fed Chairman Powell’s described the US economy as in a good place during his semi-annual testimony before the Senate Banking Committee. He said he sees the economy on track for years of strong jobs growth in a low inflation environment. However, given the as yet unquantified threat of trade tariffs, he did mention that, while policymakers were on a path of gradual rate hikes, the tightening is not a “fait accompli” and implied it could be flexible should data dictate.

USD/JPY continued its march higher, touching its highest level in six months. Equity markets struggled to echo positive sentiment on Wall Street, with losses of 0.24% for the Nikkei, 0.99% for Chinese stocks and a loss of 0.33% for Singapore. The only bright spot was Australia where the index rose 0.16%. There were no key data releases in Asia, so other currency pairs drifted in line with the dollar’s advance.

Goldilocks economy warrants a Goldilocks Federal Reserve chairperson

Japan bolsters trade links with Euro-zone

Japan and the European Union signed a trade agreement yesterday that lowers barriers on the movement of goods and services between the two economies. The agreement has been a work in progress since 2013 and it may be more than just coincidence that the deal is finalized as the two economies face the problems of US protectionism.

While on the trade topic, the G-20 meeting gets under way in Argentina this weekend and treasury secretary Mnuchin has stated he will not seek a bilateral meeting with China during the get together. Meanwhile the US Treasury Department has reiterated that it labels China’s behavior as economic aggression.

GBP/USD – UK job numbers disappoint, send pound lower

UK dominates the data calendar

The data dump from the UK continues today. Following on from yesterday employment and wages data, today features CPI and PPI numbers for June. Headline inflation is expected to tick up to 2.6% y/y from 2.4%, according to economists’ forecasts while core data is seen edging up to 2.2% y/y from 2.1%The Euro-zone also reveals its inflation data while the US session has housing starts and building permits to contend with. We also have the second session of Fed Chairman Powell’s testimony before Congress and the release of the Fed’s Beige Book to look forward to.

You can see the full MarketPulse data calendar for today here: https://www.marketpulse.com/economic-events/

Oanda Market Beat

US Inflation Eyed as Markets Pare Losses

Markets higher after tariff-related losses

It’s been a more positive start to trade on Thursday, with equity markets in the green and paring Wednesday’s losses as investors continue to weigh up what impact the latest trade tariffs will have on the global economy.

While markets have typically reacted negatively to any escalation on trade, the overall impact has been relatively modest under the circumstances which suggests investors are far from panic mode right now. Many agree that tariffs will ultimately be bad for the global economy and therefore markets but there still seems to be some hope that common sense will prevail and a full blown trade war will be averted.

With Donald Trump now pursuing another $200 billion in tariffs against China though, we may have to wait a while as he is not easing up and China – and others – is determined to prove it will not be bullied into submission. Perhaps if the economy starts to suffer or the Republicans do badly in the midterms in November Trump will be forced to consider an alternative approach.

Equities shrug off trade tariff tensions

US inflation seen rising further

As it stands though, the economy is doing very well – aided by last year’s tax reforms – and the Federal Reserve is on course to raise interest rates twice more this year, having increased them on two occasions already. The central bank is clearly more concerned about the economy overheating right now than the prospect of a trade war – although this is also on their radar – and the inflation data we’ve seen very much justifies their view.

While CPI is not the Fed’s preferred measure of inflation, it does provide valuable insight and is typically released a couple of weeks before the core PCE price index. Today’s release is expected to show prices rising by 2.9% in June compared to a year earlier, with core inflation having risen by 2.3%, above the Fed’s 2% target. The core PCE price index may be a little behind this at 2% but this is at target and on the rise. Any unexpected increase today may suggest a similar rise is on the cards for the PCE numbers as well.

(Update 1) A tenuous and unstable state of affairs

ECB minutes eyed after dovish tightening last month

The minutes from the most recent European Central Bank meeting will also be released today. The ECB confirmed at the last meeting that it will end its quantitative easing program at the end of the year and won’t raise interest rates until at least the middle of 2019, which was largely in line with expectations. The dovish spin that was put on it though weighed on the euro at the time and it will be interesting to see whether the minutes have a similar impact.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

All is quiet on the western trade war front

All is quiet on the western trade war front

For a change,  all is quiet on the western trade war front as the drop in aggressive US tariff posturing and the nonfarm payroll after effects have propelled US equity market to the third consecutive day of substantial gains. While traders sit tight awaiting the next US trade salvo, but for the time being robust US economic data is offsetting concerns about rising trade tensions. In addition to the strong payrolls report, Federal Reserve Board data showed that consumer borrowing picked up in May with total consumer credit increasing $24.6 billion to a seasonally adjusted $3.9 trillion, up 7.6%. Indeed, this incredibly strong pace of credit growth points to a resilient US consumer while continuing to highlight an extremely robust US economy despite growing trade concerns.

But markets remain deceptively tricky and could be even more so as we enter the US dog days of summer.

In Asia markets, all eyes were on Xiaomi Corp IPO but the coming out party was less than a hit and didn’t exactly attract the feeding frenzy expected from high tech investors. Indeed, global high-tech investors continue to feel more comfortable investing in global stalwarts like apple as opposed to debutantes like Xiaomi who have more of an Asia centric presence. Of course, escalating trade war concerns weighed on sentiment but being the first of many prominent Chinese tech names coming to market seeking IPO in coming months, investors may have thought Xiaomi valuation a tad “toppish” in current market conditions. And are perhaps looking for more significant fire sales as more of China’s glittering tech giants swamp the IPO markets in the months ahead.

Oil Markets
Indeed, there’s a bullish undertone in the markets with the Iranian supply question expected to support and eventually push prices higher. The Brent market climbed amid ongoing concerns regarding Libyan supplies while treader weighed the bullish medium-term impact of Iran sanctions.

While WTI was under some early pressure after Syncrude Canada announced it would be restarting production from its Fort McMurray oil sands upgrader earlier than expected, but prices remained firm and started to rally after API showed another major draw of 4.50 million barrels.

Looking to Libya, the head of their state energy producer warned that output would keep falling day by day if significant ports remained closed because of clashes last month that lead to a standoff. Mustafa Sanalla, chairman of the Tripoli-based National Oil Corp, stated that “Today, production is 527,000 barrels a day, tomorrow it will be lower, and after tomorrow it will be even lower, and every day it will keep falling.” But keep in mind, current levels are less than half what the country was producing in February pre-political deadlock levels.

Even under the supposition that production from Saudi Arabia and Russia is sufficient to offset declining output from Venezuela, Libya and Iran, keeping the market in an approximate physical equilibrium, the stream of supply disruptions will continue to upset those dynamics.

Gold markets

The weaker dollar had gold bulls charging but the run of stop losses above $ 1261 cleared a path for Gold to touch $ 1265 overnight after political turmoil reared its ugly head in the UK when Boris Johnson resigned. But technically, gold has a long road to travel before breaching the more relevant technical levels around $1300 suggesting it remains ever so prone to the stronger USD. But the robust US economic data, fading of trade war rhetoric and extremely buoyant US equity markets turned golds tide overnight as “risk on ” saw gold prices fall from interday peaks and retreat before eventually finding support at around $1258 levels.

Currency Markets

In the currency market, Political unravelling in the UK has provided the best trading opportunities.

GBP: Another roller coaster ride on GBP overnight as Brexit markets got very uneasy after Boris Johnson resignation and the thought he could force a party coup which all but unwound the positively from Friday Brexit Chequers meeting. Long Sterling is arguably the G-10 most crowded trade so any Brexit hic up will likely trigger an outsized move as weaker near-term stops get triggered. But overall the long Sterling trade remains bruised but not broken.

AUD: The lack of trade drama is underpinning the AUDUSD. But the Aussie was arguably the most subscribed USD dollar long play in G-10, so players were mercilessly squeezed as ongoing China/US trade skirmishes are showing nascent signs of easing.

JPY: US yields and equities were soundlessly trended higher which have propelled USDPY to within striking distance of the 111 level. With investors running very neutral USD dollar exposure vs the JPY, short-term traders are boarding the risk- on wagon and buying USDJPY. If US equities continue to stabilise let alone move higher and US 10-year yields continue dribble north, we could eventually test the key 111.40 support line that has proved to be an impenetrable force for months.

MYR: The relief rally on the toned-down trade rhetoric continues to take hold of ASEAN markets. Risk on sentiment in US equity markets should play out positively for local bourses. Asian currencies are trading stronger aided by a sharp move lower in $RMB, robust equity performance and improved risk sentiment which is in complete contrast to last week’s markets tumult.

However, Malaysia registered another 1.65 billion in June outflow all but wiping all the reported 8 billion in fixed income flow from March 2017-2018 which tells the real tale of the election’s impact.

The next crucial focus will be the MPC on the July 11th This will be the first policy meeting chaired by the new BNM governor and with no real drive for BNM to adjust interest rate policy at this stage, however, given all the political uncertainty their remains a chance the BNM could offer up a dovish pause.

In the meantime, the MYR is benefiting from positive regional risk sentiment and rising oil prices all the while the Chinese RMB continues to unwinds last weeks trade induced tantrum.

CNH: For me its a case of know when to hold them and know when to fold them. While I think the RMB will eventually come under renewed pressure as China risk continues to wobble,  markets have read far too much into the China economic slowdown which will likely be modest at best. Still this week tier one China economic data will continue to supply food for thought.