- Investors eye E.U. summit for direction
- Don’t expect any clear-cut decisions from Europe today
- RBA takes a pass on rate change
- Loonie bulls press panic button
Due to the importance of today’s impromptu European Union summit, major currency pairings are keeping to a relatively tight range amid low turnover in the overnight session.
However, it’s the U.S. dollar that continues to exhibit broad strength against major and commodity-related pairs due to concerns over possible Greek contagion and the impact of China’s equity market sell-off. Due to the significance of today’s meeting outcome, many investors and traders are prepared to sit the sessions out, waiting for clarity from Europe’s leaders versus being held hostage to costly political rhetoric.
The surfeit of Greek ultimatums is proving expensive to the majority, hence their preference to wade to the sidelines. The market must adjust to the incremental price changes across the various asset classes as optimism on a quick resolution between Greece and its European creditors is gradually eroded. With direct financial contagion now perceived to be limited for now (periphery yields trading in an orderly fashion), it’s the political ramifications that are harder to predict and price.
Yet market consensus does not see a clear-cut decision being delivered later today. The ‘ask’ is enormous for the future of the E.U.: should Europe resume bailout negotiations with Greece or prepare for a Grexit? Be forewarned: words not actions could prove more costly throughout today’s session.
Reserve Bank of Australia Takes a Pass
In today’s low interest rate environment, central banks are carrying the “big stick” and influencing the relative value of their domestic currency more so than fundamentals. The Reserve Bank of Australia (RBA) has been at the forefront in guiding its “overvalued” currency lower with Governor Glenn Stevens prepared to talk down the AUD at every opportunity. The RBA did not disappoint on that score, repeating its mantra that further AUD ($0.7430, a six-year low) depreciation seems both “likely and necessary.”
Earlier this morning at its scheduled policy meeting, the RBA passed up an opportunity to strengthen fixed-income expectations of a pending rate cut. Stevens left the cash rate target unchanged at a record low of +2%. The governor gave very little away during his press conference and is currently not rattled by European, Greek, or Chinese developments. Stevens acknowledged the regional problems, but did not go out of his way to highlight the issues. In retrospect, it’s probably more damaging to highlight the specifics of a troubling few weeks rather than that of a trend.
Money markets continue to price in a further rate cut by the RBA before year’s end. Expect slow growth, weak inflation, and soft business investment to be cited as the trigger.
Bank of Canada Rate-Cut Bets Increase
Petro currency shorts are all the rage after yesterday’s dramatic oil drop. Crude prices suffered their biggest one-day loss in three months, falling -7% on the back of a delayed reaction to an inventory build-up stateside last week, and on hopes of a deal with Iran. Should global powers find a way to end the 13-year stand-off with Iran and sanctions on that country are lifted, not only will it will create an emerging market opportunity, it will serve to swell the crude oil supply glut.
The loonie, as the Canadian $1 coin is known, remains at the forefront of most traders’ minds ahead of the Bank of Canada (BoC) meet next week. Governor Stephen Poloz is expected to follow the dovish lead of central banks of other commodity-based economies like the RBA and Reserve Bank of New Zealand.
Yesterday’s BoC business outlook survey has not influenced the loonie directly (CAD$1.2716). The general takeaway from the BoC’s quarterly survey was that “it could have been worse.” Analysts noted that there were only some marginal improvements on the forward-looking indicators that measure sales, investments, and hiring from the last go-around.
More importantly, the current and projected levels were well below recorded levels from one year ago. The CAD, like other commodity- and interest-rate-sensitive currencies (AUD, NOK, and NZD), has been under immense pressure from the flight to quality trading strategies. The loonie has also been dragged lower by soft crude and gold prices. Currently, fixed-income traders are pricing in a 100% chance of a -25 basis points cut by October (51.3), and they’re now starting to price in another cut in December (47.5), albeit a small chance.
With the USD well supported across the board, expect better buying of USD/CAD on pullbacks. Significant market resistance remains at CAD$1.2750, opening up to a new “handle” relatively quickly. Investors will look to this morning’s Canuck trade numbers for guidance.