Global Head of Macro Strategy
Summary: The USD rolled over off its highs this week in the highest beta currencies to risk sentiment and especially oil prices, but looks to finish the week stubbornly strong, in part on ECB maintaining its dovish credibility. Next week could prove interesting on the Wednesday FOMC meeting and a welter of CPI and first-estimate GDP readings from around the world. BUt more importantly, it is the last week ahead of August, which could bring a change in market temperature.
FX Trading focus: USD stubbornly strong as dovish ECB weighs.
We all went into the ECB expecting a relatively dovish, if somewhat uneventful outcome. That is largely what we got, though with a somewhat more forceful reaction in EU yields to the downside than I would have thought was likely had the meeting been merely “as expected.” The result of the ECB’s comprehensive policy review is that it has “learned its lesson” and will not tighten prematurely, as ECB President Lagarde said. Recall that the first of the worst two central bank moves over the last ten years of market history was ECB President Trichet’s reflexive rate hike on a brief inflation spike in 2011 even as the EU was in the midst of a full scale sovereign debt crisis. The second one was Powell’s rate hike at the December 2018 FOMC meeting. Elsewhere, the ECB unveiled its new “symmetric” inflation target of 2% with allowances for “transitory” periods in which inflation rises above. While a couple of dissenting voices were noted, President Lagarde stated that an overwhelming majority endorsed the new statement. The consensus sees it likely that the ECB unveils new asset purchase guidance to ease fears of a sudden end to emergency PEPP purchases next spring.
Chart: EURJPY
I’ve tired of constantly discussing the EURUSD chart, which remains as heavy as ever after the ECB meeting yesterday and possibly points to at least 1.1600 to the downside on a break lower. Elsewhere, I am curious whether the ECB’s more pronounced dovish stance and latest collapse in EU yields helps erodes its value versus the JPY after a solid sell-off recently that was gathered up just ahead of the 200-day moving average. As we pointed out on this morning’s Saxo Market Call podcast, the ECB is the most aggressively dovish central bank out there and yesterday’s ECB meeting did nothing to deter that notion as the ECB is snapping up a world-beating portion of outstanding EU sovereign debt relative to its global peers and doing so at a stunning rate. A break lower from here, starting with that 128.50 area SMA would have to punch well below the 127.00 area to suggest a more profound unwinding of the up-trend in place since the lows last May. For resistance, note the pivotal 130.00 level, really since back in June.
Russia’s Central Bank hiked the key rate 100 bps as an increasingly large majority of analysts expected and even guided for another rate move at one of the next two meetings. Clearly, the Russian Central Bank does not see the inflation threat as transitory and pointed to the risks of inflation in its statement, pointing especially to inflationary pressures from the labor market as it raised its 2021 inflation forecast (to 5.7-6.2% from 4.7-5.2%) but sees inflation falling back in 2022. The ruble is marginally stronger on the day and its recent strength is rather modest given the rising odds of and now execution of the largest rate hike since 2014. The central bank said is would consider a rate hike at one of its next meetings as well.
Issues for next week.
Last week head of key roll-over into August. Maybe a bit more drama?– Trading ranges were fairly large this week in places on the brief risk sentiment melt-down early in the week and its reversal. After this week we will enter August on the far side of the Wednesday FOMC meeting and supposedly on the other side of the US Treasury’s unwinding of its general account at the Fed (which it has promised to wind down to sub-$500 billion by August 1 – latest data point on the 21st was at $618B). With the US fiscal outlook cloudy, including especially how much the Democrats will be able to pass of their laundry-list $3.5 trillion social- and climate bill, but more urgently on whether the Republican opposition will continue to play for maximum obstruction and send the country into another mini-crisis over the debt ceiling.
Still holding breath on JPY upside potential – while the USDJPY action this week and solid bump higher in US long treasury yields has seen USDJPY avoiding a larger meltdown after approaching that key 109.10 area, other JPY crosses are still an open question (for example EURJPY discussed above) on whether we are set for a more full-scale setback for the JPY if yields have bottomed here or if the JPY is set for a more extensive move that disrupts the longer term downtrend. A wider scale JPY spike would likely need another bout of risk-off similar if not great than the one we saw that was so quickly gathered up this week, together with US yields challenging back toward cycle lows on a further sentiment shift post-FOMC.
Macro calendar: FOMC meeting next Wednesday for which we have a hard time seeing what recent developments could possibly will have moved the needle for the Fed – and it is a meeting with no new projections, etc. Elsewhere, we are set for a rash of CPI and GDP data points, including German and Euro Zone flash July CPI on Thursday and Friday, respectively, and the June PCE inflation data on Friday. GDP is always rear-view-mirror stuff, but can affect price action. Note that the first US Q2 GDP estimate is up on Thursday and is expected to show a annualized rate of GDP Price Index inflation of 5.4% - by far the highest data point since 1982 – nearly forty years. Back then, the Fed funds rate was nearly 10%, having been cut from 15% earlier in the year due to a recession. Different times indeed. Again, have a listen to today’s Saxo Morning Call podcast for more on our inflation outlook.
Table: FX Board of G10 and CNH trend evolution and strength
The JPY has beat a strong retreat this week in broad terms, but is not yet full reversed. The USD is finishing the week (as of this writing) with far less of a reversal of its recent strength, while CAD and NOK have displayed the most beta to this week’s developments, particularly the massive gyrations in oil prices.
Table: FX Board Trend Scoreboard for individual pairs
Among new developments in the individual pairs, note USDJPY trying to flip back to positive today and EURGBP trying to flip back to negative, likely in part on the negative pressure on the euro post-ECB.
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