Euro perks up on anticipation of ECB shift

John Hardy

Head of FX Strategy
John Hardy joined Saxo Bank in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

The euro is bid into 1.1800 this morning despite an ugly Germany Factory Order release for May showing that orders are flat following year-on-year after growth of as high as 10% in 2017. It’s a worrying advanced sign for the German export machine, but we’ll need a few more months data for a more solid indication of a slowdown.

The euro buoyancy has more to do with ECB noise, both from a Bloomberg article with ECB sources and from the ECB horse’s mouth (Praet) that next Thursday’s meeting will see discussion of when to wind down QE purchases, with a possible schedule to be declared at the meeting. The move to air this guidance from the ECB suggests the central bank is taking a hard line on Italy – and the euro is managing to rise even as Italian yield spreads have headed back in the wrong direction over the last couple of sessions, with the two-year Italian yield back up at 135 basis points this morning.

As well, Praet mentioned yesterday that the ECB sees inflation expectations as “increasingly consistent with our aim.” It has no doubt helped that EURUSD has corrected as much as a thousand pips from its highs earlier this year. 

Today the Turkish Central Bank will announce its interest rate decision at the last regularly scheduled meeting head of the June 24 election. The majority are looking for no change to the late liquidity window rate, though many are expecting another rate hike, so TRY faces a sentiment test either way and the overriding concern all along has been that President Erdogan risks interfering with policy, particularly after the election, after which he will assume expanded powers as a result of recent constitutional reforms.

The latest weak link in emerging markets is Brazil, where the chunky sell-off in the real is particularly remarkable given rather robust rally in risk appetite over the last couple of sessions and signs of EM relief elsewhere. A recent chaotic strike, overriding sense of political uncertainty and even calls for military intervention at a popular level have roiled the BRL exchange rate. Is the risk of a revolution afoot? 

Chart: USDJPY

USDJPY is at a key inflection point just as the US 10-year benchmark has crawled back to the key 3.00% area inflection point. Whether US yields are capped at the long end for the cycle is a critical question across markets, not least for EM, and also critical for whether USDJPY finds resistance in the 110.00-25 area.

The G-10 rundown

USD – is the market trying to revive the Goldilocks or “policy convergence” trade here? The latter is the idea that the Fed anticipation is fully priced for now and other central banks can play some catchup, all while risk appetite finds the unwinding of policy accommodation sufficiently benign to rally.

EUR – the euro has squeezed back higher, led by a whiplash rebound in EURJPY as the market is getting itself in a lather anticipating some new and more restrictive signal is anticipated from the ECB where none was expected before. 

JPY – the direction of global sovereign bond yields are the arbiter of the yen direction here, as strong risk appetite has weakened the yen, together with a jump in bond yields after the dip inspired by recent EU existential pain.

GBP – sterling is only higher at the moment versus the USD on the euro’s coattails and is nearing an important resistance zone in the 1.3500-1.3600 area in GBPUSD as EURGBP fibrillates in a tight range. 

CHF – the recovery in the euro is being felt acutely in EURCHF as the pair is suddenly back within reach of its 200-day moving average around 1.1650. Feels a bit uncomfortable looking for an aggressive extension higher unless we get a more supportive signal from Italian yield spreads to the core.

AUD – the AUDUSD rally has paused in the critical final resistance zone – hard to see a notable punch higher if we can’t get liftoff in Australian rate expectations or some other catalyst.

CAD – CAD tried to rally after a bearish USDCAD reversal, but the big supply builds in the weekly DoE report yesterday knocked oil prices sharply lower yesterday.

NZD – the kiwi keeping us guessing as AUDNZD is stuck in the range and NZDUSD mulls whether the 0.7060 area Fibo will hold or if a full test of the 200-day moving average up at 0.7125 is worth a stab.

SEK – SEK might firm further if the ECB is seen as making a shift in the hawkish direction as the market sees the Riksbank as a follower of the ECB’s lead

NOK – still prefer to look for a break lower in EURNOK to lead to 9.20-25, but seeing is believing after the long wait.

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