The spotlight was on the Canadian dollar as the BOC decision and NAFTA updates came in play, but the pound was the biggest mover on rumors of a Brexit agreement between the U.K. and Germany.
- Canadian trade deficit narrowed from 0.7B CAD to 0.1B CAD
- Canada’s labor productivity up 0.7% vs. 0.5% forecast, -0.3% previous
- U.S. trade deficit widened from $45.7B to $50.1B vs. $50.2B expected
- Bank of Canada kept interest rates unchanged at 1.50% as expected
- BOC: Elevated trade tensions remain a risk
- BOC: GDP to slow slightly in Q3, CPI to move back to 2% in early 2019
- FOMC member Bostic: U.S. economy performing well at full employment
- FOMC member Kashkari still seeing some labor market slack
- Bloomberg source: Germany open to “less detailed agreement” on Brexit
- German gov’t spokesperson: German position on Brexit unchanged
- Canadian foreign minister Freeland: Making progress in NAFTA talks, much goodwill
BOC rate statement
As expected, BOC head honcho Poloz and his fellow policymakers decided to keep interest rates on hold at 1.50% while keeping the door open for future tightening.
In their official statement, central bank officials highlighted stronger than expected inflation in July but dismissed this as a one-off result from higher airfare. They projected that CPI will move back to their 2% target in early 2019 and reiterated core measures of inflation are anchored at this level.
While the BOC acknowledged that the U.S. economy has been robust, they also noted that elevated trade tensions with their North American neighbor remain a source of uncertainty. Emerging market concerns were also briefly mentioned but the odds of a spillover were downplayed.
On a more upbeat note, the statement indicated that business investment, export activity, employment, and consumption are on the rise. Of particular interest was the slight change in their conclusion from July’s statement that cited:
“Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data.”
To this month’s statement that said:
“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target.”
It’s also worth noting that they added a bit on NAFTA in their conclusion as well, citing that they are monitoring progress in trade talks and its potential impact on the inflation outlook.
Germany-U.K. Brexit deal?
With Brexit negotiations ongoing, it’s no surprise that market watchers are eager to pounce on any new developments. Citing an unnamed source, Bloomberg reported that Germany and the U.K. are ready to drop key demands in order to shake on a transition deal.
The report indicated that people familiar with the matter shared that the top euro zone nation is ready to “accept a less detailed agreement on the UK’s future economic and trade ties with the EU in a bid to get a Brexit deal done.”
However, U.K. PM May’s spokesperson later clarified that this was not the case. He said:
“We have always been clear that Parliament needs to be able to make an informed decision, and Parliament has also been clear on that. There is no change in that position.”
A spokesperson from the German government also said that no such change was made, stating:
“The government’s position is unchanged. The federal government has full trust in the leadership of Michel Barnier.”
Nothing to see here then, carry on! Still, it’s worth noting that “progress” updates like these, whether fake news or not, can result to big swings in price action. Just a reminder to practice proper risk management and keep close tabs on newswires when trading European currencies these days!
Major Market Mover(s):
EUR & GBP
The euro and the pound were extra jumpy during the session, popping sharply higher on rumors of a Brexit agreement between the U.K. and Germany.
Of course most these gains were just as quickly erased when spokespersons from both fronts clarified that their positions remain unchanged.
EUR/USD spiked 142 pips to a high of 1.1640 then retreated to 1.1608; EUR/JPY rallied close to 130.00 before falling back to 129.44; EUR/GBP tumbled from .9030 to a low of .8956 then scurried back to .9017.
GBP/USD popped up from 1.2821 to a high of 1.2983 then slumped to a low of 1.2873; GBP/JPY jumped from 143.08 to a high of 144.97 then slipped to 143.62; GBP/AUD hit a high of 1.8082 then dropped to 1.7912.
The Loonie was in a weak spot against most of its currency rivals as NAFTA jitters appeared to outweigh some of the optimism from the BOC.
Trump said that the NAFTA “deal or no deal” situation should be known soon while Trudeau reiterated that Canada won’t sign a bad trade deal.
USD/CAD was stuck in its range just below the 1.3200 mark; CAD/JPY also moved sideways around 84.50, AUD/CAD is higher from .9445 to .9492, and EUR/CAD held on to its gains around 1.5325.
Watch Out For:
- 1:30 am GMT: Australia’s trade balance (surplus to narrow from 1.87B AUD to 1.46B AUD)