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EUR/USD has inched back to 1.17 in anticipation of a neutral ECB that will stay on hold today. Inflation is close to the 2% target and growth appears resilient, with rate cuts not seen as particularly likely going forward, despite some dovish voices on the Governing Council. Nevertheless, geopolitical risks are likely to cap EUR gains. Poland had to ward off Russian drone intrusion into its airspace for the first time yesterday, while France has a new Prime Minister after Bayrou lost a vote of confidence given strong opposition to his fiscal consolidation plans. Meanwhile, the USD could also ease a tad if US CPI tonight comes in below expectations.
Global trade risks still lurk, with Mexico proposing to raise tariffs to as high as 50% on cars, steel, toys, and furniture for countries that it does not have a trade deal with. This will affect Chinese car exports to Mexico the most, but exports from other Asian economies will also be affected. Economy Minister Ebrard said the move is allowed by the WTO as prices for goods arriving in Mexico are now below “reference prices”, and the government seeks to protect jobs. Trade diversion due to US tariffs could be pressuring prices downwards, and risks of other countries raising protectionist barriers in response cannot be discounted. Mexico may have also been pressured by the US to reduce car imports from China ahead of a USMCA review and promote supply chain regionalization. Both USD/MXN and USD/CNH were little changed on the news.
China’s deflation pressures have persisted, with its August CPI released yesterday declining by -0.4% y/y compared to 0% in July. The decline was largely led by falling food prices, but the pick-up in core CPI was also soft at 0.9% y/y. Meanwhile, the decline in China’s factory prices had eased to -2.9% y/y in Aug, compared to -3.6% in July. Anti-involution measures to curb disorderly pricing scheme could be having an impact. Given weak demand and sluggish price pressures, the pace of RMB appreciation is likely to be very gradual, with USD/CNH likely to hover above 7.10 for now.
Quote of the Day
“The weak can never forgive. Forgiveness is the attribute of the strong.”
Mahatma Gandhi
September 11 in history
In 1906, Mahatma Gandhi coined the term "Satyagraha" to characterize the non-violence movement in South Africa.
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