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.
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
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.