EU Calling the Shots on UK Election Date

The European central bank is widely expected to reduce its benchmark deposit rate when

the governing council meets on Thursday. I will touch on that, in a little more detail in a

minute, but first a brief recap on how the markets played out last Friday and how they

might be poised as the new week commences.

Looking at the entire G10 currency space, the winner last Friday was the CAD which

outperformed all of its peers following the release of some surprisingly good jobs numbers

(and PMI data), showing a much larger than expected payroll increase in August. Outside of

the USDCAD, the US dollar didn’t actually lose ground either, considering the tepid nature of the US latest jobs report.

The main reason for that would appear to be down to a slight uptick in the wages

component of that US report, which as I noted might be of more interest to the markets.

Well, in terms of determining how the dollar fared overall ahead of the weekend, its seems

that was the case.

Elsewhere and further to what I noted previously about Japanese foreign currency reserves

last week, I can report some further information in that regard. This time from Hong Kong,

who last Friday also released their currency reserve data. That showed a decrease of around

$16 billion in their FX reserves in August. Clear evidence, if ever one needed it, that the

HKMA has been actively selling the USDHKD in an effort to maintain the upper band (USD

7.85) of the currency peg. Perhaps no surprise then, to see that the USDHKD fell back to

close below 7.84 on Friday. However, following further violence in the territory over the

weekend the HKD has weakened again overnight.

Beyond the currency space the winner of the prize for the most volatile market on Friday

probably went to gold which lifted from a morning session low around $1502.75 to as high

as $1528 after the US jobs report, only to fall back again into the close, where it ended the

week at $1506.75. The price did have another look at its Friday low overnight, but has

rebounded again which clearly suggests there is still fresh buying interest just ahead of that

$1500 handle.

The latest Chinese trade data, released over the weekend has seen the trade surplus in

August fall by nearly $10 billion, due to a large drop in exports. Clear evidence perhaps that

that US tariffs are really beginning to bite perhaps? In fact, imports actually fell even more

in percentage terms, which isn’t good news for the global economy if it’s a trend that’s set

to continue. Those trade numbers may explain the PBOC move last week, to reduce the

Reserve Ratio Requirement it imposes on the commercial banks.

Data release wise this week, the focus is most definitely on the Eurozone with that much

anticipated ECB policy decision due on Thursday. The general consensus is that the ECB will

lower their deposit rate, pushing it further into negative territory by another 10pb, to minus

0.50%. Outside of that the calendar is pretty light really, apart from one important release

here in the UK and a couple stateside later in the week.

In respect of that ECB monetary policy decision, a 10bp deposit rate cut is surely priced into

the markets? However, certainly no change is not, but I doubt very much that the ECB will

refrain, partly because the data out of Germany continues to deteriorate and that’s ringing

alarm bells all around the governing council. The problem is that further lowering the

deposit rate will probably do little more than inflict further pain on the commercial banking

sector and drive European bonds yields more into the red.

Finally, looking at the political scene here in the UK as the new week gets underway, there’s

much that could surprise over the next twenty-four hours and whilst the pound has rallied

most recently, I am cautious on further upside without a much better excuse to deliver that

beyond what we already know.

Perhaps, the most telling thing of all is the rhetoric still emanating from across the channel,

where it seems the French are, as yet disinclined to grant a further A50 extension. Hence it’s

a case of keeping one’s eyes and ears open because any UK election date might, ironically

and absurdly, actually be determined not by parliament but the EU.

Important Economic Releases/Events Due This Week.

10/09- 2.30am-China August Annualized CPI Inflation Report

10/09- 9.30am-UK August Unemployment Report

10/09- 11.00am- US NFIP August Small Business Optimism Index

12/09- 12.45 Eurozone- ECB Monetary Policy Decision

(Consensus- Deposit Rate to be Reduced by 10bp to -0.50%)

12/09- 1.30pm Eurozone- Post ECB Monetary Policy Meeting Press Conference

12/09- 1.30pm US August CPI Inflation Report

13/09- 1.30pm US August Advanced Retail Sales

13/09- 3.00pm US University of Michigan September Consumer Sentiment Index