07 Sep 2017

Market Brief: world waits on Draghi

Shaun Garrett

Dealing team

We had two surprises in the world of central banking yesterday. Firstly, the Bank of Canada raised their interest rates to 1%, up 25 basis points from the previous level, against many economists’ expectations. 

Today's data release   Key levels
12:45 EU ECB policy announcements
  Support Resistance
13:30 EU ECB's Draghi press conference
1.2850 1.3043
13:30 US initial jobless claims 1.0830 1.1049
17:15 US Fed's Mester speaks
Market overview

The Canadian dollar surged to its strongest level in two years, short-term bond yields hit a five year high and the country’s main stock index slipped. The BoC also left the door open to more hikes in 2017. It is the only major central bank besides the US Fed that has been raising rates recently. Secondly, Stanley Fischer, the vice chairman of the US Federal Reserve, submitted his resignation which adds to the turbulence there. The central bank is currently undergoing a raft of changes, including the possible exit of Chair Janet Yellen in February. Fischer has been an advocate of higher interest rates, so his loss on the committee could signal that there is less likelihood of a rate rise in the near future.

Also on the US front, the President surprised his Republican colleagues yesterday by striking a deal with the Democrats to undertake a short-term extension to the debt ceiling and to keep the government funded beyond the end of this fiscal year (end-Sept), through to mid-December. Assuming the proposal passes Congressional votes, both issues will therefore need to be looked at again in a couple of months’ time, if not before. The move to suddenly sign off on a temporary arrangement surprised Republican colleagues who had expected the President to drive a harder deal; the added bargaining power of tying Hurricane Harvey funding into the legislation meant key Republicans thought it was likely to be difficult for Democrats to oppose a more permanent uplift. The move by the President to sign off on a deal without bringing key Republican allies on-board highlights the void between Trump and key Republicans Mitch McConnell (Majority Leader of the Senate) and Paul Ryan (House Speaker), both of whom appeared to expect Trump to work towards a permanent deal. That void is yet another reminder of the uphill struggle likely to be faced in getting the President and Republicans to unite over issues like tax reform over the coming month.

The day ahead

Today we await the European Central Bank monetary policy announcement at 12:45pm but more keenly watched in currency markets will be Mario Draghi’s press conference at 1:30pm. The ECB president is expected to start laying the groundwork for stimulus reduction but probably hold off on any major commitment. From a Reuters survey, only 15 of 66 economists polled thought an announcement would be made today. This is a sharp reversal from a month ago when nearly a half of respondents thought such a move was likely. Some market participants are worried that Draghi may warn against the strength of the euro which has risen 13 percent so far this year, the strongest performance among major currencies.

Thought of the day

Juan Martin del Potro stunned the tennis world yesterday to beat Roger Federer in the quarter finals of the US Open. It was Federer’s first loss in a major this year and marks a remarkable comeback for del Porto, the man who the tennis fans fell in love with when he won the US Open in 2009, as a young 20 year old. Since then, he has had to endure a career set with injuries. These were not just any injuries, but recurring wrist ones - the most dreaded setback for a tennis player. After going under the knife for the first time in 2010, del Potro has had to endure a total of four wrist surgeries. He was only able to play a total of 14 matches in 2014 and 2015, and fell to a world ranking of 1,042. He admitted that the agony he felt during those dark days left him contemplating retirement and he was unable to watch the sport that he loved so much. In currency markets, it seems everyone I speak to wants to see the Pound to make a comeback of similar proportions. Against the Euro, we are languishing perilously close to the all-time lows and the word ‘parity’ gets mentioned far too much in recent times. Today, the ECB and Mario Draghi will have their say as to whether the Pound will need to go back into the surgery room once more, let’s hope the injuries are healing!

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