Euro jumps on ECB hopes; Nafta comments weigh on loonie, peso

The euro gained on its main rival the U.S. dollar on Tuesday following reports that the European Central Bank would discuss an exit from its quantitative easing program next week.

Elsewhere, traders focused on Italian politics and developments surrounding a new North American trade deal.

What are currencies doing?

The ICE U.S. Dollar Index which measures the buck against six rivals, was down 0.2% at 93.834. The broader WSJ Dollar Index  fell 0.1% to 87.01.

The euro — the dollar’s main rival — climbed to $1.1725, compared with $1.1699 late Monday in New York.

The British pound  strengthened to $1.3391 from $1.3312, marking a two-week high.

Against Japan’s yen the dollar fell to ¥109.66, little changed from ¥109.81 late Monday in New York.

Both the Canadian dollar  and Mexican peso  were sharply weaker against their U.S. rival on Tuesday, pushing them to a 2.½-month and 15-month low respectively earlier in the session. The greenback last fetched C$1.2974, up from C$1.2931, and 20.3280 pesos, versus 20.0742 pesos late Monday, when the pair hit a 14-month high.

The Australian dollar  retraced some of Monday’s sharp gains after comments by the Reserve Bank of Australia were perceived as somewhat dovish. The Aussie bought $0.7620, down from $0.7646 late Monday in New York.

What is driving the market?

The euro turned positive and climbed to a session high of $1.1733 on Tuesday, following reports that the ECB would discuss an exit from its QE program at next week’s policy meeting. After weeks of low expectations for the central bank due to sluggish economic data and political uncertainty in Italy — one of the biggest eurozone economies — this spurred hopes for policy normalization in Frankfurt and pushed the euro higher.

Meanwhile in Italy, new prime minister, Giuseppe Conte, earlier outlined the new government’s policy priorities, including introducing universal income and addressing immigration. The euro softened slightly in response.

Worries about the future of the North American Free Trade Agreement weighed on the Canadian dollar and Mexican peso on Tuesday after Sen. John Cornyn, R-Texas, said the deadline for congressional approval of a new trade deal had likely run out, meaning there likely wouldn’t be Nafta 2.0 until 2019. Voting on a deal and implementing it would indeed take months and comes at an inconvenient time, given the Mexican presidential election on July 1 and the U.S. midterm elections in November.

Further, White House economic advisor Larry Kudlow said President Donald Trump was considering to split the Nafta talks into separate negotiations with Mexico and Canada.

In the U.K., the British pound was stronger after better-than-expected services sector data, which in turn drove up expectations about an interest-rate hike from the Bank of England.

What are strategists saying?

“While the ECB headline doesn’t really tell us much, it has certainly gotten the market excited,” said Brad Bechtel, managing director in FX at Jefferies. Still, the central bank would have to remain careful in balancing the economic and the political, he said.

“Cable was the clear winner of the night, rising to a higher of $1.3380 in morning London dealing after the U.K. PMI Services proved to be the third straight report to beat expectations,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management of the pound-dollar pair. “The news may be good enough for the BOE to reconsider a rate hike in July or August, and that could send cable back toward $1.40.”

What else is in focus?

The Markit services purchasing managers’ index for the U.S. in May rose to 56.8 from 54.6.

The ISM nonmanufacturing index for the same month rose to 58.6, compared with MarketWatch consensus estimates of 58. Job openings for April stood at 6.7 million, up from 6.6 million previously.

In other asset classes, U.S. stocks traded mixed, after starting the day in positive territory. The Dow Jones Industrial Average  turned negative, while other benchmarks remained in the green. Treasury bond yield came off, with the 10-year U.S. bond  last yielding 2.911%.