- EUR/USD swung widely during yesterday’s disappointing ECB press conference and hit 1.1327 before returning to around 1.1241, to finally climb slowly towards 1.13 during the Asian session.
- European equities were mostly in retreat yesterday with the German DAX sliding 0.72% and the French CAC falling 0.34%.
- As usual, when the equity rally shows signs of slowing, investors turn to the JPY. USD/JPY was the worst performer amongst the G10 complex as it fell 0.30% in Tokyo
- We expect the currency pair to keep moving lower as the market already understood that the BoJ will be unable to weaken the yen
- All eyes now on Fed meeting where the likelihood of a hike is now only 28%. There is too little time left for policymakers to send hawkish signals that would allow markets to fully reprice a rate hike
- Upcoming Fed speeches will only provide mixed signals - a rate hike will not happen - at least not before year-end.
- USD is going to increase as long as the Fed maintains its stance that a rate hike is possible in the near-term.
- Our research tends to confirm that the state of the US economy remains completely overestimated
Equities and sovereign bonds suffered a small sell-off yesterday after the ECB held its monetary policy steady, while the market was expecting Mario Draghi to announce an extension of the quantitative programme to September 2016. The European institution left its three benchmark rates unchanged (the refinancing rate at 0%, the deposit facility rate at -0.4% and the marginal lending facility rate at 0.25%) and maintained its monthly asset purchase target at €80 billion.
EUR/USD swung widely during the press conference and hit 1.1327 before returning to around 1.1241, to finally climb slowly towards 1.13 during the Asian session. Amid the release of the decision, monetary policy sensitive 2-year German bund yields rose 4bps to -0.64%, while 10-year yields were up 8bps to -0.04%, still well below its 200dma that currently stands at around 0.1760%. European equities were mostly in retreat yesterday with the German DAX sliding 0.72% and the French CAC falling 0.34%.
As usual, when the equity rally shows signs of slowing, investors turn to the Japanese yen. USD/JPY was the worst performer amongst the G10 complex as it fell 0.30% in Tokyo, partially erasing yesterday’s gains. We expect the currency pair to keep moving lower as the market already understood that the BoJ will be unable to weaken the yen, while across the Pacific the Federal Reserve will remain on hold at its September meeting. On the downside, the main support area stands at around 99-100, while on the upside the closest resistance can be found at 104.32 (high from September 2nd).
In Asia, traders followed the negative lead from Europe and the US and sold their long equity position. Traders spared Japanese shares as the Nikkei was almost unchanged compared to yesterday close; however, with the exception of Hong Kong (up 1.25%) the rest of Asian regional markets were trading significantly lower. In Europe, equities seemed doomed to open in negative territory as traders are reluctant to go against the flow ahead of the week-end.
Yann Quelenn, market analyst: “Policymakers to speak before Fed meeting: Now that the ECB meeting is over, all eyes are on the next Fed meeting on 21st of September. For the time being markets are pricing in a small probability (28%) of a Fed rate hike. There is too little time left for policymakers to send hawkish signals that would allow markets to fully reprice a rate hike.
There will be many much-anticipated speeches over the next week such as those from Governor Lael Brainard, New York Fed President Dudley or Vice Chair Fischer. In our view, these speeches will, as usual, only provide mixed signals. We do believe that a rate hike will happen - at least not before year-end.
Currency-wise, the demand for dollar is going to increase as long as the Fed maintains its stance that a rate hike is possible in the near-term. The Fed has been sending hawkish signals for a while, with no real action being taken. Last December’s rate hike was only a move for the credibility. Our research tends to confirm that the state of the US economy is completely overestimated and will stick with this view.
Recent data such as the ISM non-manufacturing & manufacturing report have sharply declined. The manufacturing sector is in contraction, while the non-manufacturing industry should soon contract according to recent data.
When looking at the unemployment rate and wage growth, it is clear that there is something wrong. Unemployment and wages growth cannot be so low at the same time. Full employment should push wage growth higher, which is not the case and is absolutely conflicting. The fact remains that the unemployment rate in the US is largely underestimated.
At the same time, US corporate profits are still subdued or negative. Equities are on the rise, but this is only because of the era of free money.” ---
Today traders will be watching industrial output from Spain; industrial and manufacturing production from France; current account balance from Turkey; inflation report from Norway and Brazil; unemployment rate from Canada.