Pound down again as markets take risk off
Yesterday saw the US dollar make additional gains against the pound as risk appetite retrenched in equities. Having looked as if the US equity markets would have a constructive session, with equity futures up strongly overnight, European and US traders were unconvinced. As a result, it was another poor session, which undermined risk appetite. The pound was under additional pressure as the UK government confirmed that they planned to introduce legislation to contravene the UK/EU Withdrawal Agreement over the Northern Ireland protocol. The pound slipped beneath $1.30 in US trading hours and has remained beneath there over the Asian session. There is the risk for investors that this trend persists, given the political risks, which seem to be escalating. In addition, the increase in coronavirus infections has provoked additional restrictions from the UK government, with gatherings of more than 6 people banned and those in breach of the rules facing fines.
There are no important UK releases today, but with the UK/EU trade talks back underway there is always the risk of another negative headline to further undermine the pound. Meanwhile, the markets are taking the view that the risk of no deal on these trade talks has increased, which in turn has raised the spectre of additional interest rate cuts or quantitative easing from the Bank of England. The reversal in gilt markets has been swift, with 5-year gilt yields testing towards all-time lows yesterday, and 2-year yields reaching fresh lows. On the back of this, it won't matter whether the BoE cut interest rates below zero, as the markets are prepared to accept record low returns irrespective of official interest rates.
Euro clings on against rejuvenated dollar
The euro was also under pressure against the US dollar yesterday. During the Asian trading session it dropped to a low of $1.1757, as equity markets were lower across the board and US Treasuries benefitted. The NASDAQ ended the US session off over 4% as the tech sell off continued. The euro did have some support from fundamentals yesterday, as the Q2 GDP figures were slightly revised upwards. This has been indicated in the daily ahead of their release. Investment, government spending and household consumption were all revised down though, so the improvement came from net exports, which doesn’t exactly bode well in terms of the sustainability of the economic recovery. The euro is at risk of ceding more ground to the USD over the coming sessions, but has stood up better than most majors against the dollar’s rejuvenation.
The upcoming US presidential election could change the dynamic between the euro and US dollar, but for now the focus is on tomorrow’s European Central Bank Governing Council meeting. The pull-back in the euro versus the dollar has, in one sense, reduced any risks of greater deflation threat from this, but the euro has strengthened against the pound, testing multi week highs over the past session. There is no necessary urgency for additional monetary loosening, but the ECB’s concerns over the increase in coronavirus infections, lack of price inflation and stalling in activity, will likely have risen since the last meeting. With the ECB meeting now a day away, the euro is likely to trade cautiously prior to any announcements.
SARB headaches, Aussie drops, BoC unchanged
Yesterday’s South African Q2 GDP figures were predictable, in that the soft signals from the South African economy were that it had suffered dramatic reductions in output over the initial phases of the Covid-19 pandemic. The drop in output of over 12.5% in the second quarter left output more than 17% lower on YoY. The rand came in for some selling pressure after this release, dropping by more than 1.5%. The South African Reserve Bank cut interest rates back in July and are due to meet again next week. With inflation towards the bottom of the SARB target range, and other indicators of activity yet to swing back into recovery, there is an increasing risk that the central bank will loosen policy again, in an effort to further alleviate the worst effects of the pandemic on the real economy. That could reverse the rand’s recent appreciation further, since over the course of the last month the rand had appreciated by more than 6.5% versus the US dollar.
Released overnight, Australian September consumer confidence recorded a further rebound. It has now almost returned to pre-pandemic levels and was not adversely affected by the renewed lockdowns in certain states of the country. There was also positive news from the property market, with lending on residential property recovering sharply in July, having bounced in June also. These figures did little to help the Aussie dollar, however, which fell sharply against USD yesterday as commodity prices nosedived, a further function of the sudden resurgence of risk-off attitudes in financial markets. The CRB index, which measures a basket of commodity prices, dropped over 2% yesterday alone. If the downward trend in commodity prices continues, that could add to the pressure on currencies such as the Aussie. The ongoing escalation of tensions between Australia and China are an extra negative pressure for the Australian dollar.
The Bank of Canada’s meeting today is expected to pass off with no change in monetary policy. There was always little chance of an additional loosening from the BoC, but last Friday’s employment figures removed any risks. What will be interesting is whether there is any change to the language from the central bank following the decision. In all probability they should leave well alone, especially with the Canadian Parliament due to return from prorogation on the 23rd September and Trudeau’s government promising a bold spending programme. The Bank of Canada have more room for asset purchases, if required, but it looks increasingly unlikely that there will be any additional moves from the central bank until they see what, if anything, Trudeau’s government can get approved by parliament. The Canadian dollar has been put under additional pressure over the past session as commodity prices slipped again. Against the US dollar, the CAD closed out the US session at its weakest level since 14th August, showing just how quickly the markets have changed their assessment on risk appetite.