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ECB jawboning stops the euro rally while bids return to safe havens (JPY, CHF, Gold & USD) as US equities reverse sharply

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ECB jawboning stops the euro rally while bids return to safe havens (JPY, CHF, Gold & USD) as US equities reverse sharply    

  • EUR: ECB jawboning short-circuits the euro at 1.20 but it’s about the pace of gains and not outright levels - EURUSD tests as low as 1.1789 overnight, dropping more than 2 big figures in as many days but with downside momentum subsiding as the broad based USD Index (DXY) approaches 93.00. The unit manages to claw back some losses to close at 1.1850 at NY, watching European equity sentiment that seems to be buoyed by the latest stimulus measures introduced by France (Recovery Plan of EUR100bn between 4%-4.5% of French GDP).  
  • EUR: While last night’s close at 1.1850 looks encouraging, the pace of EUR’s recent gains seems to be worrying ECB officials with FT overnight reporting some ECB policymakers warning that if the currency keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus. Several members of the ECB’s governing council also tell FT that the euro’s rise against USD and many other currencies risks holding back euro zone’s economic recovery with one member noting - “It is a growing concern, though not yet huge, but if the trend continues it will be a concern and we will have to watch it,” adding that the euro’s rise may likely require the ECB to further cut its inflation forecast at next week’s meeting.     
  • EUR: The FT report overnight follows comments earlier this week from ECB Executive Board member and chief economist Philip Lane that “the EURUSD rate does matter”.  Lane goes on to say there’s been “a repricing in recent weeks” in the FX rate and that non-monetary forces such as the improved resilience of the euro, or the lower risk associated with investing in the euro “are important forces”.  COMMENT: With the EUR TWI up more than 8% since May and now back to pre-Covid levels, the flurry of ECB comments on the currency have put markets on notice about the pace of euro gains (and potential for ECB to act). But it’s not the absolute levels that matter - back in Feb 2013, German Chancellor Merkel stated a EURUSD between 1.30 and 1.40 shows ‘normality’ – times are different now but Lane’s comments and FT report overnight seem more an expression of concern about the pace of EUR’s appreciation than about actual levels.  
  • USD: Unbridled optimism gives way -   US equity markets suffer a major pullback overnight. After rising in 11 of the previous 13 sessions, the S&P500 falls 3.52%. There is no singular catalyst that brings on the selloff led by heavy declines in the tech sector but a flight to safety consequently leads to bids for safe haven currencies with USD, JPY, and CHF leading the charge in G10 FX.  

Data releases overnight – US ISM services sees continued expansion & hiring; Declining US jobless claims show still - solid hiring; China’s Caixin Services PMIs firm, employment finally expands 

  • USD: Headline US ISM services for August come in close to expectations at 56.9, relative to 57.0 in July. New orders (56.8 vs 67.7) and activity (62.4 vs 67.2) slow somewhat, but the employment index (47.9 vs 42.1) improves significantly. The headline number is also supported by longer supplier delivery times which rises from 55.2 to 60.5, its highest level since May. The key news in the mostly-as-expected reading though is a stronger employment subcomponent, which highlights the upside risk in tonight’s payroll report for August (Citi analysts forecast 2.1 million total and 1.7 million private jobs). Overall however, the team continues to emphasize caution in interpreting diffusion indices such as ISMs, currently.
  • USD: New seasonal adjustments (additive, not multiplicative) mean seasonally adjusted claims numbers are lower this week, and not comparable to prior weeks. US NSA continuing claims though continue to fall to 13.1 million in the week of August 22 from 13.9 million while NSA initial claims are close to unchanged at 833k for August 29. The new seasonal adjustment brings SA (13.2 million continuing and 881K initial) more closely in-line with NSA numbers. Continuing claims fall more rapidly in the week of Aug 22, and are now down by 9.7 million from the peak. As the broader US economy continues to reopen, Citi analysts expect robust rehiring to continue with 2.1 million job added in the August payroll report.
  • CNH: Caixin Services PMIs firm, employment finally expands – China’s Caixin Services PMI for China marginally beats consensus, coming in at 54.0 vs 53.9 expected (54.1 prior). Along with the manufacturing PMI beat earlier in the week, this puts the Caixin composite PMI at 55.1 vs 54.5 prior. Details show new order growth easing further, but still strong while the press release indicates some uncertainty over overseas demand, with new export business remaining in contractionary territory. Encouragingly though, employment increases for the first time since January, signaling a plateau in job losses – a similar trend seen in the manufacturing PMI.  

Data tonight US and Canadian payrolls

  • USD:  Nonfarm Payrolls – Citi: 2100k, median: 1456k, prior: 1763k; Average Hourly Earnings MoM – Citi: -0.5%, median: 0.0%, prior: 0.2%; Unemployment rate – Citi 9.7% - Citi analysts expect another month of solid job gainsAverage hourly earnings may fall and unemployment rate could decline modestly to 9.7% though reverse in Aug/ Sep as participation rate rises. 
  • CADEmployment (Aug) – Citi: 310k, median: 250k, prior: 418.5k; Unemployment Rate – Citi: 9.9%, median: 10.2%, prior: 10.9%; Hourly Wage Rate – Citi: 5.3%, Prior: 5.7% - Canada’s employment should gain again, continuing a 3-month streak of job gains reversing some 55% of the decline in jobs over March and April. Still, the path of employment later is much more uncertain.

This is is an extract from the Daily Currency Update, dated September 4, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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