Head of FX Strategy
Summary: The ECB press conference produced a sharp euro comeback as it emerged that President Draghi’s new QE programme was hotly contested and on the general signal that the ECB has already done what it can do and won’t bring further easing from here, at least not as an independent central bank. The euro may have bottomed for now, especially versus the USD and CHF.
Trading Interest
The ECB meeting was a brilliant test of market themes and assumptions yesterday. The immediate market reaction on the release of the new measures was whether the ECB had over- or undelivered on what was promised. The open-endedness of the QE was cited as a chief driver of a considerable knee-jerk EUR sell-off that saw EURUSD and other euro crosses testing or testing beyond recent lows. But during the Q&A, the euro reversed course violently and rallied to close at an eleven day high in the case of EURUSD.
The euro snap-back was chiefly a product of the Draghi press conference and some details that immediate emerged as Draghi spoke, especially that ECB representatives of key core countries Germany, France and the Netherlands, as well as Austria and Estonia, leaned heavily against the new QE, probably the most potent new ECB measure. Draghi clearly found it difficult to answer a journalist’s question asking about the strength of the ECB governing council’s decision to do QE and this suggests that QE, while purportedly open-ended, is not likely to be expanded under a president Lagarde. Effectively, then, while another rate cut or two is possible from here, that is weak policy beer and this easing programme is all that the ECB can deliver for now. Underlining this message further, Draghi himself said in the press conference that “It is time for fiscal policy to take charge.” The ECB is done and the lows may be in for the likes of EURUSD and EURCHF if the EU shifts into fiscal stimulus mode under its new leadership.
Some of the weakness in the G10 smalls yesterday likely down to the Euro strength as short EUR/risk has likely been a popular trade, given the price action in many of these crosses in the two weeks and more prior to yesterday’s ECB meeting.
The August Core CPI in the US rose to a cycle high 2.4% - the highest print since 2008 and making the Fed’s job that much the dicier next week in deciding what signal to send on policy. Health care prices were the chief driver behind the rise, posting their largest single-month gain since 2016. The US 30-year T-bond auction was labelled “weak” but was unremarkable relative to the prior auction. The backup in US yields has proven chunky and has pulled to and slightly beyond the next quarter point resistance levels, the 1.75% level in the US 10-year benchmark and the 2.25% level for 30-years.
US President Trump is showing deepening signs of not standing for much else save for chaos as his latest tack is to suggest that an interim deal with China is possible. An FT article (paywall) quotes Trump on this: I see a lot of analysts are saying an interim deal, meaning we’ll do pieces of it, the easy ones first,” Mr Trump said on Thursday when asked by reporters. “But there’s no easy or hard. There’s a deal or not a deal . . . It’s something we would consider, I guess.” Other administration officials’ comments sounded less promising.
Chart: EURUSD
The strong dip and comeback on the very day of a key event risk in the form of yesterday’s ECB meeting is a sharp technical bullish signal and we’ll look for follow through in coming days. The long-sliding price action of the past year and more doesn’t build confidence in a large scale move here, which will likely require a strong signalling that fiscal policy is swinging into action. A close above 1.1100 sets the ball rolling for bulls, but the pair really needs a chunky rally into 1.1400 or higher to suggest a trend shift.
The G10 rundown
USD – the big dollar a bit mixed, higher versus CHF and JPY as long bond yields pulled higher yesterday and US equities tried at the highs for the cycle, but trading indifferently versus risky currencies. Higher US rates are pushing back against the narrative driving strong risk appetite, while US-China trade tension easing is pushing the other way.
EUR – a pivotal day yesterday and now we look for the follow through. To more firmly turn a key chart like EURUSD need to see a rally to something like 1.1400, but let’s start with 1.1200.
JPY – yen not liking the higher long rates and will remain on its back foot in broad terms until these turn. The 109.00 area in USDJPY the next important resistance.
GBP – EURGBP trading in sympathy with other Euro crosses – and 0.8900 looks like an important area. A nervous wait for the next batch of headlines.
CHF – A nice rally bar in EURCHF as the hopes for a switch to fiscal could finally keep the chart supported on a more sustained basis – watching whether 1.1000 can fall.
AUD – hope for a thaw in US-China trade tensions and a solid comeback rally in iron ore supporting the Aussie at the margin – watching the 0.6900-0.7000 area in AUDUSD for whether we see a full trend-neutralizing rally.
CAD – CAD on the defensive as the latest consolidation in bond yields has seen US yields bounce more forcefully than Canadian yields over the last week. USDCAD hasn’t begun to reverse the recent sell-off until up into the 1.3300 area.
NZD – AUDNZD progressing to new local highs, allowing longs to raise their stops. The move perhaps driven at the margin by a very weak Aug. House Sales data point overnight
SEK – EURSEK backing up as a function of across the board EUR strength,but actually a EU fiscal shift could prove more SEK positive (and a SEK fiscal shift could prove extraordinarily so if no evidence yet that the Swedish government’s attitude is shifting.) Even hopes of an eventual EU fiscal shift can get EURSEK back into 10.50-40
NOK – similar idea as for EURSEK, but disappointing to see EURNOK so far above 9.90 – looking for local bearish hook to argue for a move back toward 9.60.
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