FX Trading focus: ECB a snoozer, Xi-Biden dialog boosts CNH
The ECB was about as in-line with expectations as possible, as the central bank delivered a “dovish taper” that was rather pre-announced already, given that Lagarde and company had announced that the pace of asset purchases would be “front-loaded” earlier this year. At the same time, the bank announced that it sought to maintain flexibility in the rate of purchases, theoretically allowing it to expand purchases again early next year if deemed necessary. There were a couple of small adjustments to the forecasts, with the GDP estimate for this year raised to 5.0% from 4.7% and the inflation forecast raised for this year through 2023 (to 1.5% ). That last adjustment is too small to indicate any concern that current high inflation levels will prove stickier than anticipated. The meeting was essentially a punt to the December meeting, which will have to see the bank rolling out a plan for how it will wind down the emergency QE after March of next year and transfer some percentage of that to the standard asset purchase plan to avoid a cliff edge. A new German government will likely loom large as well.
Finally, the ECB probably wanted to buy a bit more time before indicating taper plans to see how the first couple of months of fall and early winter shape up before taking next steps. EU sovereign bonds rallied on the meeting, and were helped on that account by a strong rally in US treasuries that extended yesterday in the wake of another strong US treasury auction, this time of 30-year T-bonds. All in all, the ECB meeting is a relative non-factor that keeps the euro rather neutral to weak in the crosses if we keep a strong “risk on” backdrop, although the single currency could certainly rise versus a weak US dollar if we are set for an extension of this very quiet, complacent market and US yields remain low (see next week’s important US data points below). The 1.1800 and 1.1909 levels are the next ones of note for EURUSD traders.
Xi-Biden talks boost risk sentiment and CNH. Late yesterday, Chinese President Xi and US President had a long phone call, one apparently initiated by Biden as he sought to re-energize the dialogue between the two countries after lower level talks went nowhere earlier this year.
While USDCNH is far and away the most traded CNH pair, the CNH has a tendency to trade as a “low beta USD” in the crosses, though there was a period earlier this year when the CNH showed more isolated strength. On that note, it is worth not only tracking USDCNH here after the move overnight that is taking it close to range lows, but also EURCNH and other CNH crosses for signs that the renminbi is moving on its own, especially if the huge area a bit lower in EURCNH shown on the chart below gives way without notable EURUSD weakness, for example.