Easing outlook sends EUR lower


In view of the US economic data it is surprising to see the USD looking so cheerful this morning. The NAHB housing market index was not a problem: Two points lower on the month at 64 it was lower than forecast but the NAHB was still happy to describe builder confidence as "solid in June". It was the other statistic that could have made trouble for the dollar; the New York Fed's Empire State Manufacturing Survey. It crumpled from 17.8 in May to -8.6 in June, a 26-point drop and the largest in the history of the survey. Although the number was considerably worse than the forecast 10.0, investors determined to wish it away. They decided the survey responses must have been swerved by the US president's threats of tariffs on Mexican imports, made a week earlier. 

Investors were equally ready to brush off comments by commerce secretary Wilbur Ross. Mr Ross dismissed the idea of a China trade agreement at this month's G20 meeting and said Trump is "perfectly happy" with cranking up the tariffs again. He is even "giving very serious thought" to the idea of imposing tariffs on all car imports. 


This morning's Euroland data - inflation steady at 1.2%, a narrower trade surplus, and erosion of economic sentiment - rather got buried by a speech delivered by European Central Bank president Mario Draghi. The numbers were not great but it was Sig. Draghi that did it for the EUR. Having looked good in the early European session it is 0.2% lower on the day.

Sig. Draghi's comments ought not to have come as a complete surprise. There has been plenty of talk about further easing by the central bank and one of his possible successors, Olivier Blanchard, suggested that fiscal tools would be needed to fight the next downturn. Even so, investors were taken aback by the plain speaking: "Further cuts in policy interest rates… remain part of our tools" and " fiscal policy should play its role". The stage is set for renewed ECB stimulus.


Another slightly uncomfortable day for the CAD took it 0.1% lower against the USD. Oil prices did not help: WTI crude was down by only 1.3% but a fall is a fall and there was no way to read it as a benefit to the Loonie.

The Canadian data showed foreign investors reducing their holdings of Canadian securities by $12.8 billion in April while Canadian investors "marginally reduced their holdings of foreign securities". Cross-border investment flows seldom have much impact on the currency.


Sterling's Achilles heel, once again, was Brexit. The particular fear is that the prime-minister-in-waiting will somehow manage to force Britain to trade on WTO terms after the end of October. Financial analysts put the chance of a no-deal Brexit at around 4/1 while the bookies see it at closer to evens. Neither of those odds makes the pound look appealing to investors. Its average loss on Monday was 0.4% and it is 0.4% lower against the USD.  

This afternoon at 4pm EDT the remaining contenders for the premiership vacated by Theresa May will take part in a televised Q&A. Among them will be Boris Johnson, the apparent front-runner in the contest who has worn a cloak of invisibility since the race began. Nobody knows yet where Mr Johnson stands on a host of policy issues, not least on Brexit. He has the potential to send the GBP lower if he sets out his agenda today.


Another statistic-free day in Japan left the yen to wander at the whim of the risk-off and risk-on factions. The risk-offers won and the JPY is a net 0.3% firmer against the USD.  

Had it not been for the ECB's Mario Draghi (cf.) the yen would have been all but unchanged against its safe-haven confrère, the Swiss franc. However, with talk of easing in Euroland the gravity of the EUR pulled the CHF lower.

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