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Finally Some Action

August 4, 2016

Good morning. Finally some action on Thursday as the Bank of England cut its main interest rate for the first time since 2009 and ramped up stimulus efforts in an attempt to stave off a recession. The central bank voted 9-0 to cut rates by 25 basis points and elected to increase stimulus purchases by 60 billion pounds as policymakers made it clear to markets their concerns over a Brexit-induced recession. Not surprisingly, sterling is the biggest loser today with the greenback experiencing a second straight day of advances before tomorrow’s July employment report. Equities in Europe and Asia were higher, this time led by financial stocks, as US private sector employment data on Wednesday bested forecasts and increased expectations (slightly) of a Fed rate hike before the end of 2016.

Ahead of this morning’s Bank of England release, it was another quiet session for Asia. Devoid of key releases, the Australian dollar was the big winner, boosted higher by rallying oil prices which jumped back above the $40-per-barrel mark. Australian retail sales for the month of June came in +0.1% against +0.2% expected without any impact on price action. The yen bounced as well overnight, boosted by a rally in the Nikkei as well comments from the Bank of Japan’s Iwata. Mr. Iwata commented that the central bank’s current policy mix is certainly not deficit financing and the local economy is no longer in deflation. The yen remains at multi-year highs as the central bank and government remain at odds on how to revive the economy. Sterling is lower by more than 1.25% in the hours following the Bank of England’s important decision. Governor Carney and his colleagues voted unanimously to cut rates and add to stimulus, in the form of £60bn of UK government bonds and £10bn of corporate bonds, in addition to the current asset purchases. Governor Carney also made it clear that banks have no excuse not to pass on the lower borrowing costs and some could be charged a penalty if they do not lend. Mr. Carney added that the central bank “took these steps because the economic outlook has changed markedly, with the largest revision to our GDP forecast since the MPC was formed almost two decades ago.” So far, the euro’s reaction has been extremely muted, but the single currency has turned over quite a bit over the last day, losing more than 1% against the greenback, continuing to respect a technical downtrend which began in early May. The ECB and BUBA’s Weidmann was speaking overnight on the issue of additional stimulus for EU, but those comments were largely ignored. The European Central Bank does not meet again until September 8th.

Turning to the US, we are about twenty-four hours away from the next critical non-farm payrolls report. Tomorrow, markets are expecting an announcement that 175,000 jobs were created in the US during the month of July. The US dollar, which suffered three straight days of losses, rebounded on Wednesday, but still under considerable pressure off of last Friday’s worrisome GDP figures. This morning, weekly jobless claims ticked up slightly as 269k Americans filed first time unemployment claims last week. US stocks have not managed to charge on as a result amid disappointing earnings from the ‘non-tech’ sectors. Oil prices finally snapped its losing streak on Wednesday, at one point rally more than 1.3% above the most recent lows. Stocks of crude oil in the US went up 1.41 million barrels last week following a 1.67 million increase the previous week. This was the second straight week of increases following nine straight weeks of declines. Technically, crude prices seem to be turning over but luckily for the Canadian dollar, concerns over the FOMC rate outlook have limited the downside with attention focused on the greenback.

Along with US jobs numbers tomorrow, Canada will also be releasing its own July employment report. The market is expecting a slight reduction in forces after June was relatively unchanged – unemployment should stay firm at 6.8%. Technically, USD/CAD has spent the last few months consolidating around the current spot rate. With the Bank of Canada not scheduled to meet again until early September and the data calendar rather quiet this month, the Canadian dollar should remain susceptible to outside forces, notably the performance of US data and energy prices.

 

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