Don’t believe the euro dip
Euro retraced some of yesterday’s gains as the European Central Bank’s July meeting gets underway. Tuesday’s close was the highest for the euro in almost two years as a deflated dollar pushed the single currency higher.
The statement and press conference will be closely watched. While there is no change in the policy decision tomorrow, guidance on scaling back the bank’s massive stimulus program has long been anticipated by markets. However, their hopes may not come to fruition until after the August break. Citing euro-area officials familiar with the matter, Bloomberg reported Wednesday that the future path of quantitative easing, or QE, won’t be discussed until later in the year.
This is putting downward pressure on the euro, but is unlikely won’t derail calls for scaling back QE as the Eurozone economy continues to enjoy one of the strongest expansions of the developed world.
Investors aren’t the only ones waiting with bated breath. Policymakers across Europe are eyeing the ECB. Governor Stefan Ingves of Sweden’s Riksbank aptly described the scenario in an interview: “when you’re next to an elephant, you need to tread carefully.” Sweden recently scaled back their bias towards easing, but if they move before the ECB this could put undue pressure on their currency and narrow the interest rate differential, which could negatively impact inflation.
Switzerland will also likely eye the euro-area central bank. The Swiss National Bank adopted a negative interest rate policy two years ago in order to widen the interest rate differential and take pressure off the Swiss franc.
Healthcare reform: dead in the water
US dollar is also bucking yesterday’s moved, recovering from a 10-month low yesterday despite further disappointment on the legislation front.
Mitch McConnell was unable to carry the senators who voted to repeal Obamacare in 2015, leaving the second attempt at pushing through healthcare reform dead in the water. Four Republican senators coming out against a repeal and delayed replacement: Shelley Moore Capito of West Virginia, Susan Collins from Maine, Lisa Murkowski from Alaska, and Rob Portman from Ohio.
Senator Collins said “we can’t just hope that we will pass a replacement within the next two years. Repealing without a replacement would create great uncertainty.” The others echoed similar concerns about the inherent uncertainty that repeal alone would introduce, both for markets and their constituents.
On the data front, US housing starts rebounded in June and carried an upward revision for May – a nice silver lining on what is shaping up to be a disappointing second quarter.
Canadian manufacturing bounces
Canadian manufacturing sales rose more than expected in May according to data from Statistics Canada this morning.
It was the third straight month of gains, with sales rising 1.1 percent versus the 0.8 percent gain economists were expecting.
Sales were higher in 16 of 21 industries, leading the way to a CAD $54.6 billion expansion. Transport and chemical manufacturing industries led the advance, with sales of cars and car parts making a strong contribution.
While this speaks to solid activity in the second quarter, we do highlight the downward revision for the month prior. April’s initial reading showed a 1.1 percent gain which was revised down to 0.4 percent. This has tempered CAD gains.
It will be interesting to watch how the manufacturing sector performs in light of currency appreciation and the renegotiation of NAFTA. The recent spike in Canadian dollar could negatively impact growth, and uncertainty surrounding trading relations with the neighboring US could be a tricky climate for business activity.
EURUSD: Euro backed off from yesterday’s spike as the ECB begins their two-day policy meeting in Frankfurt.
GBPUSD: Sterling slightly lower as the greenback makes a recovery against European currencies.
AUDUSD: Aussie dollar continues to find support in the currency space, gaining again against the USD.
USDCAD: CAD is little changed against the USD as a bounce in manufacturing was offset by gains in the US housing market Wednesday.
USDJPY: The dollar is lower against the yen, struggling with the failure of the healthcare bill in the Senate.