By XE Market Analysis
The Dollar traded mostly softer, as did the Yen, against most other currencies amid a backdrop of buoyant global equity markets, although European stock markets showed signs of fatigue following a bullish session in Asia. The USD index (DXY) was showing a 0.2% loss as of the early PM session in Europe. EUR-USD lifted to a peak so far of 1.1715 before settling, remaining buoyed but so far holding below the three-week peak seen yesterday at 1.1717. Cable posted a two-month high of 1.3215, lifted in part by Sterling outperformance following an unexpected rise in UK inflation, which drove EUR-GBP to a seven-week low at 0.8861. The EU's chief Brexit negotiator also said that the EU is "ready to improve" its offer on the Irish border, which is a potentially significant development as the issue has been the major block toward making a deal, and shows the EU to be acknowledging the political realities of the UK. USD-CAD declined for a second day, posting a three-week low at 1.2939. Canada's focus today will be on the resumption of NAFTA trade talks amid hopes for a deal by tomorrow. USD-JPY posted a two-month high at 112.44, with the Yen underperforming the otherwise soft Dollar. Yen crosses rallied, with the biggest gainer of which being AUD-JPY, with a rise of 0.6%. Sentiment has been buoyed by pledges of pro-investment and pro-growth measures by China, North Korea's Kim vow to work on the "complete denuclearization", and with Trump declaring that the U.S. trade deal with South Korea has been "fully renegotiated." These factors have offset the escalation in the U.S.-China trade war.
Dollar softness has been at play amid a backdrop of rising global stock markets. There remain a mixture of influences and potential influences on EUR-USD. One potentially bullish influence are shifting Fed versus ECB policy expectations, with the former's tightening cycle at a relatively mature stage while the latter's is set to start. However, concerns remains about the populist coalition government in Italy, both its viability and its ability to implement credible budget decisions and policies, which has left the Euro with a factored-in discount, which could increase depending on how things work out. There is also a chance that markets are underestimating the degree to which the Fed may have to eventually tighten, given the mix of loose fiscal policy and enduring strength of economic growth, which is leading to tighter labour markets. The impact of the tariffs on Chinese imports on the U.S. economy is likely to be limited, too, with Chinese goods imported accounting for only 10% of the total of goods imported in the U.S. Goldman Sachs has estimated that the impact of the U.S. tariffs will add only three hundreds of a percentage point on to U.S. CPI. EUR-USD has resistance at 1.1687-90, and support at 1.1650-52.
Sterling jumped concomitantly with Gilt yields in the wake of the unexpectedly perky August inflation report out of the UK, with Cable rallying nearly 50 pips and EUR-GBP dropping by some 30 pips before stabilizing. Cable posted a two-month high at 1.3213, since settling back under 1.3200. UK August CPI rose to 2.7% y/y, up from 2.5% y/y in July, versus the median forecast for a dip to 2.4% y/y. Core CPI also jumped, to 2.1% y/y from 1.9% y/y in the month prior, confounding the median expectation for an unchanged 1.9% outcome. The data will capture the attention of the BoE after last week's labour market report showed UK wage growth unexpectedly picking up. The August services PMI report also revealed that tight labour markets have been constraining employment growth, leading to higher salary payments. The BoE has highlighted upside risks to inflation due to tight labour markets and a low productivity growth rate, which has been a justification for its gradual tightening policy. We don't advocate following Cable higher due to Brexit-related uncertainty, which will likely remain until at least after the Conservative Party annual conference on September 31st - October 3rd.
USD-CAD is down for a second day, posting a three-week low at 1.2947 so far. The move has been driven by broad weakness in the U.S. dollar, with the Canadian buck trading mixed versus other currencies, including posting modest losses against the Euro and Australian Dollar. Focus today will be on the resumption of NAFTA trade talks between the chief negotiators for Canada Freeland and Lighthizer in the U.S. Thursday is currently seen as the latest deadline to get a handshake deal. These "deadlines" have come and gone before, though any news of a long-awaited handshake would like sharp a sharp drop in USD-CAD. Canadian August CPI data is up on Friday, where we project to come in at 2.9% y/y from 3.0% y/y in July. USD-CAD has resistance at 1.2979-80.
