Morning Commentary: A September to Remember

Foreign Exchange - Morning Commentary
A September to Remember
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
As markets return on the first week of September, uncertainty remains the key theme.  Case in point, the UK is headed into the most critical period since the 2016 referendum, and the US and China can’t agree on a date for its next round of talks.  As a reminder, the US’s most recent round of tariffs are kicking in this weekend, and China plans to file a complaint with the WTO.

All of this uncertainty matters as it has been the unifying factor behind the growth downgrades over recent quarters.  After a relatively quiet August, September kicks off a wave of key central bank meetings and how monetary policy evolves to elevated uncertainty will be a key driver for the markets going forward.   
 
Last night, the Reserve Bank of Australia kept rates unchanged at 1.0%, meeting market expectations.  The central bank also kept its conditional forward guidance and stands ready to ease if needed.   As such, the Q2 GDP report later this week will provide an important gauge on the pace of the slowdown this year with the annual growth rate expected to slow.  Longer term, we expect further AUD weakness on a slowing global economy and further RBA cuts. 

Over in Canada, the Bank of Canada (BoC) will announce its next rate decision tomorrow.  Based on market pricing, there is little chance for any rate action.  This makes sense given the solid run of economic data out of Canada.  However, markets will be watching to see how wide the BoC will open the door for future rate cuts. 

The global economy is decelerating and Canada has over 50% of its GDP tied to trade.  As such, a deceleration in global growth should decelerate the Canadian economy.  With the Canadian economy expected to slow, the BoC will need to ensure that it protects against unwanted tightening.  The Fed has already cut rates in July, and further cuts are expected later this year due to the recent escalation in the US-China trade war.  As the Fed cuts, expect the BoC to be compelled to follow suit and defend monetary conditions in Canada albeit not at a one-to-one pace.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • In the UK, Parliament returns from its recess today and is scheduled to vote on taking over control of business tomorrow.  The voting results are expected to be known today around 2 pm PST.  PM Johnson has indicated he will move to call a snap election should he lose tonight’s vote.  While it’s a complicated and fluid situation, snap elections before October 31 opens the window for more GBP positive outcomes.  However, since Friday’s close, the GBP is the poorest performing G10 currency.
  • Italy appears to have formed a government with 5-Star and PD likely to formally agree to a coalition tomorrow.  Although before that can happen ~100K 5-Star members will take part in an online poll to approve the new partnership.
  • China’s manufacturing PMI surprised to the upside, coming in at 50.4 against expectations for a 49.8 print.  A reading above 50 implies expansion with a reading below 50 implying contraction.
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