Euro waits for ECB as trade thaw spurs yuan rebound

File picture shows the headquarters of the European Central Bank (ECB) being illuminated with a giant euro sign at the start of the ‘Luminale, light and building’ event in Frankfurt March 12, 2016. — Reuters pic
File picture shows the headquarters of the European Central Bank (ECB) being illuminated with a giant euro sign at the start of the ‘Luminale, light and building’ event in Frankfurt March 12, 2016. — Reuters pic

LONDON, Sept 12 — The euro hovered near US$1.10 (RM4.59) today as traders prepared for the European Central Bank to unveil an expected stimulus package, while China’s yuan and Australia’s dollar rallied on further signs of a thaw in the US-China trade war.

Investors expect a rate cut at today’s meeting as the ECB tries to prop up the region’s ailing economy. The real uncertainty is whether policymakers restart a quantitative easing (QE) programme after some ECB members expressed doubt in recent weeks about the need to relaunch asset purchases.

Euro/dollar overnight implied volatility has soared to its highest since mid-2018, reflecting investor uncertainty about the impact of the ECB announcement on the single currency.

The ECB decision is scheduled for 1145 GMT, and president Mario Draghi’s press conference at 1230 GMT. The meeting is the first in a series of major central bank events, with the Federal Reserve and the Bank of Japan meeting next week.

SEB strategist Jussi Hiljanen said he expected the ECB to cut the deposit rate by 10 basis points from the current level of -0.4 per cent, extend the forward guidance on rates by six months and announce the restart of QE but with monthly purchases lower than the market anticipated.

“Such a package of stimulus measures would be a disappointment for the market, pushing long rates higher and EUR/USD higher and steepening the curve,” Hiljanen said.

The common currency has shed 3.4 per cent since June but was 0.2 per cent higher at US$1.1028 today.

Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said that if the ECB prepares the market for significant rate cuts ahead, “that would be quite dovish, quite bearish” for the euro.

However, he said the reaction would be contained as traders were reluctant to take positions on the dollar before next week’s Fed meeting.

The dollar was slightly lower against a basket of currencies at 98.528.

Risk rally

After a difficult August in which concerns about a global recession sparked a scramble into safer assets, markets have rallied this month, encouraged by easing trade tensions and by receding fears of a no-deal Brexit.

China yesterday exempted a basket of US goods from its tariffs, while US President Donald Trump said in a tweet he would delay a scheduled tariff hike by two weeks in October.

Export-driven currencies across Asia strengthened, as did most emerging market currencies.

The Aussie hit a six-week high of US$0.6887 and the offshore Chinese yuan rose 0.5 per cent to a three-week high of 7.0737 per dollar.

The Japanese yen, the go-to safe haven currency for fearful investors, fell to a six-week low against the dollar. The yen breached the 108 mark in Asian trade and was last at 107.86 yen per dollar. It had hit a seven-month high of 104.46 last month.

Sterling was little changed . The pound rocketed to a six-week high against the dollar on Monday as investors welcomed the British parliament’s move to block a no-deal Brexit on October 31.

Despite the more positive mood in risk assets this week, analysts expressed caution about its sustainability.

“The bigger picture is one of a very tense geopolitical environment that is unlikely to be rectified quickly,” BMO’s Gallo said. — Reuters

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