Head of FX Strategy
Summary: Traders will want more details on the policy review promised this morning by ECB president Lagarde, but the initial reaction was mostly euro negative. As long as Lagarde is not set to double down on negative rates and traditional QE, this may eventually prove euro supportive even if the market not seeing it that way this morning.
The ECB meeting account showed a rather downbeat Governing Council that tried to gin up a feeling of “unity” among its members after discord over the restarting of QE in Draghi’s penultimate meeting at the helm. Concern in the minutes focused on the economic outlook and inflation remaining low for longer. There was a general lack of feeling that the ECB can do much about the situation, as fiscal policy is seen as a more appropriate response. It is surprising to me to see how many observers are looking for the ECB to continue chopping rates from here – when there is a widening consensus that negative rates actually become counterproductive when implemented for too long a period. Even incoming ECB president Lagarde has been out pledging a review of negative rates – and just before publishing this piece we have Lagarde out this morning saying that Europe needs a new policy mix and that the ECB will review its strategy in the near future. The euro is actually selling off after the mixed to weakish flash November PMIs (softness only on the services side) and Lagarde’s announcement and we’ll take that at face value, but if the ECB policy focus is on fiscal policy measures and perhaps relief for banks (end of negative rates?) this could eventually prove euro positive – stay tuned. Note that Bundesbank’s Weidmann out speaking later as Lagarde also in Frankfurt today.
Yesterday saw the second slightly elevated US initial weekly jobless claims number, the first sign of such an elevation in months and with Q4 growth stumbling below a 0.5% annualized clip as per the two Fed surveys of current GDP, we wonder if the labour market weakness the bears on the US economy (we include ourselves in this lot) expect is finally ready to more consistently show up in the numbers. We won’t know until the week after next in the case of the monthly official numbers but a third weak reading next Friday. At the very short end of the US curve, we’re seeing increased activity in pricing in a Fed rate cut for the January and subsequent meetings, a compelling trade from a risk-reward angle as strong signs of a weakening US economy for the November and December data cycles could see the Fed lower rates at that meeting – even by 50 basis points if the numbers are sufficiently alarming (currently less than 20% odds of a single cut). But at the longer end of the curve, US treasuries were sharply weaker yesterday even as the equity market put in rather weak session and the USD was generally firm.
CAD firmed slightly after Bank of Canada Governor Poloz’s “fireside chat” yesterday as he generally failed to echo the degree of concern in Deputy Governor Wilkins’ speech earlier this week. He expended considerable effort fretting trade war spillover effects on Canada but argued that the economic is in a “good place overall” and is happy with the current policy rate. We argue that Canada could prove particularly vulnerable to a weakening US economy.
Chart: EURUSD
EURUSD weaker after a decelerating expansion in the services sector if we’re to believe the flash November PMIs out this morning and after ECB president Lagarde was out speaking this morning. The pair is down poking on the tactical support around 1.10550 again after a try at two-week highs yesterday a bearish development if a break lower holds, but the big downside pivot level is the psychological and Fibonacci support down near 1.1000, a break of which opens up for a full test of the lows and perhaps beyond.
The G-10 rundown
USD – the US dollar relatively firm but not sending any signal just yet, but can’t avoid doing so technically if it pulls another small leg higher here.
EUR – the euro stumbling this morning after Lagarde’s announcement. EURUSD focus on 1.1000 if weakness extends below 1.1050.
JPY – could be interesting EURJPY downside on the assumption of ECB activism, but looks like little to differentiate EURUSD and EURJPY directionally. USDJPY hopelessly rangebound for now.
GBP – sterling suffering further weakness as flash November Services PMI dives below 50 to 48.6, the worst since just after the 2016 Brexit vote, but everything is about how the election shapes up and how profoundly Boris Johnson’s eventual fiscal impulse and capital inflows support sterling.
CHF – EURCHF pushing on 1.1000, but the technical level of note is higher at 1.1050, while USDCHF focus is on parity if the greenback mini-rally blossoms into something more.
AUD – AUDUSD looking heavy near the downside pivot around 0.6770 at times this morning. Risk appetite and the fate of the US-China trade deal likely the key drivers for whether we are pushed over the edge for a test of the lows below 0.6700.
CAD – the loonie vulnerable to weakening US data, independent of USD direction, but Canada’s Sep. Retail Sales data up later today.
NZD – AUDNZD getting into the strategic “cheap zone”, but need a negative NZD catalyst to offer confidence that we aren’t in for a bigger test lower.
SEK – EURSEK turning lower again and teasing for a break lower – is the Riksbank’s policy of getting back to zero a harbinger of what is to come from the ECB? Market certainly not playing the euro that way and would like the outlook for a firmer SEK better if EUR also firm. Riksbank’s Jansson was out this morning saying that he saw no major adverse impact from the forecast rate hike for December.
NOK – oil prices supportive again, but need that break down through 10.00 in EURNOK to get a sense that the lows are in for the krone.
Today’s Economic Calendar Highlights (all times GMT)
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
