Morning Commentary: Reason to Believe

Foreign Exchange - Morning Commentary
Reason to Believe
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, the optimistic momentum from last week’s announcement regarding further trade talks between the U.S. and China in October continues to impact the markets. Global equities continue to remain upbeat and hopeful about a breakthrough in the trade talks which is helping to push G7 interest rates incrementally higher and off their most recent lows. Over the past week, U.S. 2-year yields versus U.S. 10-year yields have returned to positive territory after being inverted which is a positive development. Safe haven currencies continue to give ground and even gold has come off its most recent highs.

Adding to the momentum is the market’s anticipation that the ECB and Federal Reserve will do their parts in lowering interest rates and potentially providing more monetary stimulus to cushion their respective economies. While it is still not clear exactly what actions the ECB will take on Thursday, it is with almost 100% certainty that the Fed will lower interest rates by 25 bps for the second meeting in a row on September 18.

Keep in mind that the global economic turndown related to the trade war and tariffs is not helped by an easing of monetary conditions. Supply chain disruptions and continued use of tariffs create uncertainty for business planning, and this uncertainty about the future will continue to impact future growth even if central banks lower interest rates. U.S. interest rates have come down sharply this year, and U.S. economic data continues to reflect a slowing economy and weaker job growth.

We anticipate that the markets will maintain their near term momentum but will also be confined to narrow ranges as the markets await the key ECB monetary policy decision on Thursday and the FOMC meeting the following week. The Fed has entered its blackout period prior to the FOMC announcement on September 18 so there will be no further communications or speeches from any of the Federal Reserve board members.
 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • China reported very weak August trade data with both exports and imports declining sharply once again. On the other hand, Germany reported July trade and current account data which both surprised on the topside with exports rising by 0.7% against expectations of a decline of 0.5%. This has provided a better tone for the euro as German exports rising is a good sign for an economy that is overly dependent on trade.
  • The British pound (GBP) has been extremely volatile today but overall is much stronger from Friday.The GBP initially opened lower in Asia on the back of weekend news reports that another senior minister had quit PM Boris Johnson’s cabinet. But better-than-expected July GDP and industrial production surprised the markets as many economists have been anticipating a possible pre-Brexit recession. U.K. GDP grew at its fastest pace in six months at 0.3% sending U.K. interest rates sharply higher and pulling the GBP higher.
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