Dollar Soft Ahead of ECB Decision

US dollar bill and binary code (Digital Composite) marc

  •  The ECB meeting is the highlight for today  
  • During the North American session, the US reports weekly jobless claims and July consumer credit
  • Japan reported final Q2 GDP data overnight; China and Australia reported trade data
  • Mexico reports August CPI; Peru’s central bank is expected to keep rates steady at 4.25%

The dollar is broadly weaker against the majors ahead of the ECB decision. The Scandies and the Aussie are outperforming while the yen and sterling are underperforming. EM currencies are mostly firmer. ZAR and the CEE currencies outperforming while PHP, TWD, and THB are underperforming. MSCI Asia Pacific was flat, with the Nikkei falling 0.3%. MSCI EM is up 0.2%, with Chinese markets flat. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is flat at 1.54%. Commodity prices are mostly higher, with oil up 1.5-2%, copper flat, and gold up 0.2%.

The ECB meeting is the highlight for today. Staff forecasts will be updated. Over the last few months, the TLTRO II and corporate bond purchase programs have been implemented, but it is too early to evaluate the results. There does not seem to be a consensus to do more at this juncture. Perhaps the most that can be reasonably expected is that the ECB extends the asset purchase program beyond of March 2017. That is probably the path of least resistance. If not today, then when? Given the ECB’s modus operandi, the next window of opportunity would be with updated staff forecasts in December.

The euro is trading firm ahead of the decision. Any disappointment in the ECB is likely to see a test of the August 18 high near $1.1365. As always, there is a risk that Draghi pushes back against euro gains at the press conference. The economy remains weak, inflation is basically non-existent, and a firmer euro is the last thing needed now.

During the North American session, the US reports weekly jobless claims and July consumer credit. There are no Fed speakers today. Yesterday’s Beige book seemed to focus on political risk, citing growing uncertainty and business concerns about the upcoming elections. On economics, the report noted modest wage and price pressures despite tight conditions in several regional labor markets.

Japan reported final Q2 GDP data overnight. Headline growth was revised upwards to 0.7% q/q annualized from 0.2% previously. July current account surplus came in slightly smaller than expected at JPY1.45 trln adjusted. Dollar/yen showed little reaction to the data, however. The pair has traded in a 50 pip range today, and remains stuck near the 101.50 area.

China trade data for August was slightly better than expected. In USD terms, exports came in at -2.8% y/y vs. -4.0% expected, while imports rose 1.5% y/y vs. -5.4% expected. USD/CNY has been remarkably steady this quarter, trading mostly in the 6.6-6.7 range. For now, China is on the back burner.

Australia reported July trade. In USD terms, goods exports rose 2.2% y/y and was the first positive reading since July 2014. Goods imports still contracted slightly, however. With firm GDP and trade data this week, markets have likely downgraded their RBA tightening expectations. No action is seen at the next policy meeting in October. However, next month’s Q3 CPI print will be very important.

Mexico reports August CPI, which is expected to rise 2.77% y/y vs. 2.65% in July. It then reports July IP Friday, which is expected at -0.3% y/y vs. 0.6% in June. The economy remains weak, but price pressures are rising. The central bank is likely to remain in hawkish “wait and see” mode but will find it hard to justify another rate hike.  

Mexican Finance Minister Videgaray announced he is stepping down. Some press reports are tying it to Trump’s visit, but no official reason was given for his departure. It could also be the start of a wider cabinet shuffle by President Pena Nieto, who has seen his popular support fall to record lows. To his credit, Videgaray was able to push through some difficult economic reforms during his tenure, and was well-respected by the markets. His successor is likely to maintain tight fiscal policy.

Peru’s central bank is expected to keep rates steady at 4.25%. CPI rose 2.9% y/y in August and was in the 1-3% target range for the second straight month. The tightening cycle is over, and we think the markets should start thinking about an easing cycle by early 2017.