Calming Coeure

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As traders in Canada return to their desks afterMonday’s bank holiday, global equity markets are looking to build on yesterday’s gains as market sentiment is buoyed by comments from European Central Bank officials aimed at calming the bond market and depressing the recent bout of volatility.  During a speech last night, the ECB’s Coeure volunteered that the central bank would be “frontloading” the purchases of euro-area assets over the next two months, before an expected low-liquidity environment in the summer.  The plan to increase the pace of bond buying over the next two months has helped calm concerns in regards to the high levels of volatility recently experienced in the European bond markets, with the smoothing effect as a result of the overall liquidity environment aiming to help to depress yields across the zone in a more orderly fashion.  In addition to the comments from Coeure, Noyer lent further support to fixed income markets, assuring participants that the ECB would be willing to continue asset purchases past September 2016 if required.  Equity indices in Europe are firmly in the green midway through their session, the yield on the German 10-year Bund dropping to 0.585%, and the euro sinking lower against the greenback to flirt with the 100-day moving average.

Turning our attention to the UK, the pound is also lower against the big dollar this morning, which is a product of an overall environment that is conducive to USD strength along with the fact that inflation figures for the month of April came in softer than anticipated.  The increase of 0.2% on a month-over-month basis in the CPI basket was half the increase that had been forecast by analysts, and pushed the year-over-year figure to -0.1%, the first time in negative territory since at least 1960.   Though the disappointing inflation print is in-line with the dovish quarterly inflation report from last week, GBPUSD has accelerated its losses this morning, outpacing the euro decline to be the major laggard on the session.

As we get set for the North American open, the commodity complex has been getting hit to start the week, with a noticeable bid tone emanating from oil as front-month WTI slides below $60.  The drag on hydrocarbons has been a result of data released on Monday that showed Saudi Arabia shipped their highest volume of crude exports in March since November 2005, backing up the Kingdom’s determination not to cede market share to higher cost producers.  On the economic data front, both building permits and housing starts over the month of April for the US economy were released, and the sharp rebound in both measures to start the second quarter has helped underpin the USD.  Permits and starts jumped to 1.14mln and 1.13mln respectively, both outpacing the median forecast and building on the small recovery seen in March after weather conditions in the early part of the year held back construction activity.  The combination of lower oil prices and relatively decent US economic data has clipped the loonie’s wings ahead of the opening bell, with USDCAD poised to build on yesterday’s price action.  Bank of Canada Govern Poloz will be speaking in a few hours, so expect the speech in Charlottetown to be parsed for any clues on monetary policy, and if the BoC has any insight into how quickly the first quarter oil price shock is dissipating.

Further reading:

State of EUR/USD – The fall, the recovery and what’s next

Markets await UK inflation data

Get the 5 most predictable currency pairs

About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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