Hedging flow activity more influential than economic data on currencies. US data mixed. EUR under pressure. Canada stars. NZD weaker

There was plenty of economic data to digest Friday, but month-end hedging flows dominated trading activity. The NZD fell below 0.63 for the first time since 2015 but ended the week just above that mark.

EUR was the weakest of the majors, not helped by soft inflation data and negative Italian politics. US equities and Treasuries were relatively flat.

Any hope that Trump might back down on his recent threat to raise Chinese import tariffs was extinguished, with fresh punitive 15% tariffs on $110 bln of Chinese imports kicking in from yesterday, with the latest round capturing mostly consumer goods. Furthermore (previously announced) tariffs kick in 1 October and 15 December.  Ahead of their imposition, on Friday Trump remained as defiant as ever, tweeting “We don’t have a tariff problem (we are reining in bad and/or unfair players), we have a Fed problem. They don’t have a clue!”, and in another tweet saying “Badly run and weak companies are smartly blaming these small tariffs instead of themselves for bad management”.

On Friday night there were mixed economic reports out of the US.  Personal spending growth was solid in July, indicating a strong start to the third quarter after the very strong June quarter. By contrast, the University of Michigan’s final consumer sentiment survey showed the largest monthly drop in nearly seven years, falling to a near 2-year low. Tariffs were flagged as a concern by one-in-three consumers. A stronger Chicago PMI allayed some fears of the ISM manufacturing index falling to fresh lows when it is released early this week. The core PCE deflator was in line with expectations at 1.6% y/y, suggesting moderate inflationary pressure despite being ten years into the economic expansion.

The data weren’t market-moving, with month-end flows dominating. The USD was on the strong side, with DXY up 0.4% and touching a fresh multi-year high, largely reflecting EUR underperformance.

EUR fell below 1.10 for the first time since May 2017, reaching as low as 1.0983. In Italy the new (prospective) coalition between Five-Star and the Democrats got off to a rocky start with some public disagreement on the policy agenda and the threat of new elections by Di Maio, leader of Five-Star. Euro area inflation remained subdued, with annual headline CPI inflation for August at 1.0% and the core rate coming in a weaker-than-expected 0.9%, suggesting little progress has been made by the ECB in driving higher inflation through negative interest rates and its massive bond-buying programme.  The law of stupidity in the current central bank playbook would suggest delivering further policy stimulus to see if it drives a different result. Right on cue, ECB’s Rehn repeated his bias for easing when the ECB meets 12 Sept, saying “it is important the ECB continues its rather accommodating policy” and the “situation calls for an effective policy package in September.” Against this his colleague Lautenschlaeger echoed comments from hawks Weidmann and Knot recently that she did not see the need for a re-start of QE. Austria’s Nowotny said there was room for tweaks to policy settings, but there isn’t room for new measures. These comments gel with our view that from a timing perspective, we will likely get lower rates at the next ECB meeting and some tiering of the deposit rate, but any further QE policy may have to wait.

Data showing a stronger-than-expected recovery in Canada GDP in Q2 only had a passing impact on CAD.  The breakdown of the data showed strong growth was driven by net exports, with soggy domestic demand growth. This keeps alive the expectation that the Bank of Canada will join the club of central banks easing this year – not this week when the Bank next meets but almost a full cut remains priced by December.

During local trading hours, the NZD fell below 0.63 for the first time since 2015, as commodity currencies came under pressure. Local data can’t be blamed, with a small lift in consumer confidence and, despite the fall in dwelling consents, on an annual basis they continue to track close to their highest level since the mid-1970s – an indicator confirming that, at least up until now, slower NZ growth has been more of a supply issue than a demand issue. The NZD made a fresh multi-year low of 0.6283 Saturday morning, before staging a rally into the NY close to around 0.6310. The AUD followed a similar profile and closed flat around 0.6735.

After the close, China PMI data were close to expectations, with the manufacturing index showing further (slight) slippage and remaining below the key 50 mark.

GBP fell 0.2% to 1.2155, but outperformed the soft euro. A Scottish judge refused to block Boris Johnson’s plan to suspend Parliament. This was the first of three judicial reviews that have been launched to try to overturn Johnson’s plan. None of them are expected to succeed and focus turns to the reopening of Parliament early this week after the summer recess.

The bond market ended the week on a fairly lacklustre note, with little change in yields across the US, Europe and NZ. The 10-year US Treasury yield traded as high as 1.54% but ended the session flat at 1.50%. The market value of negative-yielding bonds in the Bloomberg-Barclays Global Aggregate Index hit the $17 trillion mark.

It should be a quiet start to the week with US markets closed tonight for the Labor Day holiday.