Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Dovish Draghi dines on hawks
Michael O’Neill
FX Trader, Loonieviews.net
Osteria Francescana is a Michelin three-star restaurant in Modena, Italy. A 12-course tasting menu will cost you €270. Adding the wine pairing option is another €180. If you bring a date and pay for parking, you just made €1,000 disappear, or $1,156.00. That is an impressive feat, but it pales in comparison to what European Central Bank President Mario Draghi accomplished on June 14.
He made $13.38 billion disappear.
Most of the loss occurred in less time than it would have taken the Osteria Francescana diner to finish the third course.
The $13.38bn number is reasonably accurate. In September 2016, the Bank for International Settlements' Triennial Central Bank Survey estimated that the daily spot FX turnover in April 2016 was $1.70 trillion or €1.49 trillion. EURUSD lost 0.0290 points from its post-ECB statement peak to the Asia trough. Simple multiplication gives the result.
Traders eagerly anticipated the June ECB policy meeting. They expected the governing council to announce an end date for the quantitative easing programme. It is the first step toward policy normalisation. However, they but were cautious as they had been disappointed in the past.
EURUSD rallied 5.4% between January and April, 2018, before Draghi appeared to defer a QE statement until later in the year. They didn’t want to be fooled again.
They weren’t. The ECB said that net asset purchases would end by December 2018. EURUSD popped on the news.
Then “Dovish Draghi” struck. The policy statement also said:
“we decided to keep the key ECB interest rates unchanged, and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path.”
EURUSD collapsed. The move was exacerbated by Wednesday’s Federal Open Market Committee decision. The Fed raised interest rates by 0.25%, putting the Federal Funds target rate at 1.75%-to-2.00% and suggested that two more increases were likely in 2018. The hawkish tone to the Fed statement sharply contrasted with the ECB message and EURUSD paid the price.
The EURUSD technical are bearish while prices are below 1.1800, looking for a break of support at 1.1490 to extend losses to 1.1364. (61.8% Fibonacci retracement level of the April 2017- February 2018 range).
The FOMC statement (and broad US dollar strength) wreaked havoc on the Canadian dollar, which was already suffering from the risk of a trade war with the US.
The Bank of Canada deferred a rate increase in March because of “growing uncertainty from trade policy developments.” That uncertainty faded in April and May after US and Canadian officials expressed optimism for a renegotiated North American Free Trade Agreement. The May 30 BoC policy statement was considered hawkish with many analysts pencilling in a rate hike in July. Those forecasts came under duress after the G7 war of words between Prime Minister Trudeau and President Trump. Trade woes got worse on June 14. Italy announced that it would not ratify the European Union’s free trade agreement with Canada. USDCAD rallied supported by widening Canada/US interest rate differentials
USDCAD has climbed from 1.2526 to 1.3152 since April 16. The uptrend is intact while prices are above 1.2920 with the break above the 2018 peak of 1.3125 targeting gains to 1.3200 and then 1.3375.
The silver lining in the cloud is that depressed level of the currency gives the BoC plenty of room to raise interest rates.
The week ahead
Major events:
Thursday: Bank of England policy meeting. There is plenty of room for GBPUSD volatility. UK data has been mixed, diminishing the risk of a rate hike. However, a hawkish statement would underpin sterling.
Thursday: Swiss National Bank policy meeting
ECB Forum on Central Banking June 18-20: there will be no shortage of top Central Bankers providing insight including ECB President Draghi, and Fed Chair Jerome Powell
Major data:
Friday Eurozone “flash” PMI. They should have limited impact due to their proximity to June 14 ECB meeting.
Canada: Friday CPI and retail sales: Better than expected data will help set the table for a July rate hike.
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