Hurricane Harvey Overshadows Tapering Buzz

Weekly Report - 03/09/2017

Euro Pushes Lower After Positive US Data and Unfolding Hurricane Impact


Building tensions on the Korean Peninsula were dominated by the landfall of Hurricane Harvey in the Gulf, with the dollar moving higher despite the concerning backdrop.  Upbeat economic data released by the US throughout the week helped offset recent Euro appreciation driven by speculation that asset purchase tapering will be discussed during the next ECB meeting.

Last Week

Looking beyond North Korean anxiety, key data pointed to a resurgence in the US economic cycle. Though the devastation caused by Hurricane Harvey captured financial markets’ attention last week considering the immediate impact on energy commodities and stocks, the economic interruption is forecast to be offset by rebuilding activity. Supporting the greenback was a fresh reading of second quarter GDP, which showed the US economy grew by an upwardly revised 3.00%. Consumer confidence also held up well, with the overall Conference Board index hitting 122.9 last month. However, August payroll figures only grew by 156,000 jobs, pushing the unemployment rate to 4.40%.

Across the Atlantic, a new round of Brexit talks began last Monday, with the European Union’s top negotiator Michel Barnier saying no "decisive progress" was made. GBPUSD ended the month near the lows of its range, suggesting further weakness could be in store. Across the English Channel, Euro Area inflation edged up to a higher than anticipated rate, climbing to 1.50% from 1.30% in July thanks to rising energy prices. To top off the week, China’s official manufacturing Purchasing Managers' Index came in at 51.7 for August, mitigating concerns that slowing growth and high debt levels threaten to derail the economy.


The Week Ahead

Monetary policy will dominate the week ahead as central banks in the Euro Area, Canada and Australia hold their scheduled policy meetings. A decision on tapering its massive asset purchases program has been a long time coming for the European Central Bank. Policymakers have been signalling that any scaling back will be gradual; more so given the Euro’s recent sharp rise. The exchange rate has become a major cause for concern, adding to speculation that ECB chief Mario Draghi will use his Thursday press conference to verbally curb any further rally in the Euro. Meanwhile, the Canadian economy’s pickup in second quarter growth have lifted the odds of a September interest rate hike, with the current consensus veering toward an overnight rate of 1.00% by October.

The Reserve Bank of Australia is set to meet Tuesday to set interest rate policy. Governor Philip Lowe’s comments in August reinforced the view that the RBA will hold rates at a record low of 1.50% for a considerable period. Nevertheless, the Central Bank’s views on the strength of the economy and exchange rates will be carefully scrutinized. In a holiday-shortened US week, factory orders data will be released Tuesday with PMI figures available on Wednesday.


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