Subdued FX markets look to Powell, Lagarde

6th October 2020 – Macro Daily

Risk Appetite

Global risk appetite received a boost late in yesterday’s US session on the news that the US President had left hospital (although he will continue receive 24 hour care at the White House). Trump has reportedly had no fever for over 72 hours, nor has he had any respiratory complaints. US equities thus had a strong session, with the S&P 500 ending up 1.8% higher, with upside also being attributed to growing “fiscal stimulus hopes”.

Asian bourses thus also had a strong overnight session, playing catch up to gains on Wall Street. However, recent upside momentum in US equity index futures petered out overnight; S&P 500 futures currently trade 0.1% lower, with price action capped by the 3400 mark for now. Still, mid-September highs of around 3430 are not out of reach. Trade in European equities is equally subdued this morning (the Stoxx 600 is flat) and front month brent and WTI are flat-lining around the respective $39.50/bbl and $41.50/bbl levels. Meanwhile, the US treasury curve continues to steepen, albeit at a much more modest pace than was the case yesterday.

Today’s broader lack of conviction is unsurprising given we have both FOMC Chair Powell and ECB President Lagarde speaking, ahead of FOMC minutes tomorrow and ECB minutes on Thursday.

In terms of the latest on US fiscal stimulus, breakthrough on a deal remains elusive, but House Speaker Pelosi and Treasury Secretary Mnuchin continue to negotiate (they spoke for an hour on the phone yesterday and will exchange papers ahead of another call later today). It is worth noting reports that some within the Republican party remain “unconvinced” and continue to see Senate approval of any stimulus package as unlikely (but if Senate Majority Leader McConnell is on board then I’m sure a stimulus package could make it through). ING suspect that “in order to keep the good momentum in risk assets going, markets will likely require more indications that the bipartisan stimulus talks are progressing.”

Elsewhere, on the election front; further polling data suggests Biden is widening his lead over the incumbent. A Reuters/IPSOS poll of likely voters in swing states Pennsylvania and Wisconsin had Biden 5% and 6% ahead respectively.

G10 FX

Mirroring the tone elsewhere, G10 FX markets are mostly subdued this morning, though we did see some choppy action at the EU open (a bout of USD weakness that quickly reversed). USD is flat on the day, with DXY off lows in the 93.30s but remaining capped by the 93.50 level; to the downside, we have the 50dma at 93.25, to the upside 1st October low at 93.51 then the 21dma at 93.58.

After this morning’s brief bout of USD volatility, EURUSD is back to trading flat at the 1.1780 mark, with the psychological 1.1800 (which also has 600mln expiring at today’s NY cut) level providing resistance for now. To the upside, the 50dma sits at 1.1803 and to the downside we have the 1st October high of 1.1769, as well as the 21dma at 1.1766. August German industrial orders this morning were strong, in fitting with the narrative of outperformance of the Eurozone (particularly German) manufacturing sector – EUR was unmoved on the data.

Elsewhere, amid a lack of Brexit updates to drive sentiment, cable also trades relatively subdued, if not a little higher; GBPUSD saw short-lived gains above the 1.3000 level in recent trade, but is now back in the 1.2980s. UK Chancellor of the Exchequer was on the wires this morning but did not give away anything new on future UK fiscal policy.

Meanwhile, NOK, CHF, SEK, CAD and JPY are pretty much flat vs the buck on the day, while the antipodes are the underperformers, led lower by choppy post-RBA price action in AUD;

The RBA held rates at 0.25% (going into the meeting, money markets had been pricing a reasonable possibility of a cut to 0.1%), reiterated its usual forward guidance (to keep policy accommodative until progress being made towards inflation and employment goals) and came across as a little more optimistic on the outlook for the Australian economy, particularly in terms of GDP and employment. Thus, the immediate reaction of AUD was to spike higher; AUDUSD moved sharply above the 0.7200 from pre-meeting levels around 0.7190, but could not make it beyond the 1st October highs at 0.7210. The cross has since reversed sharply to trade closer to 0.7150 (just below its 100dma). In terms of why AUD might have reversed, some insight from Westpac;

Firstly, Westpac note that the Statement ended on a very clear dovish note, “The Board continues to consider how additional monetary easing could support jobs as the economy opens up further.” In this Statement he chose to end the Statement on this note rather than in September when the second last sentence read “continues to consider how further monetary measures could support the recovery”., Moreover, the Australian bank continues that the final sentence in the Statement will always be the one of most importance and that the new phrasing of “additional monetary easing” is a stronger signal than the previous wording of “further monetary measures”.

Secondly, the bank notes that the Governor directly refers to a further easing by quoting market pricing “3-year yields have fallen to around 18 basis points as markets price in some probability of further monetary policy easing”. Westpac comment that, in their experience, “central banks like to refer to market pricing when it is consistent with their own biases.”

Also of note for AUD; last night’s trade data was disappointing; Australia’s trade surplus in August was just $2.6bln, well below expectations for $5.1bln. Looking ahead, the government will propose the 2020-2021 commonwealth budget, which RBC say will “be the framework for the Government’s recovery narrative, with policy focused on supporting growth, confidence, and jobs. This will demand numerous measures, which will also deliver a historically large budget deficit (RBC AUD236bn) and accompanying issuance program.”

The Day Ahead – Not much by way of important data. Speeches by ECB President Lagarde and FOMC Chair Powell to dominate focus.

0930BST/0430EDT, Final UK Construction PMI (Sep)

0935BST/0435EDT, ECB President Lagarde participates in pre-recorded fireside chat at the WSJ’s online CEO Council Summit… Unlike other ECB members, President Lagarde has not been drawn into “jawboning” EUR lower. Her language on EUR remains relatively soft and pretty much amounts to stating the obvious; the governing council will carefully assess all incoming information, including developments in the exchange rate, she has said, as well as noting that the external value of EUR has an impact on inflation, (so) we monitor FX movements. Otherwise, Lagarde is expected to continue to characterise the Eurozone’s economic recovery as incomplete, uncertain and uneven, and, regarding reports of an increasingly divided governing council, will likely characterise dissent as “healthy”.

1030BST/0530EDT, Australian Treasurer Frydenberg unveils new Common Wealth Budget for 2020-2021… Despite post-RBA AUD downside, ING think AUD might pare losses in and around this event, given substantial new fiscal stimulus.

1130BST/0630EDT, UK PM Johnson gives a keynote address on the closing day of the Conservative Party Conference

1300BST/0800EDT, EIA Short-Term Energy Outlook

1330BST/0830EDT, US and Canadian Trade Data (Aug)… The US trade deficit was its largest since 2008 in July, widening to -$63.6bln. Wells Fargo note that “the wider deficit during the month occurred as growth in imports (+10.9%) outpaced exports (+8.1%). The relative strength in imports lately has been primarily fuelled by soaring consumer demand for durable goods.” The recovery in Exports may continue to struggle to keep pace with that of Imports as the global growth environment struggles to find secure footing (the new resurgence of Covid-19 in Europe is not helping). But it is worth noting that the pace of improvement may also slow given, as Wells Fargo note, “the summer bounce in consumer activity looks to be fading heading into the fall.” Markets expect a trade deficits of $66.1bln in the US and 2bln in Canada.

1400BST/0900EDT, ECB President Lagarde participates in a panel discussion on the 10th anniversary of the European Stability Mechanism (ESM)

1540BST/1040EDT, FOMC Chair Powell speaks (via webcast) at the National Association for Business Economics Annual Meeting on the Economic Outlook… Powell is expected to reiterate that the Fed will “do what we can for as long as it takes” to support the US economic recovery and is likely to again call for more fiscal aid for the economy. Beyond that, markets will be on the lookout for any indications as to what it would take for the FOMC Chair to back further stimulus, and in what form this could take (analysts speculate the FOMC could lengthen the maturity of asset purchases).

1620BST/1120EDT, GlobalDairyTrade Price Index (of note for NZD, given Dairy exports make up over one quarter of the New Zealand’s exports).

1630BST/1130EDT, ECB Chief Economist Lane deliver an online speech at the online 62nd NABE annual meeting… Lane’s language on EUR has been much stronger than that of the ECB President’s; on September the 11th, he noted that core inflation has been significantly muted by the appreciation of EUR, and that recent appreciation dampens the inflation outlook (EURUSD was just above 1.1800 when these comments were made). More EUR jawboning is therefore possible, but is likely to have lost much of its sting.

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