Another day another rout

Euro higher on taper shock

"When the European Central Bank ends its asset-purchase programme it will do so by gradually reducing the amount it buys each month rather than just stopping dead." This shock revelation sent the euro higher on Tuesday afternoon, making it the day's top performer.

On its own, that news would have raised no eyebrows. Of course the ECB will wind down its QE programme. If Mario Draghi were to rock up to his press conference one day and announce that the bank had turned off the cash spigot financial markets would go barmy. But the news was released in the context of recent observations by two senior ECB folk, chief economist Peter Praet and board member Yves Mersch, who noted that banks with lower share prices tend to lend less. One reason for lower bank share prices is that negative interest rates hit their profitability, making them a less attractive investment. 

Uninvestable banks lending less money is not at all what ECB monetary policy aims to achieve. So investors put two and two together and, bingo! The ECB must be preparing the way for an early end to the QE scheme! The euro jumped a cent higher against the US dollar.

(Yawn) sterling lower again 

Brexit uncertainty took another -0.4% off the pound's value on Tuesday as it added a four-year low against the euro to the 31-year low on Cable. The fall happened despite a second positive surprise from the UK purchasing managers' index readings.

The pound also touched an all-time low against the NZ dollar but was helped back up by the deus ex machina of a -3.0% decline in the Global Dairy Trade milk price index. Shortly afterwards all the supposedly "risky" commodity currencies were hurt by the ECB taper story. Already in reverse the Kiwi clocked a daily loss of one cent against sterling. The others made headway only because of the pound's retreat.

For what it's worth, Britain's construction sector PMI exceeded the forecast by three points, coming in at 52.3. But nobody cared: they were all fixated on the fleeing pound. It would have made no difference if the number had been 92.3.

Three out of three?

The third of the PMI trio, this time for the services sector, comes out at half past nine. Analysts are going for 52.0 but the experience of the last couple of days suggests the actual number will be higher than that. But not high enough to help the battered pound.

The round of PMIs today is accompanied by Euroland retail sales and the balance of trade figures for Canada, the United States and, tonight, Australia. 

A point to ponder: In the four months since the referendum sterling has fallen by roughly 13% against the euro and the US dollar even though, brexitwise, nothing has happened. But anyone who thinks it is due for a rebound should bear in mind that moves like this can become seriously overextended.