· Dollar bides time ahead of ECB, Brexit woes hit sterling
The dollar held steady on Tuesday as investors weighed whether an accommodative turn from the European Central Bank later this week could hit the euro, while the pound nursed losses due to Brexit uncertainty.
A day after thin holiday trade, the greenback was slightly stronger against a basket of currencies at 93.128 and firmed marginally against the euro at $1.1809.
Moves in the Asian day were modest, but had the dollar back under gentle pressure as risk appetite appeared to return to equity markets.
The main focus this week is on the European Central Bank’s policy decision on Thursday.
Most analysts don’t expect a change in the central bank’s policy stance but are looking to the message on its inflation forecasts and whether it seems concerned by the euro’s strength.
The meeting comes after the single currency marked a two-year high just above $1.20 at the beginning of the month, until comments about its level from ECB chief economist Philip Lane knocked it lower.
“The ECB could raise more concerns over a further appreciation in the euro and make some downward revisions to its inflation projections,” said Commonwealth Bank of Australia currency analyst Kim Mundy, which would flag easier policy.
“In our view, the dollar can lift further over the remainder of the week because of the possibility the ECB takes a sharper dovish turn.”
Analysts say many currency market participants no longer consider the leadership race as a catalyst, as the next leader is likely to follow Abe’s policy path.
The yen last changed hands at 106.29 per dollar.
The British pound, meanwhile, was the laggard amid a fresh crisis in EU-UK trade negotiations.
New talks are due to begin in London later on Tuesday.
The pound edged 0.2% lower to $1.3146, after shedding 0.8% overnight.
· Biden and Trump go on the offensive as U.S. campaign enters final stretch
President Donald Trump and Democratic rival Joe Biden took rhetorical swipes at each other on Monday as the presidential campaign entered its traditional homestretch on the U.S. Labor Day holiday.
Trump described Biden, whom he trails in national polls, as a threat to the economy and “stupid,” while Biden took aim at Trump’s reported disparaging of fallen troops.
At a White House news conference, Trump said: “Biden and his very liberal running mate (Kamala Harris), the most liberal person in Congress by the way - is not a competent person in my opinion, would destroy this country and would destroy this economy.”
Biden’s campaign also announced the endorsements of three unions: the Laborers’ International Union of North America, the International Union of Elevator Constructors and the National Federation of Federal Employees.
Biden promised to be the “strongest labor president” in the history of the country, vowing to hold executives legally accountable if they interfere with union organizing, and to raise the minimum wage and strengthen the National Labor Relations Board.
· Markets Will Watch ECB Announcement Closely
It is a shortened trading week with the Labor Day holiday. But the big event this week is the ECB meeting on Thursday.
The ECB chief economist already noted last week that the euro rate absolutely mattered, and if it does matter, then the ECB may look to try to weaken it.
A weaker euro is bullish for the dollar and bearish for risk assets and anything linked to inflation. Now, the ECB may not choose to take aggressive action at this meeting, but it is the language or jawboning, they choose to use that will matter most, putting the market on notice.
This may be a crucial meeting, in that context, for the ECB to get out ahead of the Fed and try to turn the tied in what could become a race to devalue currencies. The dollar has been hanging around the 92 to 92.50 level, but has been showing signs of turning with an dollar index that is diverging higher. It will take a move above 93.50 to get the dollar into rally mode.
Meanwhile, the market may already be getting ahead of the curve because you can see the rates to borrow overseas dollars are on the rise, with the eurodollar futures appearing to have broken out potentially.
The euro has been challenging the 1.20 level vs. the dollar, but to this point, it has been unable to break out. But a reversal may be on the way, with an RSI that is dropping and diverging from the rising euro. A break below 1.17 in the euro gets it moving lower back to the trend line, and potentially to 1.14.
Now a more strong dollar should be positive for European equities, as a weaker euro will make the export economies like Germany more competitive, while also helping to boost inflation and growth for the region. But, at the same time, this a negative for US dollar quoted ADRs.
If the ECB takes on a more aggressive monetary stance, it is likely to widen the spread between US and European interest rates. The spread between the US and Germany 10-year bonds are ready to surge and break out. If that should happen, we could see the spread rise to around 1.42% from 1.20%, further strengthening the dollar vs. the euro.
Meanwhile, Oil looks like it could ready to move back to $34.
Finally, a stronger dollar hurts US equities because it makes multi-nationals less competitive and hurts the revenue and earnings; when converting back into US dollars for reporting purposes, it acts as a drag on earnings.
The worst thing that can happen is a sudden and aggressive move higher in the dollar index over the coming weeks. What happens this week with the ECB will matter a great deal.
· German July trade figures point to slow recovery
German exports remained far below their pre-crisis levels in July despite a 4.7% increase during the month, data published on Tuesday showed, adding to signs that Germany’s economic recovery from the coronavirus will be slow.
Imports rose by only 1.1% on the month, taking the seasonally adjusted trade surplus to 18 billion euros, the Federal Statistics Office said.
The data add to expectations that Europe’s biggest economy will return to growth in the second quarter helped by a return to pre-crisis activity levels domestically and in some of Germany’s main trading partners.
· Japan's Nishimura says rising income to underpin consumption
Japan’s Economy Minister Yasutoshi Nishimura on Tuesday voiced hope that rising household income and a rebound in exports would underpin consumption and prevent capital expenditure from weakening further.
“The economy was in a severe state in April-June because we intentionally halted activity to contain the coronavirus. But it has recently shown signs of picking up,” Nishimura told a briefing after a regular cabinet meeting.
· Japan's Suga says coronavirus a top priority, to stay on Abe policy course
Japan’s chief cabinet secretary, Yoshihide Suga, a frontrunner to be the next prime minister, said on Tuesday he would expand testing capacity to fight the coronavirus pandemic and push for wide coverage of vaccines.
Delivering a candidacy speech for the premier’s role, Suga said virus policies would be his top priority and he would stick to the “Abenomics” economic policy set out by outgoing prime minister Shinzo Abe.
· Japan to spend $6.3 billion from emergency reserve for coronavirus vaccines
The Japanese government approved on Tuesday spending of 671.4 billion yen ($6.32 billion) from emergency budget reserves to secure coronavirus vaccines, the Ministry of Finance said.
The government has said it hoped to secure enough vaccines for every citizen by the middle of next year, and provide them for free.
· Indian economy projected to contract 11.8% year-on-year, Fitch domestic arm says
India’s economy is projected to contract 11.8% on the year in the current fiscal year beginning from April, before bouncing back in the next fiscal year, India Ratings and Research, a domestic arm of ratings agency Fitch, said on Tuesday.
The economy is projected to contract 11.9% in the current quarter, followed by a contraction of 6.7% in the December quarter and 5.4% in the subsequent quarter, Sinha said, citing the adverse impact of coronavirus pandemic.
Earlier, India Ratings had projected the economy would contract 5.3% in the current fiscal year, versus growth of 4.2% in the previous year.
While a second wave of infections sweeps the globe, India has not yet managed to flatten the first wave, he said.
· India records highest coronavirus deaths in more than a month
India recorded its highest daily deaths from the coronavirus in more than a month on Tuesday, even as new infections slowed, data from the health ministry showed.
The health ministry said 1,133 people had died of COVID-19 in the last 24 hours, the highest since July, taking total mortalities to 72,775. But new daily cases were at 75,809, the lowest in a week.
India surprassed Brazil on Monday to become the country with the most number of coronavirus cases outside of the United States and has a cumulative caseload of 4.28 million.
· India, China accuse each other of firing in the air on tense border
India and China have accused each other of firing in the air during a new confrontation on their border in the western Himalayas, in a further escalation of military tension between the nuclear-armed nations.
· Oil prices fall as fuel demand concerns grow after end of U.S. summer driving season
Oil prices fell on Tuesday amid concerns that a possible rise in Covid-19 cases following the U.S. Labor Day long weekend, which also marks the end of the peak U.S. driving season, could squeeze demand for fuel.
Coronavirus cases rose in 22 of the 50 U.S. states, a Reuters analysis showed, on the holiday weekend traditionally filled with gatherings to mark the end of summer. At the same time cases are flaring up in India and Britain.
U.S. West Texas Intermediate crude futures fell 76 cents, or 1.9%, to $39.01 per barrel at 0433 GMT, playing catch-up with a drop in Brent prices overnight.
Brent crude futures eased 8 cents, or nearly 0.2%, to $41.93 a barrel, after falling 1.5% on Monday.
Brent dropped on Monday after Saudi Arabia’s Aramco, the world’s top oil exporter, cut the October official selling prices for its Arab light crude, seen as a sign demand growth may be stuttering as Covid-19 cases flare up around the world.
Reference: CNBC, Reuters
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