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Foreign Exchange Market Update

October 18, 2019

United States (US): Fed's Clarida Says Officials Will Act 'As Appropriate' to Sustain Economy and Address Risks; Leading Economic Index Unexpectedly Edges Lower in September
 
Fed Vice Chairman Clarida reiterated his stance that the central bank will “act as appropriate” to extend the recovery and shield the US economy from risks posed by geopolitical tensions and slowing global growth. “Looking ahead, monetary policy is not on a preset course, and the committee will proceed on a meeting-by-meeting basis to assess the economic outlook as well as the risks to the outlook,” Clarida said. “It will act as appropriate to sustain growth, a strong labor market, and a return of inflation to our symmetric 2% objective.” His remarks were in line with those of other policymakers who emphasized this week that they are open minded about future policy decisions.
 
The leading economic index edged down by 0.1% in September after dipping by 0.2% in August. The drop by the index reflected weaknesses in the manufacturing sector and the interest rate spread, which were only partially offset by rising stock prices and a positive contribution from the Leading Credit Index.
 
Australia: RBA Chief Says Negative Interest Rates Extraordinarily Unlikely
Australian dollar traded at 68.49 U.S. cents at 9:00 am PST.
 
RBA Governor Lowe said negative interest rates are extraordinarily unlikely. "I'm not going to speculate on negative interest rates or quantitative easing in Australia, other than to say negative interest rates are extraordinarily unlikely in my country," he said. "I don't think it's the right assumption to make that we are going to have a lot more work to do to get inflation back to target and growth back to trend," he added. The economy has been through a very soft patch over the last year, but it is gradually improving, and lower interest rates are working. He expects Australia to return to trend growth over the next year. Further, he noted that housing market has turned around, which is set to support household consumption.
 
European Union (EU): ECB Cuts Deposit Rate, Restarts Asset Purchases; European Council Confirms Christine Lagarde As Next ECB Chief
Euro traded at 1.1159 against USD at 9:00 am PST.
 
The ECB announced a host of stimulus measures, as expected, to boost the euro area economy in the penultimate rate-setting session chaired by the outgoing President Draghi. The central bank slashed the deposit rate by 10 basis points to -0.50%, while it left the main refinancing rate and the marginal lending rate unchanged at 0.00% and 0.25%, respectively. The bank also significantly changed the wording of its forward guidance and said "The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics." The ECB restarted its asset purchase programme, or APP. The bank said it will make monthly asset purchases of EUR 20 billion from November 1. The new APP will "run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates," the ECB added. The bank will continue to reinvest the proceeds from maturing securities purchased under the APP as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
 
European leaders confirmed the appointment of Lagarde as the next president of the ECB. Lagarde will take office on November 1, after the incumbent Draghi steps down on October 31.
 
United Kingdom (UK): Pound Retreats on Doubts Over Brexit Deal Approval in Parliament; Ramsden Still Sees Scope for Rate Hikes If Brexit Goes Smooth: Report
British Pound traded at 1.2858 against USD at 9:00 am PST.
 
GBP eased off from its early highs against its major counterparty after Northern Irish party continued to object the Brexit deal, complicating the chances of getting it passed by Parliament. The support of the DUP is needed for approving the accord in Parliament. "These proposals are not, in our view, beneficial to the economic well-being of Northern Ireland and they undermine the integrity of the Union," the DUP said in a statement.
 
If the UK moves out of the EU smoothly, then the BoE has room to hike interest rates in a limited and gradual manner, Deputy Governor Ramsden said. "The kind of guidance we've been giving -- in the world of a deal it still applies," the banker said. "We're not saying over what timeframe, but limited and gradual is a reasonable qualitative framing," said Ramsden.
 
China: GDP Growth Weakest Since 1992
Onshore Chinese Yuan traded at 7.0779 per USD and offshore Chinese Yuan traded at 7.0810 per USD at 9:00 am PST.
 
China economy expanded at the slowest pace in nearly three decades in Q3 amid subdued investment, industrial production and domestic demand. GBP expanded 6% YoY in Q3 after rising 6.2% in Q2. This was the slowest growth since 1992 and below the expected rate of 6.1%. The economy grew 6.2% during January to September period. The government targets 6-6.5% growth for the full year. The IMF forecast China's growth to slow to 6.1% this year and to 5.8% next year. Industrial production advanced 5.8% annually after rising 4.4% in August and 4.8% in July. Output was expected to climb 4.9%. The unemployment rate remained unchanged at 5.2% in September. The domestic economy is under downward pressure, but growth will remain in a reasonable range, the statistical office said.
 
This market update is prepared by Cathay Bank for informational purposes only and does not constitute any form of legal, tax or investment advice, nor should it be considered an assurance or guarantee of future exchange rate movements or trends. This information is provided without regard to the specific objectives, financial situations or needs of any recipient. Cathay Bank does not make any representations or warranties about the accuracy, completeness or adequacy of this market update.

 

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