Major Overnight Headlines
• Australia records A$765mln trade deficit in July on faster import growth, but trade surplus with China narrows
• ECB’s Asmussen says forthcoming bank stress tests “last chance” to build confidence, Bloomberg
• Riksbank’s policy and forecasts for key variables mostly unchanged; “welcomes” new macro-pru framework
The first-half of the non-Asian session in London appeared to be largely driven by pre-event positioning, leaving flows rather indiscriminate. Indeed, the rally in the EUR from the lows across pairs made it appear as if FX has for some time been “selling the rumour” (i.e. a dovish ECB) and today “buying the fact” – but before the fact. That’s so typical of FX.
There are two reasons, primarily, why the GBP should fall in the event of a BoE statement this afternoon. The first is that we have to assume any communication with the financial markets today will be a comprehensive attempt to reiterate what has been said previously. Interest rates need to remain well anchored at low levels. The second is that the financial markets at large are still paying too much attention to the monetary side of the equation, and not the financial policy side of the equation instead. To quote Governor Carney’s Nottingham speech last week: “The important thing to recognise is that we now have tools other than interest rates that can be used to contain risks in the property and financial sectors. These so-called macroprudential tools were not available to us before the crisis and we are now fully prepared to deploy them if they were needed.”
The EUR on the other hand is still not straightforward at all yet. New liquidity measures or interest rate cuts are a EUR negative on the one hand, but they alleviate banking sector distress on the other, and that is a EUR positive. Additionally, any new EUR liquidity which alleviates banking sector distress may also flow abroad, and that too is medium-term EUR negative. Based on the price action this morning, we suspect that the “pain trade” is to the topside in the EUR, so EUR bears should be mindful of the fact that both the growth forecasts and Draghi’s general tone could very well be EUR supportive. However, given the risks associated with Fed tapering, Syrian tensions, and underlying banking sector distress we are content for now to fade any EUR/USD rallies into the 1.3230-1.3290 range or lower.
Read the full report: FX Daily
BMO