All eyes and ears were on ECB head Draghi’s testimony as this was the only major catalyst on the session’s docket. His optimistic outlook for the euro zone economy lifted the shared currency while the Loonie took fresh hits on NAFTA jitters.
- U.S. new home sales down from 643K to 593K vs. 655K forecast
- ECB head Draghi: Euro zone growth expanding robustly, labor market to improve further
- Draghi: Price pressures have yet to show an upward trend
- Draghi: Market volatility and currency movements warrant close monitoring
- New Zealand trade balance swung from 596M NZD surplus to 566M NZD deficit
ECB Overlord Draghi’s speech
Draghi seems to have woken up on the right side of the bed this week as he sounded chipper about the euro zone economy during his speech.
He acknowledged that the euro area is expanding robustly and that the labor market would likely see more improvements. In turn, this would lift wage pressures and allow the central bank to stay confident about their inflation outlook.
However, Draghi also warned that financial market volatility and currency movements warrant close monitoring, leading some market participants to worry that the ECB might step in and do something about euro strength if necessary.
Draghi also noted that inflation has yet to show more signs of a sustained upward adjustment, citing that the relationship between growth and inflation has weakened temporarily. He explained:
“The recent period of low inflation may appear surprising from a cyclical perspective given that we have seen positive economic growth over the past four years, supporting a steady and gradual absorption of economic slack. This has raised the question of which factors, cyclical or structural, may have played a role in the growth-inflation relationship.”
Draghi ventured to say that this might have been caused by a number of factors, such as the aftermath of the debt crisis, structural changes due to globalization, and changes in demographic behavior stemming from technical developments.
To conclude, Draghi gave the ECB a pat on the back in steering monetary policy to have a tangible impact on the euro zone economy. Still, he added that further initiatives are needed to reduce vulnerabilities and increase growth potential.
Not a good start for NAFTA talks?
The Canadian dollar was already on weak footing due to weakening oil prices in the earlier session and it got another blow when NAFTA talks went off on a rocky start.
Word through the grapevine is that Mexican President Nieto called off his trip to the U.S. after losing his temper in a phone call with President Trump as the latter refused to publicly announce that Mexico won’t be paying for the border wall.
Recall that the Mexican government has consistently declined to foot the bill in building this wall while the Trump administration has been strengthening its stance against illegal immigrants. Both sides are trying to arrange a sit-down with the two leaders in the coming weeks, but it looks like the drama is heating up.
Now this can’t be good for Canada, which is another major NAFTA stakeholder. Keep in mind that The Great White North sends roughly 75% of its exports to Uncle Sam, so any cracks in this agreement could impact its businesses significantly as well.
A bit of risk appetite
U.S. equities still managed to chalk up some gains, with analysts attributing the optimism to expectations of a toned down tightening bias from Powell’s first speech as Fed head.
- Dow 30 index is up 399.28 points to 25,709.27 (+1.58%)
- S&P 500 index is up 32.30 points to 2,779.60 (+1.18%)
- Nasdaq is up 84.07 points to 7,421.46 (+1.15%)
Gold ticked slightly higher while crude oil recouped some of its intraday losses.
- Gold is up to $1,333 per troy ounce
- WTI crude oil bounced $0.46 to $64.01 per barrel
Major Market Mover(s):
The euro drew some support from Draghi’s positive remarks, which touched upon most of the hawkish views shared in the ECB meeting minutes last week.
EUR/USD recovered from a low of 1.2277 to a high of 1.2321, EUR/JPY found support at 131.50 then rallied back up to 131.76, EUR/GBP bounced to the .8820 area, and EUR/AUD is holding on to the 1.5700 mark.
The Loonie continued to slide against its peers as traders weighed in on the NAFTA drama and how it’s starting to impact business sentiment in Canada.
USD/CAD popped up to a high of 1.2712 but retreated on dollar weakness, CAD/JPY resumed its slide to 84.25, EUR/CAD is up to a high of 1.5626, and AUD/CAD is up to .9963.
Watch Out For:
- 5:00 am GMT: BOJ core CPI y/y (0.6% expected, 0.7% previous)