The models are broken
Chief Investment Officer
Head of FX Strategy
Summary: The appointment of Christine Lagarde as next ECB president and Trump nomination of two likely policy doves for empty Fed Board of Governors spots has driven another round of dovish central bank anticipation and lower yields and higher Japanese yen. The US dollar has not committed directionally yet as traders eye this Friday’s US jobs report to further size up the odds for a larger rate cut at the July 31 FOMC meeting.
Those choosing USDJPY shorts versus EURUSD longs yesterday will maintain the former with lowered stop below 108.50. Cautious on EURUSD longs, still prefer a half long position with stops lowered a bit more to below 1.1225 to see if the market gets over the “Lagarde as ECB president” news and can rally anyway. If USD turns lower, looking to put on an AUDUSD long on close above recent 0.7036 high.
Market wrap – JPY is king of the hill as global yields continue to collapse.
The JPY is king of the hill once again on the sense that central banks are all caving in the direction of more policy support. The appointment of Christine Lagarde to head the ECB was the most important development yesterday, but the BoE’s Carney added to the energy with an indication that policy cuts are back on the table, and Trump announced two new Fed Board of Governor nominations with a likely dovish policy tilt. Perhaps most spectacularly, the long end of the US yield curve has dropped over the last couple of session more quickly than the market can price rate cuts, so the US yield curve has actually flattened for the 2-10 maturities as the 10-year benchmark trades this morning well under 2.00%.
Lagarde as ECB president
The horse-trading for top EU posts and the ECB presidency is now over and has produced surprise appointees that were never even on the list of top candidates. Grabbing the most of the market’s attention was the appointment of Christine Lagarde to head the ECB. The immediate spin is that Lagarde is a dove and is likely to prove an activist ECB President, defaulting to dovish policies that provide maximum accommodation. But Lagarde is no economist or technocrat and looks more like a political appointment, a strong leader of the ECB’s Board of Governor and someone who can act forcefully and sway the EU’s political heads to make the key fiscal and other policy decisions that will matter from here. Those leaders will also have to be convinced to provide the ECB with the mandate to reach for even more unconventional tools from here – and Lagarde seems the kind of personality that can do a lot of convincing. The market has rather fairly sold the euro on the announcement of Lagarde, though we are still intrigued on whether the single currency can hang in there versus the US dollar.
A rate cut from the BoE?
Mark Carney was out speaking yesterday and railed against the threat to the economy from protectionist policies, a threat that could require a policy response: “In some jurisdictions, the impact may warrant a near term policy response as insurance to maintain the expansion.” He also echoed other central bankers on the need for fiscal stimulus. This speech saw a kneejerk response to pricing of BoE policy, with the December short sterling STIR pricing in about 7-8 more basis points of easing. Sterling dipped as well, with GBPUSD now back close to the important 1.2500 area.
Two new Fed appointees
US President Trump has chosen two new Fed appointees for the two empty slots on the Board of Governors. The one, Christopher Waller, is a more conventional policy dove from within the Fed, while the other, Judy Shelton, is a far more interesting profile and an outspoken critic of Fed policy. She is the current head of the European Bank for Reconstruction and Development and has a number of compelling ideas about the need for a new international reserve asset, as well as cutting IOER for banks back to zero, even if she is a nominal dove on the need for interest rate cuts. IN all, these two nominees would only add to the dovish potential from a Fed that is already firmly set on a dovish path.
Chief Investment Officer
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