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Daily Market Analysis Temperamental Tuesday

Stephen Casey October 4, 2016

– Dollar Surges Higher

– ECB’s Praet Cautions on Low Rates

– Sterling Touches 31-Year Low

 

Good morning. A lot of moving and shaking on Tuesday as the British pound has now reached its lowest level in over thirty years on Brexit worries. Oil prices have subsided a bit, which has given the US dollar a significant boost, making grounds against a number of major currencies. Overnight, India’s central bank slashed interest rates by 25 basis points in what was a surprise move, leaving their headline rate at 6.25 percent. The Reserve Bank of Australia left their main rate unchanged citing lower forecasts for domestic inflation. North American equities are pointing to a positive open after strong gains for Asia and Europe today. There is very little on the economic calendar this morning following stronger US manufacturing numbers on Monday.

Central bankers in Australia kept their headline interest rate at 1.50 percent with an announcement overnight. The Australian dollar is only a touch lower as central bankers noted lower forecasts for inflation and cautioned that an appreciating Australian dollar could “complicate economic adjustment.” This was the first meeting for new Governor Philip Lowe who took control of the RBA a little over two weeks ago. Meanwhile, it was a different story in India as the new six-member monetary policy panel cut rates by 25 basis points on Tuesday. The Indian rupee has touched a four-week low as a result of this morning’s action as local stocks closed higher by 0.32%. Today’s strong gains in the equity space weighed heavily on the yen, which is trading lower versus the dollar and euro. The Bank of Japan’s Kuroda didn’t help the yen’s cause, stating negative rates could be a plus for the overall economy. The New Zealand dollar was one of the few winners on Tuesday, benefiting from AUDNZD cross sales following the RBA announcement.

Turning towards Europe, the big story remains the pound which is now trading at its lowest level since 1985. Senior members of PM Theresa May’s government were quoted overnight as refusing to prioritize the UK’s financial sector when Brexit negotiations begin in early 2017. Funny enough, UK equities markets jumped much higher today with the FTSE crossing the 7,000 level for the first time in 16 months as UK construction PMI came in much higher than expected. This continues a strong run of domestic data out of the UK, even as the broader market remains very nervous about the impending Brexit fallout. Deutsche Bank shares touched a two-week high overnight, as German markets opened for the first time this week following yesterday’s Unity Day holiday. Volatility remains elevated for DB shares which have seeped into the foreign exchange market, although today’s price action signals the correlation may be breaking. Speaking on Tuesday, the European Central Bank’s chief economist Peter Praet did caution low rates could be here for much longer, warning “the ECB will preserve its accommodative stance until inflation returns to our aim.” These comments no doubt have weighed heavily on the euro as markets search for guidance. EU producer prices for the month of August slipped lower by 0.20%, as forecasted.

Turning towards North America, the big story this morning is the big dollar. The greenback is surging higher as odds for a rate hike are increasing following hawkish comments from the Fed’s Lacker and Mester. Speaking earlier today, Richmond Federal Reserve President said there is a strong case for moving rates higher, arguing that rates might have to rise in the short-term to keep rising inflation under control. Mr. Lacker went as far as saying the headline rate here in the US could be as much as 150 basis points above the current rate. On Monday, Cleveland Fed President Loretta Mester made the case for a November hike following more positive US manufacturing data. Speaking on Bloomberg television, Mester said moving in November would “remain compelling.” The odds for a December hike are now up to 61 percent. Oil prices have finally cooled off a bit, which has resonated in some short-term weakness for the Canadian dollar. The Loonie continues to trend lower but has yet to break significant technical support. The data calendar is empty this week so further Canadian dollar weakness could hinge on tonight’s

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