Euro perks up on anticipation of ECB shift

The euro is bid into 1.1800 this morning despite an ugly Germany Factory Order release for May showing that orders are flat following year-on-year after growth of as high as 10% in 2017. It’s a worrying advanced sign for the German export machine, but we’ll need a few more months data for a more solid indication of a slowdown.

The euro buoyancy has more to do with ECB noise, both from a Bloomberg article with ECB sources and from the ECB horse’s mouth (Praet) that next Thursday’s meeting will see discussion of when to wind down QE purchases, with a possible schedule to be declared at the meeting. The move to air this guidance from the ECB suggests the central bank is taking a hard line on Italy – and the euro is managing to rise even as Italian yield spreads have headed back in the wrong direction over the last couple of sessions, with the two-year Italian yield back up at 135 basis points this morning.

As well, Praet mentioned yesterday that the ECB sees inflation expectations as “increasingly consistent with our aim.” It has no doubt helped that EURUSD has corrected as much as a thousand pips from its highs earlier this year. 

Today the Turkish Central Bank will announce its interest rate decision at the last regularly scheduled meeting head of the June 24 election. The majority are looking for no change to the late liquidity window rate, though many are expecting another rate hike, so TRY faces a sentiment test either way and the overriding concern all along has been that President Erdogan risks interfering with policy, particularly after the election, after which he will assume expanded powers as a result of recent constitutional reforms.

The latest weak link in emerging markets is Brazil, where the chunky sell-off in the real is particularly remarkable given rather robust rally in risk appetite over the last couple of sessions and signs of EM relief elsewhere. A recent chaotic strike, overriding sense of political uncertainty and even calls for military intervention at a popular level have roiled the BRL exchange rate. Is the risk of a revolution afoot? 

Chart: USDJPY

USDJPY is at a key inflection point just as the US 10-year benchmark has crawled back to the key 3.00% area inflection point. Whether US yields are capped at the long end for the cycle is a critical question across markets, not least for EM, and also critical for whether USDJPY finds resistance in the 110.00-25 area.