USD weaker across the board, with the USD TWI down 0.6%; EUR higher and German rates lower on ECB policy update; Lower German rates drag down UST rates to fresh year-to-date lows

By Jason Wong

The USD remains under pressure for various reasons, while the EUR has performed well despite the ECB’s warnings. A lack of detail on ECB policy sees lower German yields, helping to drive down US Treasury rates to new lows.

The key focus overnight was the ECB’s policy update.  Policy settings were left unchanged, including the Bank’s long-standing commitment to maintaining its asset purchase programme at €60bn per month until the program ends in December, “or beyond if necessary”.  But ECB President Draghi suggested that next month he might be ready to make an announcement on the next steps for the asset purchase programme.  “Various scenarios” were discussed, with Draghi unwilling to give much away at this stage. On the strength of the euro, the press statement mentioned “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring” and Draghi was questioned repeatedly about the euro in the press conference.  While he admitted that there was “broad” concern in the Governing Council over the euro, he said the currency merely warranted “monitoring”, but he added that the GC would have to take into account the appreciation of the euro in its future policy decisions.

The lack of detail on any potential tapering of asset purchases and fears that EUR strength might extend the quantum of asset purchases saw German bunds well bid after the announcement and the 10-year rate fell 4bps to 0.30%.  EUR spiked to a high of 1.2060 as Draghi spoke, seemingly ignoring his message about policy decisions being linked to the strong EUR.  This may be linked to the ECB’s more upbeat economic outlook and the fact that EUR-strength only had a small negative impact (0.1pp) on the Bank’s inflation forecasts. EUR has since pulled back to 1.20, still up 0.7% for the day, but broad USD weakness has been a significant factor as well.

Lower German rates dragged down the US 10-year rate to a fresh year-to-date low of 2.03%, and it is currently down 4bps for the day at 2.06%. Yesterday’s resignation of Fed vice-chair Fischer and the pushing out of the debt ceiling showdown to mid-December are also on the minds of investors, as they are seen to reduce the chance of the Fed tightening late in the year.  The Fed’s Mester, a known hawk, is still of a mind to continue along the path of rate normalisation. She commented that the Fed can’t afford to wait until its policy goals on unemployment and inflation are fully met before acting, noting that “further removal of accommodation via gradual increases in the fed funds rate will be needed and will help sustain the expansion”.

Other factors are keeping bond yields suppressed.  US-North Korea tensions remain.  Four launchers for a US missile shield arrived at a military base in South Korea, as Seoul warned North Korea may launch a new missile as soon as this weekend.  Meanwhile, Hurricane Irma threatens to bring catastrophic damage to Florida, following the devastating impact of Hurricane Harvey.  This creates added economic uncertainty.  US jobless claims surged ahead last week, the first data to show the impact of the hurricane season.

The USD is weaker across the board, with the upbeat ECB and yesterday’s BoC rate hike sitting alongside other factors, such as the hurricanes and a lack of conviction on Fed tightening.  The USD TWI majors index is down 0.6% for the day.  USD/CAD is down 0.7% to a fresh 2-year low of 1.2140.  USD/JPY is down 0.5% to 108.60, close to key technical support levels.  With a weak USD, EUR/GBP is perhaps a better indication of the impact of the ECB announcement.  EUR/GBP is up 0.4% for the day to 0.9175.

The NZD and AUD have been bystanders in all this, with both making modest gains against the soft USD.  NZD trades this morning at 0.7215.  There was a kneejerk 30pip fall to 0.7175 after the latest opinion poll showed a growing lead for Labour over National, but the fall wasn’t sustained.  We see kneejerk reactions like this as short-term trading opportunities because ultimately we don’t see the election outcome having any material impact for the NZD.  NZD/AUD is down slightly for the day at 0.8990.

NZ swap rates lifted from their year-to-date lows, reflecting the upward pressure from the previous US trading session. The 2-year rate rose 2bps to 2.15% while the 10-year rate rose by 4bps to 3.08%.  Expect a little downward pressure on today’s open.  The Fed’s Dudley’s speech at 11am is worth watching, being one of the key FOMC members alongside Fischer and Yellen.


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