There have been a number of market drivers overnight that add up to a risk-off tone, seeing the yen and Swiss franc the best performing currencies, and equities and rates lower.
US equities are down around 1% and the VIX index is up from 11.5 to around 14.5 as a risk-off tone has set in. While some weaker earnings reports explain some of the weakness in stocks, there has been a lot of other stuff going on in the background.
Early in the session, rumours were swirling that top White House economic adviser Gary Cohn would be resigning in disgust over Trump’s recent comments following the racial violence in Charlottesville. He has been leading Trump’s efforts on tax reform and has been widely picked as the possible front-runner to replace Fed Chair Yellen early next year. Later in the session, a White House official confirmed that Cohn would remain in his position.
A terrorist attack in Barcelona, with at least 13 deaths so far and major injuries to many others, added to the risk-off tone.
Economic data wasn’t market moving. In the US, industrial production was slightly weaker than expected, while there were signs of further tightness in the labour market, as jobless claims fell to their lowest level since February and the second-lowest level since 1973.
In the currency market, movements have been fairly modest, with CHF and JPY the best performers in the risk-off environment, both up about 0.4% against the USD, seeing USD/JPY down to 109.70. The USD itself is flat to slightly higher on the various indices, with EUR, GBP and CAD losing ground.
EUR was hit following the release of the ECB’s minutes of the July meeting. There were three references to the higher EUR in the minutes, which were a little surprising, as President Draghi had dodged making a big deal of EUR strength at his Press Conference. The minutes expressed concern about the exchange rate “overshooting in the future”, which saw EUR fall towards 1.1660, but it subsequently recovered and sits this morning at 1.1745, but still down 0.2% for the day. The minutes revealed sensitivity to market reaction as it pulls away from its QE programme. We still look for next month for the timing of the announcement for guidance on the tapering of its asset purchase programme, with a risk of the central bank waiting until October.
The NZD has been out of the spotlight and range-bound, sitting this morning close to 0.7300, while NZD/AUD sits close to where it was 24 hours ago at 0.9230. All the crosses are little changed apart from a 0.6% fall in NZD/JPY to around the 80 mark.
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