- President Obama throws his support behind “Gang of Six” plan, providing comfort to the markets
- BoC significantly changes its tone, turning hawkish
- Expectations of dovish BoE minutes should pull GBP lower
With markets focused on debt issues in both Europe and the US, there has been some positive news on the US as the deadline nears. On Tuesday, President Obama threw his support behind the “Gang of Six” plan, a bipartisan proposal which calls for USD 3.75trn in deficit cuts over 10 years. Congressional leader said that the “Gang of Six” plan would pass the US Senate with as much as 60 or 70 votes. Both equity and bond markets responded positively to the news as equities rallied and 30yr yields became well bid. On the FX side, USD gained further momentum against the “safe haven” currencies, i.e. CHF and JPY, after the announcement. Progress on the budget and an eventual agreement would remove one of the main overhangs in the markets. With the US’s AAA status potentially in question pending a budget deal, Moody’s now said that they have placed 5 of 15 Aaa states on review for possible downgrade given the US sovereign risk vulnerability.
Turning to Europe, the focus remains on the EU Summit meeting on Thursday, but moves in Europe will likely be steered by the GIIPS spreads. The performance on Tuesday of the peripheral bonds helped support EUR as EURCHF rose to a high of 1.1688. While the strength of the CHF is concerning for the Swiss government, the government, in an emailed statement, rejected any immediate actions to mitigate its strength. They noted that any action would not produce the desired results because European leaders haven’t yet agreed on a solution for Greece. Thus, CHF will remain subject to news out of both Europe and the US.
While the BoC kept rates unchanged, the tone of the statement was unexpectedly hawkish, changing the language from “considerable monetary policy currently in place will be eventually withdrawn” to “considerable monetary policy currently in place will be withdrawn”. In addition, the BoC also noted that core inflation is slightly firmer than anticipated due to temporary factors and will remain around 2%. Also worth noting, the comment on the currency was much briefer than the previous statement, saying only that “net exports remain weak reflecting modest US demand and ongoing competitiveness challenges including the persistent strength of the CAD”. This could arguably be because the CAD has been relatively rangebound since the last BoC meeting. Nevertheless, the hawkish BoC should keep CAD well-supported, particularly against EUR and GBP. It will also CAD to catch up with its commodity currency peers — especially AUD — since the market is pricing in about 50bps of rate cuts over the next 12 months (which in our view is premature) vs. almost 50bps of rate hikes from the BoC. Thus if AUDCAD breaks below the 200-day moving average at 1.0091, CAD should see further gains against AUD. We expect the BoC to hike in December.
Also on the central bank front, the BoE will release its MPC minutes later today. Given the stream of weak data out of the UK, the minutes are likely to lean on the dovish side yet again, which is likely to be the trigger that will pull GBP lower.
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BNP Paribas
Corporate & Investment Banking