USD ended the day higher against most other G10 currencies after an exceptionally strong non-manufacturing ISM index (59.8 vs 55.5 expected). However, much almost half of the rise was apparently due to weather conditions delaying supplier deliveries, so the impact later faded to leave USD up only modestly. The much awaited ADP report was exactly in line with expectations at 135k despite all the uncertainty surrounding the situation because of the weather – an amazing result! US bond yields finished the day little changed even as the S&P 500 made another record intra-day high. 

EUR/USD has not yet really started to feel any impact from the problems in Catalonia, but I expect that it could as the situation there worsens. Catalan President Carles Puigdemont yesterday fell short of declaring independence but hinted that it would happen soon, saying, “In the following days we will show our best face to apply the results of the referendum.” Another politician said the declaration of independence would be made after a parliamentary session on Monday. was the big loser, such as it was, among the major currencies after the August retail sales figure missed expectations considerably (-0.6% mom vs +0.3% expected). Interestingly, the currency weakened even though the trade surplus was higher than expected (AUD 989mn vs AUD 850mn expected) and the previous month was revised higher. This clearly shows how the currency is being driven by expectations of how monetary policy will react to domestic conditions. I remain bearish on AUD.

Today’s market

The European day gets off to an early start with the Swiss CPI. As I mentioned yesterday, this is one of the few Swiss indicators that affects CHF nowadays. The expected acceleration in inflation is likely to be positive for the currency. Chief Economist Peter Praet opens an ECB conference on central, eastern and south-eastern European (CESEE) countries. The subject is “Institutional quality and sustainable economic convergence.” Among the other speakers are Finland’s central bank governor, Erikki Liikanen, and ECB Executive Board member Beoit Coeure. It doesn’t look like the conference will hit on general ECB policy, but you never know.

The account of the latest ECB meeting of 7 September will be closely scrutinized to see if we can get a better handle “the discussions about different scenarios” that ECB President Draghi mentioned concerning  the length of the program and the size of the monthly bond purchases. However, he cautioned that the discussions were “meant to ask questions about the different scenarios and what the transmission channels or different scenarios was rather than expressing policy options or policy preferences,” so we may not get any clearer idea of what they are likely to decide at their next meeting on 26 Oct.

The latest meeting also apparently had a substantial discussion about the exchange rate. Draghi said ”..there was by and large broad consensus…that the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.” He said that “most” members were concerned that the rise in the exchange rate would depress inflation, as reflected in the staff’s downward revision to the inflation forecasts. Investors will also be interested in reading more about this and just how the exchange rate feeds into the ECB’s reaction function.

What about America?

Canada’s merchandise trade deficit is forecast to narrow somewhat in August. However, the forecast figure wouldn’t be enough to keep the 12-month moving average from deteriorating. In other words, even though it’s an improvement, it’s not enough of an improvement. That suggests that the figure is likely to be negative for CAD., the US trade balance is expected to narrow somewhat. According to the forecast, it should be enough to keep the 12-month moving average constant. In other words, no deterioration in the deficit (although the trend seems to be that way). In that respect, a figure along the lines of what’s being forecast should be positive for the dollar. factory orders are expected to be up in August. This is an extremely volatile series, but the above-trend figure should prove encouraging to the market. The fact is though that the factory orders figure is pretty closely related to durable goods, which are already out, so there are few surprises here.

Fed speakers in the spotlight

There are a number of Fed speakers today. Fed Governor Jerome Powell speaks at the Treasury Market Practices group on “A look back and a look ahead.” This talk may be interesting, given that the Fed is going to start winding down its enormous stock of bonds soon. He might give us more information about how they plan to do this. Powell is a middle-of-the-road sort of guy, so his views can be taken to represent more or less the consensus view.

Overall, the other speakers tend to the hawkish side and so their comments may tend to support the dollar, if indeed they do say anything of interest to the markets.
San Francisco Fed President John Williams gives the keynote speech at a seminar on community banking. He might not say anything about monetary policy, but then again, he might. Williams is a somewhat hawkish non-voter.

Philadelphia Fed President Patrick Harker speaks at a Fed conference about the workforce. Not the most promising venue either, but he could add something in general interest if he wanted to. Harker is also somewhat hawkish and he’s a voting member of the FOMC. Kansas City Fed President Esther George will also speak at this conference. She’s a very hawkish non-voter.

Hawks from BoE

There are also two talks by Bank of England Monetary Policy Committee members. The uber-hawk Ian McCafferty, who’s been voting for a rate hike recently, will give the Founders’ Company annual lecture. There’s no clue about what he’s going to talk about, but my guess is that it’s likely to include a call for higher rates. He recently said that that depending on economic data, “we would expect to see a couple of modest rate rises over the next couple of years or so.” This seems to be at odds with the views of Gov. Carney, who has said that any increase in rates would be “limited”.

Then BoE Chief Economist Andy Haldane will talk on “Central Bank Engagement with Society.” Again, not the most promising of topics. Haldane was recently quoted as saying that a rise in rates would be “interest rates getting back to normal,” and therefore a sign that the economy is healing — so something to be welcomed rather than feared. If he repeats a comment like that, along with some hawkish comments by McCafferty, it could give sterling a boost after its poor performance yesterday.

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