· The dollar steadied on Wednesday as investors appetite for risk showed cautious improvement and the yen weakened in the shift away from safe havens, but currencies kept to tight ranges ahead of a series of major central bank meetings over the next week.
Investor focus for now is centered on the European Central Bank’s meeting on Thursday. Expectations it will push interest rates even further into negative territory have weighed on the euro, which has shed 3% since June.
The single currency edged higher to $1.1050, with bets divided on the likely scope and style of any stimulus.
The dollar index was steady at 98.332.
· Since being fired by news last week that a new round of U.S.-China trade talks were scheduled for next month, the risk-on sentiment has begun to fade.
But there was still enough optimism left for Asian equities to move higher, and for U.S. bond yields to hold near a one-month high, while the retreat from safe havens saw the yen ease to 107.77 per dollar, its weakest since Aug. 1.
· The pound stood at $1.2356, near its six-week high of $1.2385 hit earlier in the week on the reduced chances for Britain to crash out of the European Union without a divorce deal.
The Chinese yuan and Australian dollar briefly jumped after the editor of Communist Party newspaper The Global Times tweeted that China would introduce measures to mitigate the trade-war impact.
· EUR/USD lacks a clear directional bias in the run-up to Thursday's ECB rate decision. The Euro remains supported by the German stimulus talks-led bund yields surge while the US dollar steadies amid trade optimism and higher Treasury yields.
· The US investment banking giant’s, Goldman Sachs, analysts believe that the shared currency risks a break to the upside, as the European Central Bank (ECB) may disappoint the doves this Thursday.
Key Quotes:
“Risks of a disappointing outcome high.
The package could easily disappoint in terms of its size, its timing "or even whether it happens at all".
"We are no longer confident that an outcome in line with our view [for a substantial easing package] will drive the euro lower against the dollar over the near term."
· Analysts are split over what to expect from the European Central Bank (ECB) on Thursday, after central bank officials moved to downplay market expectations of immediate and substantial quantitative easing (QE).
In June, ECB President Mario Draghi confirmed he was exploring measures to boost the 19-member euro zone economy, citing persistent low inflation and sluggish growth.
These have been mooted to include a change in forward guidance, rate cuts, a tiered deposit rate and recommencing asset purchases, or QE.
However, ECB officials have dampened hopes of a substantial monetary stimulus package of late. French central bank President Francois Villeroy de Galhau and Estonian central bank President Madis Muller are the latest to cast doubt on the scale of intervention.
They join Sabine Lautenschlager, a member of the ECB executive board, Klaas Knot, president of the Dutch central bank, and Bundesbank President Jens Weidmann, who have all signaled skepticism about relaunching QE.
· Shweta Singh, managing director of global macro at TS Lombard, said in a note Wednesday that the shift in ECB communications was “puzzling.”
Singh also highlighted that a combination of a new round of tit-for-tat tariffs in the U.S.-China trade war, a strong dollar weighing on global financing conditions and dampening demand for euro area exports, and the chaos surrounding Brexit does little to ease these concerns.
Without a great deal of support from fiscal policy, she suggested the ECB will have to do the heavy lifting, but the effectiveness of a fresh round of stimulus would depend on what form it takes.
“The marginal benefits of cutting rates that are already negative are limited at best, even if such a move is accompanied by a new round of cheaper long-term refinancing operations (TLTROs) and a tiering of deposit rates,” Singh said.
She added that on the other hand, a second round of quantitative easing by the ECB (QE2) could provide a more meaningful boost to monetary and financing conditions. However, this would still have a milder impact than QE1, when “borrowing costs were higher, fragmentation across the euro area was severe and domestic risks were far greater.”
· German Chancellor Angela Merkel said on Wednesday there was still every chance for Britain’s divorce from the European Union to take place with a deal although Berlin is prepared for a disorderly Brexit in case that does not happen.
“We still have every chance of getting an orderly (Brexit) and the German government will do everything it can to make that possible - right up to the last day. But I also say we are prepared for a disorderly Brexit,” Merkel told parliament.
“But the fact remains that after the withdrawal of Britain, we have an economic competitor at our door, even if we want to keep close economic, foreign and security cooperation and friendly relations,” Merkel added.
Chancellor Angela Merkel said on Wednesday that the trade conflict between the United States and China was hitting Germany, which has traditionally relied on exports to propel its economy.
“We have international uncertainty due to the U.S.-China trade conflict and that is of course having an impact on an export nation like Germany,” Merkel told the Bundestag lower house of parliament.
· Billionaire liberal financier George Soros offered some rare praise of Donald Trump’s policies in a Wall Street Journal op-ed Tuesday, but said he’s worried the president will undermine his own strategy.
Soros called Trump’s policy on China, “coherent and genuinely bipartisan” as well as “the greatest — and perhaps only — foreign policy accomplishment of the Trump administration.”
In the op-ed, Soros called China “a dangerous rival in artificial intelligence and machine learning” but said its ability to compete in the 5G market is seriously hampered by Huawei’s dependence on U.S. companies.
“As long as Huawei remains on the entity list, it will lack crucial technology and be seriously weakened,” Soros wrote.
But Soros said he worries Trump could remove Huawei from the entity list as a concession to China during trade talks. Soros said he believes Trump will want to arrange such talks in the lead-up to the 2020 election. While amendments have been introduced in the House and Senate to prevent Trump from removing Huawei from the list without congressional consent, Trump has sought to block that restriction, Soros wrote.
· China’s Ministry of Finance announced plans to exempt 16 types of U.S. products from additional tariffs on Wednesday, including whey and fish meal products and some lubricants.
The exemption, which is scheduled to go into effect from September 17, will be valid for a year through to September 16, 2020.
· Some American companies in China are speeding up their move away from the mainland as increasing tariffs continue to hurt their businesses. That’s according to a survey released by the American Chamber of Commerce in Shanghai on Wednesday.
More than a quarter of the respondents – or 26.5% – said that in the past year, they have redirected investments originally planned for China to other regions. That’s an increase of 6.9 percentage points from last year, the AmCham report said, noting that technology, hardware, software and services industries had the highest level of changes in investment destination.
U.S. firms in the mainland also said restrictions to accessing the local market have made it difficult for them to carry out their business, the report said.
Asked about the best possible scenarios in ongoing trade negotiations, more than 40% of respondents said greater access to the domestic market would be the most important outcome to help their businesses succeed. That was followed by more than 28% that ranked improved intellectual property protection as key.
· President Donald Trump announced in a tweet Tuesday that he had fired his national security chief. But Bolton disputed that. In his own tweet minutes later, he said he had “offered to resign.”
“Bolton’s departure would open the US up to taking a softer approach to talks with North Korea,” Scott Seaman, Asia director from political risk consultancy Eurasia Group
“We can expect to see some further progress on their talks in the coming weeks, possibly even as soon as the upcoming (UN General Assembly),” he added.
In contrast with the North Korea situation, “the policy on Iran is unlikely to see any major radical shift sometime soon,” said Waqas Adenwala, an analyst from Economist Intelligence Unit.
“Bolton and Trump have both been skeptical of Iran although Mr Trump is more open to the idea of meeting Iranian leadership compared to Bolton,” said Adenwala.
He added: “Unlike North Korea’s Kim, the leaders in Iran too are not very keen to engage with the US which complicates their bilateral relationship.”
· Russia does not expect its ties with Washington to suddenly improve following the exit of U.S. national security adviser John Bolton, RIA news agency cited Deputy Foreign Minister Sergei Ryabkov as saying on Wednesday.
· Oil prices traded higher on Wednesday after an industry report said U.S. crude stockpiles fell last week by more than twice the amount that analysts in a Reuters poll had forecast.
Brent crude futures LCOc1 rose 40 cents, or 0.6%, to $62.78 a barrel by 0643 GMT, while West Texas Intermediate (WTI) futures CLc1 were up 37 cents, or 0.6%, to $57.77 a barrel.
Prices had ended lower on Tuesday, squeezed by speculation of sanctions-hit Iranian crude returning to the market following U.S. President Donald Trump’s move to fire national security adviser John Bolton, a noted Iran policy hawk.
But they rebounded after American Petroleum Institute (API) data late on Tuesday showed U.S. crude oil and gasoline stocks fell last week, while distillate stocks built.
· Iraq will immediately comply with OPEC production cuts after months of overproduction, its oil minister told CNBC on Tuesday.
The second-largest crude producer in the 14-member organization is often labeled OPEC’s ‘problem child’ for chronically overproducing even as the group tries to curb output during a time of low oil prices.
In August, Baghdad reported its highest oil production on record at 4.6 million barrels per day (bpd), a volume that has increased steadily over the past few years despite nearly two decades of war and a bloody three-year battle to drive out the so-called Islamic State (IS).
· CRUDE OIL TECHNICAL ANALYSIS
Crude oil prices pulled back to retest recently broken resistance set from late April, but the outlines of yesterday’s upward breakout remain intact (for now). The next topside hurdle is in the 60.04-84 area. Neutralizing near-term bullish cues calls for a close below trend support set from August’s swing bottom now at 54.73. This is followed by support levels at 52.96 and in the 49.41-50.60 zone.
Reference: Reuters, CNBC, Daily FX, FX Street
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