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
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