FX: Beginning of the Week Recovery in Risk
Daily FX Market Roundup Sept 9, 2019
All of the major currencies recovered today in what was a quintessential recovery in risk appetite. USD/JPY rose above 107 on the back of higher bond yields and US equities. Despite Friday’s lackluster jobs report and the lack of US data on Monday, 10 year Treasury yields rose above 1.6%. Investors were moved by the People’s Bank of China’s decision to lower its reserve requirement ratio by 50bp. This marked the third change of the year and fanned speculation for more aggressive fiscal stimulus from China. The latest trade numbers from China were dismal – not only did the surplus shrink more than expected but imports and exports declined. While overall exports fell only 1%, exports to the US were down 16% year over year on trade tensions. On Friday, White House economic advisor Larry Kudlow said a phone call earlier in the week with China on trade “went very well” which could explain some of the optimism but until the tariffs are reduced or canceled, we are reluctant to believe any “talk” of progress. With that said, we are more than a week away from the Fed meeting, so unless there are negative trade headlines before then, USD/JPY losses could be limited while the Australian and New Zealand dollars could extend their gains.
This week is all about the euro. The European Central Bank meets on Thursday and for the most part, we expect the single currency to remain under pressure. Yet better data and reports that the German government is considering fiscal stimulus helped EUR/USD recover today. Germany’s trade and current account balances were much stronger than expected thanks to an uptick in exports – economist had anticipated a decline. More importantly, the German ministry said a budget adjustment is possible if the outlook warrants. There are reports that Germany could create a “shadow budget” to increase public investments. This persistent hint of fiscal stimulus suggests that the Germans are pretty serious about avoiding a deep prolonged recession.
Sterling also traded higher after British lawmakers officially ruled out a no-deal Brexit. Britain will now be forced to return to the European Union to ask for a delay if there is no withdrawal agreement by October 19th. This was one of Parliament’s last moves before they are prorogued until October 14th. The problem is that the government vehemently opposes the bill against a no-deal Brexit and have apparently come up with “about 20 ways” to get around it. This includes ignoring the bill completely which is flat out illegal and hugely risky, send a second letter to the EU that says “Ignore the request,” which the EU could push back against harder or table a bill that amends the Fixed-term Parliament Act which would just require a simple majority in Commons to pass. UK labor market numbers are scheduled for release tomorrow and while we have every reason to believe that the data will be weak according to the PMIs, Brexit remains the main focus.