ECB in focus ECB in focus ECB in focus

FX Update: ECB meeting the chief focus this week

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Risk sentiment is in a hopeful mood to start the week, driven by goldilocks US data and hopes for de-escalation of US-China trade tensions next month. The Euro and safe haven currencies are weak and risky currencies are resurgent in hopes that the good times will continue. Biggest event risk on this week’s calendar the ECB meeting.


Trading interest

  • Maintaining long AUDNZD position with stops below 1.0570 and targeting 1.0950
  • Maintaining short EURSEK, lowering stops to 10.71 and targeting low 10.50’s
  • Long EURCHF with stops below 1.0850 for 1.1000+

The ECB meeting is this week’s chief highlight as we all question whether the market has overpriced the scale of the easing package Draghi and company are set to deliver and whether any new easing is pushing on a string anyway. President Draghi is no doubt ready to bring out the big policy bazooka, but there seems a noisier contingent of ECB “hawks” leaning against significant activism. On the way at this Thursday’s meeting is some mix of rate cut (odds only slightly favour 10 vs 20 bp cut), tiering (a must for core banks with the huge reserves paying negative interest), new cheap loans to banks (most important for peripheral banks to continue to roll bad debt) and asset purchases (likely the most controversial topic among ECB governing council given where yields are trading, nonetheless estimates start with EUR 20 billion per month and pick up steeply from there).

The net effect of these measures will bring some degree of relief for the banking system in particular – an absolute must to pull the European financial sector out of its death spiral and avoiding the current policy environment from inflicting active harm on banks and credit transmission. Still, the more powerful medicine for the economy (and the euro) would be coordination with EU governments to link QE with significant fiscal stimulus and perhaps combining this with Bank of Japan-style yield curve control, but it appears too early to look for this. As for the EUR, the single currency is rather weak against risky currencies after last week’s surge in risk appetite, but has pulled back to critical levels against the US dollar, as we look at in the chart below.

The coverage of Brexit and UK Prime Minister Boris Johnson’s political travails and the comeback in sterling don’t take into account that the machinations of parliament to seize control and avoid a “cliff edge” No Deal on October 31, and even the chaos in his the Conservative party could eventually play straight into Johnson's hands in an election scenario, as polls continue to indicate strong outcomes for the Conservatives. In other words, No Deal Brexit odds may be higher than ever beyond a new January deadline and investors looking positioning for “No Deal or Corbyn” now have far better prices and implied volatilities to work with for downside sterling scenarios. This week, Johnson will again look to call for an election, though there could yet be drama around the bill to force a deadline extension.

China fixed USDCNY eleven basis points lower overnight, and it won’t be surprising if USDCNY is closer to 7.05 than 7.15 – or at least kept very quiet – through China’s National Day celebrations at the first of next month and ahead of the US and China talks sometime thereafter.

Chart: EURUSD
EURUSD is at a crossroads this week as we await ECB easing measures and whether the market has overpriced these. The rejection of the recent break below 1.1000 in EURUSD is a hopeful development for bulls, but not yet forceful enough to reverse the trend. The 1.1000-50 area looks pivotal over this week’s ECB meeting and the prior price action in recent months is not encouraging for structural bulls unless the narrative somehow changes, as every rally has eventually faded and long positions are costly to hold because of the carry differential.

Source: Saxo Bank

The G-10 rundown

USD – the August jobs report was not encouraging, but odds are dropping for a 50 bp move from the Fed next week as the immediate threat of trade war escalation between the US and China has faded. The US dollar has reversed back lower after a surge to new highs last week – the situation looks technically pivotal right now for the greenback and will remain so through the September 18 FOMC meeting.

EUR – before judging that the euro looks firm versus the US dollar and the yen, have a look at EURCAD and other EUR/risky crosses, which suggest that the market is looking for strong easing from the ECB – these may be the most prone crosses to a severe correction in the event the ECB disappoints on the hawkish side.

JPY – the yen on the defensive as risk sentiment has improved and bond yields have backed up. For broader JPY outlook, watching the 107.00 area in USDJPY for whether the yen remains the weakest of the weak here.

GBP – sterling is not out of the woods yet – thought technically, the EURGBP reversal is impressive. Very headline driven.

CHF – prospects for ECB easing holding EURCHF down, while risk sentiment and yield back-up driving in the opposite direction. Seems time for a consolidation, especially if yield consolidation higher continues.

AUD – the Aussie trying to mount a comeback here, finding fuel on crowded short positioning and the prospects for US-

CAD – if equities continue to stage a comeback here and risk sentiment finds encouragement from the ECB and then next week’s FOMC meeting (even more important) potential for USDCAD to test all the way to 1.3000.

NZD – AUDNZD seeking out local support and so far finding it not far below 1.0650 – AU/NZ yield spreads continue to point the needle higher for the pair as the next hurdle is the 1.0700+ area recent highs for a possible go at 1.1000

SEK – the resurgent risk appetite and solid PMI data out of Sweden last week boosting the SEK and have EURSEK challenging the key pivot area below 10.65 that could open for 10.50 and more if the good mood continues across markets.

NOK – Solid GDP print this morning has EURNOK digging lower below first key area around 9.90, but bigger breakdown requires taking out the 9.80-75 area: probably a full recovery in risk sentiment and hopes on the other side of the ECB and FOMC meetings that the central banks are getting ahead of the curve needed for significant EURNOK downside traction to develop.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0830 – UK Jul. Manufacturing Production
  • 0830 – UK Jul. Trade Balance
  • 0130 – China Aug. CPI
  • 0130 – Australia Aug. NAB Business Survey

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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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-sg/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 Markets 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

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 such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

The information or the products and services referred to on this website 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 intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.