Morning Commentary: Steady As She Goes

Foreign Exchange - Morning Commentary

Steady As She Goes

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The European Central Bank (ECB) met today and provided a bit of a surprise to the markets as they were not as dovish as expected. Interest rates and monetary policy were kept unchanged as largely expected, and this was a disappointment to many traders and investors as the overall bias in the ECB over the years has been overly dovish. Market expectations had risen for further action by the ECB particularly when it had the political cover of many other G7 and G10 central banks lowering interest rates or extending policies that were seen as dovish over the past weeks and months; this includes dovish comments from Fed Chairman Powell this week.
 
For the markets, the net result of the official announcement and his post-meeting comments (sees no recession in sight) were that the ECB is staying the current course on monetary policy for the foreseeable future, and it disappointed those who were looking for more monetary policy accomodation. German interest rates are higher on the session (U.S. interest rates lower today) and the resulting interest rate differential has narrowed allowing the euro and many other European currencies to outperform today, not only against the U.S. dollar but against many other Asian and North American currencies.
 
Markets are likely to trade in narrow ranges over the rest of the North American session as the markets await the key U.S. jobs report tomorrow. Traders and investors will be watching closely the NFP payroll component in light of the very weak ADP report yesterday as there is a good correlation, but not constant correlation, between the two reports. Inflation data viewed as part of the average hourly earnings report will also be scrutinized closely. Stay tuned.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The U.S. trade deficit for April came in near expectations at $50.8 billion and was very close to the March reading. Inside the overall headline number, exports fell the most in three years (weaker demand for civilian aircrafts). Goods exports to China also fell sharply and are down 20% YTD. The Mexican trade deficit narrowed to $7.9 billion.
  • The Mexican peso is one of the weakest currencies today and has fallen nearly 1% before recovering from a one-two punch. Moody’s cut the country’s outlook to negative from stable which was immediately followed by Fitch also downgrading Mexico. The second part of the equation came from inconclusive trade talks at the White House between U.S. and Mexican representatives. The White House has indicated that the first 5% tariff increase on Mexican imports will start on June 10 and will continue to escalate if no progress is made on the broader issue of Mexico deterring more Central American immigrants from coming to the U.S.
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