The European Central Bank kicked off its corporate bond-buying program today and investors applauded the move by driving the euro above 1.1400. While this reaction may be counterintuitive especially as Eurozone corporate bond yields dropped to its lowest level in more than a year, their aggressive start gave investors hope that this additional stimulus plus the TLTRO program beginning on June 22nd will be effective in stimulating inflation and growth in the economy. After hitting a record low, 10-year German bund yields also rebounded and this recovery on a day when Treasury yields declined helped to drive EUR/USD higher. No Eurozone economic reports were released today but Germany’s current account and trade balance is scheduled for release on Thursday. ECB President Draghi also speaks in Brussels in the morning and with the recent appreciation in the currency he may feel compelled to remind the market of their dovish monetary policy bias. If EUR/USD breaks 1.1400 in a more meaningful way it will be headed for the April high at 1.1465.
The U.S. dollar traded lower against all of the major currencies today except for the British pound, which gave up earlier gains to end the day lower against the greenback. The volatility in sterling is tied to Brexit uncertainty and had nothing to do with the market’s appetite for U.S. dollars. The weakness of the dollar, decline in Treasury yields and rise in stocks tell a consistent story of pared back expectations for Fed tightening. Fed fund futures are pricing in 0% chance of tightening this month and only 20% chance of tightening in July. At this stage, the Fed may opt for September when there is a press conference but the timing of the U.S. election complicates that decision. Either way there are fewer traders looking for a summer rate hike and their shift in expectations has and should continue to keep the dollar under pressure. With that in mind, USD/JPY is struggling to extend its losses ahead of next week’s monetary policy announcement.
Another day another rollercoaster ride for sterling, which climbed as high as 1.4600 only to end the day near 1.4500. U.K. data was very strong with industrial production rising 2% in April and the NIESR GDP estimate rising to 0.5% for the month of May. Manufacturing production grew at its fastest pace since 2012 and the improvement is consistent with the pickup reported in the PMI manufacturing index. The trade balance is scheduled for release tomorrow and given the recent reports, the risk is to the upside. However just like today, the market may overlook the data and choose to focus on Brexit headlines. According to UK Finance Minister Osborne, Turkey will not be joining the European Union, which should encourage voters to Remain because Turkish migration is viewed as a threat. However for the time being sterling traders have largely ignored the report.
The Reserve Bank of New Zealand left interest rates unchanged this afternoon, which was right in line with expectations. However based on the sharp rally in the currency, traders were clearly positioned for a rate cut. We’re a bit surprised considering that New Zealand’s economy mostly saw improvements since April but nonetheless the market’s reaction was strong. While the RBNZ said NZD strength is holding down tradables inflation and that further easing may be required, their upward revision to 2016 and 2017 inflation forecasts suggest that they are not really concerned about low inflation and in fact they are probably more concerned about rising house prices. Easing is done for the time being down under and so far the recent appreciation of commodity currencies hasn’t worried central bankers in the region.
Last night’s Chinese trade numbers still proved to be net positive for the Australian and New Zealand dollars. While the trade surplus increased less than expected, imports dropped only -0.4% compared to a forecast of -6.8%. China is an important trading partner for both Australia and New Zealand and while this includes exports and imports, their growth hinges on Chinese demand – that’s why both currencies soared on the back of the Chinese trade report. China’s steel imports also increased 3.7%, a sign that their demand for hard commodities and raw materials could finally be recovering. No Australian economic reports will be released this evening but Chinese inflation numbers are on the calendar.
USD/CAD fell for the fourth consecutive trading day on the back of rising oil prices. Economic data from Canada continued to disappoint with housing starts rising less than anticipated and building permits falling. Between the deterioration in manufacturing activity and now the housing market – we are seeing a major misalignment between the performance of the economy and the currency. Higher oil prices will contribute to growth but its positive impact will be limited by the recent appreciation of the currency.