'Never-hike Draghi' slams the euro 'Never-hike Draghi' slams the euro 'Never-hike Draghi' slams the euro

'Never-hike Draghi' slams the euro

Forex 7 minutes to read
John J. Hardy

Head of FX Strategy

Summary:  ECB president Mario Draghi will exit the stage later this year without ever having hiked interest rates during eight years at the helm of the ECB. Yesterday’s ECB meeting easily cleared the bar of dovish expectations and hit the euro across the board, sending EURUSD to new lows since mid-2017.


The European Central Bank meeting yesterday easily cleared the bar of dovish expectations, as TLTROs were announced now rather than later, the rate hike guidance was shifted over the horizon and most impressively, the ECB slashed growth and inflation forecasts for 2019, obviously impressed with the deceleration of the economic outlook in recent months.

Sovereign bonds across the EU (save for Greece) were heavily bid, most notably Italy’s BTPs where the 10-year yield dropped 12 basis points yesterday and Germany’s 10-year bund yield dropped 6 bps to its lowest level since 2016. It's interesting that risk assets across Europe, instead of rallying, actually sold off on the futility of the ECB’s move; a new TLTRO is a weak policy option that won’t drive growth and European banks stocks sold off heavily across Europe as yield curves flattened aggressively. The only policy options that will move the needle of growth for Europe from here will be fiscal.

In addition to the steep sell-off in the euro, the bout of weak risk sentiment was yesterday’s most notable development, sending equity markets, other risk assets and especially EM sharply lower and sovereign bonds sharply higher. This saw the JPY rising to the top of the heap, a development that could extend as we discuss with the USDJPY chart below.

Former UK Prime Minister Brown yesterday called for a long delay of a year to “consult the people” if the vote next week on May’s Brexit deal fails. I have kept a hopeful stance on sterling on the idea that we would reach some resolution fairly soon or have a sense of where this is going. But if a delay is the option, I fear it could turn into a rather long one and I am increasingly cautious on the sterling outlook if so – even if the path to a second referendum eventually opens up (but not until 2020?). Chiefly, this is due to the outlook for the global economy, where recession risks may do sterling few favors, as capital flows to fund the UK’s enormous still large current account deficit may be hard to come by.

Trading interest

Long USD: taking profit on EURUSD put options, retaining spot shorts with stops moved down to 1.1280 – targeting 1.1000 area or however far we can get ahead of FOMC. AUDUSD staying short for a significant move below 0.7000.

EURJPY short – maintaining shorts and adding on upticks with stops above 126.00

Chart: USDJPY

USJPY is at an interesting technical pivot here – back down through the 200-day moving average and the prior range highs around 111.25. This pair could offer the most beta to any significant surprise over US data – especially negative surprises that boost US treasuries and further weaken risk sentiment – the action could be even more brutal in other JPY crosses, as the USD tends to keep a relatively even keel elsewhere when general risk deleveraging is afoot.
USDJPY
Source: Saxo Bank
The G-10 rundown

USD – It's important for broad USD sentiment that the EURUSD break lower hold. Elsewhere, USD strength is an easier prospect as less liquid DM and EM currencies are offered amidst weak risk sentiment. As for today’s US jobs report, in-line to strong numbers may be looked through, while exceptionally weak payrolls numbers and/or a disappointment on the earnings front could see notable USDJPY selling.

EUR – EURUSD poked to new lows and the question in coming days will be whether Trump’s tweets and anticipation of a further dovish shift at the March 20 Federal Open Market Committee meeting will prevent further progress lower. EUR weakness against JPY was even more pronounced yesterday – more to come there if risk sentiment deteriorates further.

JPY – the yen is the king of the mountain as the shift in risk sentiment sees the unwind of carry trades in EM/JPY et cetera. A deepening of this ugly backdrop could lead to at least an echo of the big JPY cross meltdown we saw at the beginning of the year.

GBP – sterling thriving against the euro, but what happens next week will be pivotal. We have been generally hopeful for sterling strength, but weak risk sentiment is not particularly helpful and if we don’t get a deal next week, a delay scenario could risk turning into a long delay scenario that leaves sterling twisting in the wind on the extension of uncertainty.

CHF – thriving on the weak risk sentiment and the ECB’s dovish turn – not much room for takeoff if the Swiss National Bank is going to defend the 1.1200 area.

AUD – the AUDUSD hanging in there above 0.7000, but for how long? Let’s see how the USD reacts over today’s jobs report, but the key test will be whatever emerges from US-China trade talks.

CAD – more upside range to work with in USDCAD and I expect the full extent of that range to be explored as long as we see this ugly backdrop. We will see an interesting test of this pair specifically today as both the US and Canada report their latest jobs numbers and Canada’s erratic employment change series is coming off a massive positive spike in January.

NZD – kiwi holding out against the US dollar in these market conditions is a near miracle and must be based on some combination of a hope that China will maintain its strong yuan policy and that something positive emerges from the US-China trade talks.

SEK – we were constructive on SEK rally potential but yesterday’s move shows that SEK is still highly sensitive to weak risk sentiment and the “low forever” ECB frustrates the idea that the Riksbank can ever really normalise. 10.729 was the post-GFC high in EURSEK and next Tuesday’s Sweden CPI is the next key event risk for SEK.

NOK – important risk events up for Norway early next week with Monday’s CPI and Tuesday’s Regions Survey. EURNOK resistance below 9.85 not holding this morning and a break and hold above risks setting in motion a bigger squeeze. Key two or three sessions dead ahead. 

Upcoming Economic Calendar Highlights (all times GMT)

13:15 – Canada Housing Starts
13:30 – Canada Feb. Unemployment Rate / Net Change in Employment
13:30 – US Feb. Housing Starts & Building Permits
13:30 – US Feb. Unemployment Rate
13:30 – US Feb. Change in Nonfarm Payrolls
13:30 – US Feb. Average Hourly Earnings
Saturday: Powell Speech, Q&A
Sunday: Powell interview on 60 minutes TV show

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.