Central banks return to school from their summer breaks, with investors wondering who's done their currency assignments. But don't we all need a crash-course in Geopolitics 101?
Central bankers return from their summer holidays en masse this week, with policy meetings scheduled in the Eurozone, Sweden, Australia and Canada. The first three on the list will certainly not want to drive their currencies any higher, though benign external conditions are against them. A nonchalant Bank of Canada may surprise markets with a rate hike, though we suspect it may show a more cautious hand this week. Despite the renewed North Korea geopolitical tensions, we don’t expect markets to be persistently plagued in the absence of a material escalation. The limited negative spillover into the high-beta currencies - as well as the lack of a broad-based or safe-haven USD strength - provides a case in point.
It'll take some strong US data to break markets from the current weak USD spell. The number of data points to save a December rate hike is decreasing by the week; unless some of the Fed speakers manage to convince markets that rates will be raised in December, the benign external conditions, which includes an orderly fall in the dollar, look set to continue. And noticeably, the dollar has failed to derive any benefit from the return of fiscal stimulus chatter as part of the Trump policy agenda, no doubt because the chances of Congress approving unfunded 'tax cuts' - as opposed to comprehensive 'tax reform' - look virtually zero.
The standout event of the week is the ECB meeting on Thursday and with concerns over a EUR overshoot having actually manifested since the July meeting, we expect President Draghi will do his best to tame any material EUR upside
Central bank meetings in Australia and Canada will show a clear divergence in policy stances, though we wouldn't be surprised to see both sets of policymakers chalking up concerns over a stronger local currency
Currency-sensitive Riksbank unlikely to front-run the ECB and this suggests limited scope for EUR/SEK to break 9.45