Draghi’s swan song at the ECB yesterday was rather short on developments, as the ECB president once again harped on the need for an EU fiscal union. His discussion during the Q&A of the ECB’s capital key for further QE purchases “by stock” rather than by size-of-GDP, was interesting in that it opens up for a longer period of QE than many have estimated. As well, Draghi simply stated that its QE limitations are “self-imposed” , also pointing to the lack of real, technical limit to how long the ECB can continue with the “QEternity”.
US Vice President Pence was out speaking on China yesterday, delivering further criticism of Chinese policy in what mounted to a lack-of-progress report some 12 months after an aggressively critical speech on China’s actions and behaviour last year. Still, there was no general call for disengagement and US-China decoupling and Pence expressed the hope that the two sides could come together on trade. There was zero market reaction, but this speech did not look like the basis for building new bridges between the two super-powers.
Sterling on the defensive as Boris Johnson aims for December 12 elections, which now hinge on the length of the delay that the EU grants for the Brexit deal. Labour’s Corbyn says he won’t support an election (requires two-thirds majority vote) unless there is a sufficient delay. The EU’s decision on the delay is expected today.
The Riksbank out yesterday with both hawkish and dovish signals. The hawkish was absorbed first as the bank insists it remains on course for a likely December rate hike, as many expected a longer wait. The Riksbank just seems determined to get back to zero, almost regardless of the economic situation, even if it claimed to have two-way leeway on policy if the outlook worsened. But the guidance on the policy rate for the longer term was lowered, suggesting that the bank sees the rate at zero for the foreseeable future after a December hike. Elsewhere, the Riksbank lowered GDP forecasts for this year and next slightly, raised unemployment rate forecasts for 2020 and 2021, and raised the core inflation forecast for next year 0.1% to 1.8%. EURSEK quickly rallied back to unchanged after an initial sell-off.
Gold and silver swung into action yesterday without any particularly notable signals from other markets, like the usual suspects long bonds and the yen, but I suspect the massive chops to policy rates across EM and prospects for more could be playing a part, as well as the sense from the ECB that QE will continue over the horizon for now. Turkey sliced its policy rate 250 basis points yesterday to 14%, a large move than expected, and the year forward carry available has dropped close to 10% as further rate cuts are expected. The Russian central bank will chop rates again today and will keep doing so as long as USDRUB remains rangebound and Brazil next week is expected to reduce the already record low Selic rate another 50 bps to a policy rate of 5.0%.
The Riksbank supported SEK today – at least in the kneejerk reaction – in delivering unchanged guidance for “most probably” hiking in December rather than pushing the rate hike further over the horizon. However, the longer term guidance was lowered to zero for a “prolonged period”, suggesting that the Riksbank remains uncertain about the outlook for growth, and the statement also saw the bank retaining easing potential (rate cuts or expansionary policy “in some other way”) in the event “the economy were instead to develop less favourably.” GDP estimates for this year and next were lowered slightly, but the core CPI forecast for 2020 was raised to 1.8% vs. 1.7% previously. The subsequent price action suggests the immediate reaction might be overblown – other key elements needed to stitch together a SEK-positive story – like an upswing in the global growth outlook and EU (and Swedish) fiscal stimulus. Today’s Sep. Household Lending survey showed another drop – to 4.8% - a new low for the cycle and suggests gathering recessions risks for Sweden.
Chart: USDCAD weekly
USDCAD has proven consistently heavy over the last couple of weeks in the wake of the Canadian election, where the story is that Trudeau will have to maintain fiscal expansiveness to satisfy left-leaning coalition partners (even if that spending is not particularly productivity enhancing, in the case of spending on climate initiatives, etc). There is certainly room for a much larger drop to come if the US and its neighbour to the north avoid a recession and risk appetite remains buoyant. But Canada has inflated one of the largest private debt bubbles in the world relative to GDP, so any shift to a credit crunch scenario and recession could quickly see the high-flying CAD come in for an ugly direction shift. For now, the technical focus in the key USDCAD pair is on whether the pair can break down through the pivotal 1.3000 area and next week’s battery of event risks should prompt volatility.