- The Brazilian real is suffering again from the uncertain political environment as impeachment threats materialise eventually locking the country into an extended period of political gridlock, which would push Brazil deeper into recession
- The EUR continues to stabilise ahead of today’s ECB meeting as the outcome is quite uncertain and market participants are split
- We personally believe that the central bank will wait until December before starting to prepare the market for an extension/increase of the QE as otherwise it would be considered as a sign of weakness and would damage the ECB’s credibility
- EUR/USD is consolidating above the 1.1327 threshold and will unsurprisingly trade range-bound until Draghi comments
Yesterday was a busy day for a few central banks but there were no surprises. In spite of a cut in its growth forecast - to 2% from 2.3% - the BoC kept its overnight lending rate unchanged at 0.50%. In Brazil, the BCB did not want to increase the burden on the already wounded economy as they decided unanimously to maintain the Selic rate at 14.25%. Finally, in Turkey the central bank also left its benchmark rates unchanged. After a period of easing selling pressures, the Brazilian real is suffering again from the uncertain political environment as impeachment threats materialise. A request to open impeachment was submitted to the lower house’s president, Eduardo Cunha, on Wednesday. The market is now wondering whether Mr. Cunha is willing to accept the request, which would lock the country into an extended period of political gridlock, pushing Brazil deeper into recession. The BRL is therefore doomed to remain under selling pressures as the prospect of a positive outcome vanishes once again.
The EUR continues to stabilise ahead of today’s ECB meeting. The outcome of the meeting is quite uncertain and has market participants split. Some believe that Mario Draghi will prepare the market for either an extension of the QE or an increase in the size of the programme, while others think that the ECB’s president will wait until December in order to gather more information about the efficiency of the programme and to get a fresh forecast on the euro zone economy. We personally believe that the central bank will wait until December before preparing the market for an extension/increase of the programme, doing so at this point could be considered as a sign of weakness and would damage the ECB’s credibility. However, we do expect a dovish message as the latest data does not allow us to be overly optimistic. EUR/USD is consolidating above the 1.1327 threshold (Fibo 38.2% on August-September debasement) and will, unsurprisingly, trade range-bound until Mario’s comments.
On the equity front, equity returns were mixed in Asia. Japanese shares partially erased yesterday’s gains with the Nikkei and the Topix index off 0.64% and 0.56% respectively. In mainland China, shares got some colours back after a sharp sell-off in the previous session. The Shanghai Composite rose 1.20%, while the tech-heavy Shenzhen Composite climbed 3.45%. Hong Kong’s Hang Seng was off 0.68%, while South Korea’s Kospi fell 0.98%.
***Yann Quelenn, Market Analyst: US Housing Data: "The Fed is looking for more supportive economic data to decide when a further rate hike will happen. Officially Fed members’ attention remains focused on the jobs market. Hawkish members claim that employment conditions would fuel inflation, while doves support the idea of a reserve army that would flow back in the job markets as soon as the situation improves. In any case, it is clear that there is growing dissension surrounding jobs market statistics, which are been said to not accurately depict the current situation. Therefore, it is important to get additional evidence that would support a monetary change. From that standpoint, we think that housing market data is an important tool to more accurately appraise the real situation in the U.S.
Low interest rates and steady unemployment should provide the necessary traction to underpin the housing market. Last month, existing home sales fell 4.8% against the backdrop of constant jobs creation and mixed economic conditions. The main issue is that the era of zero interest-rate is not over and this adds upside pressures to house prices. We believe that today’s existing home sales will print in lower than consensus, which is expected to be released at 1.5% m/m. The EURUSD is set to gain on this data release. Events outside of the U.S won’t be the only drivers for broad USD trend. The economic situation in the U.S is largely overestimated and the Fed will soon have a hard time justifying the inefficiency the three quantitative easings they have launched over these past seven years.”***
Today traders will be watching September retail sales from the UK; unemployment rate from Brazil; ECB rate decision and consumer confidence for the Euro zone; Fed Nat activity index, initial jobless claims, Bloomberg consumer confidence comfort, existing home sales and leading index from the US.