Foreign exchange trading reminder on September 10: European Bank slows down the pace of bond purchases, the euro rises, and the dollar follows U.S. bond yields lower

On Thursday (September 9) the U.S. dollar index fell 0.22% to 92.51, and U.S. bond yields fell after the U.S. Treasury Department completed the $120 billion U.S. bond auction plan this week. The focus of investors' attention is when the Fed will begin to reduce the scale of debt purchases as it measures the rising price pressures and the still relatively weak employment situation.

Data released on Thursday showed that the number of initial jobless claims in the United States fell to the lowest in nearly 18 months last week, which provides more evidence that employment growth is hindered by labor shortages, not because of the cooling demand for workers.

Chicago Fed President Evans said on Thursday that the U.S. economy "has not been out of the predicament." Despite strong economic growth and the hope of vaccines, challenges including supply chain and labor market bottlenecks still exist.

At the same time, Fed Governor Michelle Bowman joined a growing camp of policymakers on Thursday that believes that the weak August employment report will not cause the Fed to abandon its monthly cut of $120 billion later this year. Plans for the scale of bond purchases.

The euro to US dollar rose 0.08% to 1.1825, recovering from earlier losses; the previous European Central Bank meeting maintained a dovish tone without major surprises. The central bank will slow down the pace of emergency debt purchases in the next quarter and move towards gradually ending emergency assistance. Take the first small step. During the pandemic, emergency assistance supported the euro zone economy.

In the past two quarters, the European Central Bank purchased 80 billion euros of assets each month. The bank did not provide specific guidance on the size of bond purchases in the next three months. The monthly government bond purchase target is between 60 and 70 billion euros, maintaining the flexibility to increase or decrease bond purchases according to market conditions.

TD Securities analysts said in a report that the ECB’s actions today are basically in line with expectations. Looking ahead, the focus will be on how the ECB defines “moderate”. Any number below 60 billion euros per month may be negative. of.

Erik Nelson, a foreign exchange strategist at Wells Fargo Bank, wrote in a report that the prospect of the European Central Bank raising interest rates basically does not exist. Taking all these considerations together, the downward trend of the euro against the US dollar may be possible before the September FOMC meeting and the German election. Will be enhanced. We expect the Fed to continue to stand still in September, but may announce a reduction in November or December.

The British pound outperformed most currencies and set its biggest gain in nearly two weeks; the pound rose 0.48% to 1.3837 against the dollar. As the spread between British and German government bonds widened, the euro fell 0.4% to 0.8546 against the pound, breaking the 55-day moving average and hitting a three-week low of 0.85327.

The dollar fell 0.48% to 109.72 against the yen after hitting a one-month low.

The US dollar fell 0.21% against the Canadian dollar to 1.2664; Bank of Canada Governor Tiff Macklem said that the Bank of Canada continues to expect strong economic growth in the second half of this year, but due to the impact of the coronavirus, the rebound may not be stable.

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Summary of Institutional Views

BlackRock: After the PEPP ends, the European Central Bank may accelerate the pace of its asset purchase plan

BlackRock’s head of macro research, Elga Bartsch, said that, as Lagarde emphasized at the press conference, the European Central Bank’s slowing down of debt purchases is not reducing debt. Taking into account the current relatively loose financing environment, this is only a technical adjustment decision. As the new policy framework paves the way for a more sustained loose monetary policy in the Eurozone, the European Central Bank’s asset purchase program is expected to continue. The current priority of the European Central Bank should be to increase medium-term inflation, because economic expectations indicate that it will be far below the new 2% target. When the PEPP comes to an end, accelerating the pace of debt purchases in the asset purchase plan may help push up inflation, although financial support may eventually be required.

Goldman Sachs expects the Bank of England to postpone rate hike due to employment prospects

Although investors expect the Bank of England to raise the benchmark interest rate in May 2022, they have already digested their expectations of a cumulative rate hike of 28 basis points by the end of 2022. But Goldman Sachs economists expect that the Bank of England will not raise interest rates until the third quarter of 2023. This is because Goldman Sachs believes that there is more slack in the UK economy than the Bank of England expected. Goldman Sachs UK chief economist Steffan Ball said that when the government’s wage support program ends on September 30, the situation may worsen.

The job market outlook will play a key role in determining when the Bank of England will begin raising interest rates from the current record low of 0.1%. The Governor of the Bank of England Bailey told lawmakers on Wednesday that he and some officials believe that the central bank’s minimum standards for tightening monetary policy have been met. Ball said, "We are more worried (than the Bank of England) that there may be some interference, for example, some people on paid leave may not find a job immediately and eventually fall into unemployment." Goldman Sachs predicts that the unemployment rate will peak at 5.5% in the second half of the year. , While the central bank believes that the unemployment rate will gradually decline. Overcapacity means lower inflationary pressures, so there is no need to raise interest rates immediately.

Imperial Bank of Canada: The Bank of Canada has not yet tightened its monetary policy and is expected to raise interest rates later next year

Bank of Canada Governor McCallum’s speech indicated that the central bank’s reduction of weekly bond purchases should not be seen as a tightening of monetary policy; the Bank of Canada is expected to enter the reinvestment phase, at which point the central bank will only purchase a sufficient amount of bonds To replace bonds that are about to mature, thereby maintaining the stability of the balance sheet. Economist Royce Mendes said that having a stable balance sheet should be seen as maintaining the monetary stimulus already provided through quantitative easing, rather than increasing it further. Overall, McCallum’s speech is in line with outside expectations that the bank will enter the reinvestment phase this fall, but the interest rate hike and the resulting policy tightening will be postponed until later next year.