LONDON (Reuters) – The euro climbed past $1.2050 despite a verbal warning on its strength from ECB head Mario Draghi on Thursday, as the central bank flagged it was preparing to scale back its 2.3 trillion euro ($2.75 trillion) stimulus program.
Traders were left waiting after the ECB’s initial statement reaffirmed its ultra-easy policy stance, but leapt on the euro as Draghi said the bank’s staff were looking at how to wind down its 60 billion-euro-a-month buying program..
The euro jetted as high as $1.2059 EUR=EBS from just under $1.1975 before Draghi spoke, while European stocks saw their day’s gains halved at the prospect of ongoing euro strength.
“We will be ready for much of what we have to decide (to scale back stimulus) by October,” Draghi said at the ECB’s post-meeting news conference. “Right now, judging the way the world is going we should be ready.”
Markets also benefited from relief that the U.S. Congress struck a deal on the country’s debt limit and that there had been no further ratcheting up of the North Korea crisis in Asia, though Wall Street saw a flat start with Hurricane Irma on track to hit Florida by the weekend. [.N]
Canada’s dollar CAD=D4 held its gains, after a surprise interest rate rise on Wednesday reminded everyone that G7 monetary settings will not remain super-easy forever .
It also showed the clear implication of policy tightening right now – the Canadian dollar surged more than 2 percent at one point to its highest levels in two years.
Draghi acknowledged that that was one of the ECB’s main conundrums. All the economic activity signals suggest it should take its foot off the gas – updated Eurostat figures as policymakers met confirmed the bloc saw robust growth in the second quarter.
But the 13 percent surge of the euro already this year is impacting its sub-target inflation outlook, forecasts for which were trimmed by the ECB on Thursday.
It is not the only issue Frankfurt is struggling with either.
Sweden’s crown – the only northern European currency to have risen against the euro this year – fell on Thursday after its central bank said it was introducing a bigger buffer on its inflation target. That should give it more leeway on policy moves.
AT THE LIMIT
Wall Street’s S&P 500, Dow Jones and Nasdaq indexes slipped 0.2-0.3 percent as they opened [.N].
Ahead of the restart a Labor Department report showed the number of Americans filing for unemployment benefits jumped to its highest level in more than two years last week amid a surge in applications in hurricane-ravaged Texas.
Asia in contrast had been mildly risk-on overnight.
China’s yuan rose past the psychologically important 6.5 per dollar level for the first time since May 2016, MSCI’s broadest index of Asia-Pacific shares .MIAPJ0000PUS gained 0.3 percent and Japan’s Nikkei .N225 rose 0.2 percent.
South Korea’s KOSPI .KS11, which has been burdened by tensions over North Korea, jumped 1.2 percent. That was its biggest gain in four months and came amid signs that major powers were talking intensively about the region’s strains.
South Korean President Moon Jae-in said he was having discussions with the leaders of Russia, Japan and the United States and that there would be no war on the peninsula.
China said it agreed the United Nations should take more action against North Korea after its latest nuclear test. North Korea said any U.N. sanctions would be met with “powerful counter measures” as it again accused the U.S. of angling for war.
Market sentiment had also been helped after U.S. President Donald Trump forged a surprising deal with Democrats in Congress to raise the U.S. debt limit and provide government funding until Dec. 15.
There was some disappointment that the deal was so short-term. But U.S. economic data was also fairly upbeat.
“The deadline on the debt ceiling has been extended just by three months, so it will come back to haunt markets again later this year. Still, markets liked it as we don’t have to worry about it for now,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.
Yields on U.S. Treasuries had ticked higher on the deal but were being pushed back again, along with the dollar. Ten-year paper was hovering at 2.087 US10YT=RR just off the previous days 10-month low of 2.054 percent.
Euro zone yields also fell despite the ECB’s hint at reduced bond buying. Italy’s 10-year yield fell to 1.958 percent, its lowest since late June, with traders soothed by a comment from Draghi that the sequencing of the scale back had been set. [GVD/EUR]
In commodities, oil prices maintained most of this week’s strong gains as the reopening of U.S. Gulf Coast refineries improved the outlook after sharp falls caused by Hurricane Harvey. [O/R]
U.S. crude futures CLc1 were steady at $49.05 per barrel, having gained 3.0 percent in the previous three sessions, while Brent LCOc1 ticked to a new 3-1/2-month high of $54.59.
Traders are now shifting their focus to Hurricane Irma, ranked as one of the five most powerful Atlantic hurricanes in the last 80 years. It killed eight people on the Caribbean island of Saint Martin, left Barbuda devastated on Thursday and was expected to reach Florida at the weekend.
($1 = 0.8378 euros)
Additional reporting by Hideyuki Sano in Tokyo; Editing by Toby Chopra