FOREX 5 minutes to read

Lagarde to head ECB. BoE to join global cutting frenzy?

John Hardy

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.


Trading interest

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. 

Chart: EURJPY

Source: Saxo Bank
The anticipation that a dovish ECB president Draghi will yield to an actively politicized ECB under a President Lagarde is keeping the euro under pressure here, especially versus the JPY, which tends to thrive when global yields are in a nosedive. This morning, the German Bund (10-year sovereign bond) is hitting a new record low of -38 basis points. EURJPY is in a steep retreat and is nearing the lows for the cycle again, which come in just below 121.00. Significant new lows will likely require that long bonds globally track lower still.

The G-10 rundown

USD – the US dollar trading sideways, weak against the JPY, but no notable moves elsewhere as we await today’s ISM Non-
manufacturing and especially the Friday jobs report, where a negative surprise could further turbo-charge anticipation of Fed rate cuts. On that note, the market could be very reactive  on the June ADP employment change release today if it proves weak.

EUR – the euro on the defensive in the wake of the appointment of Lagarde . Still, we’re four months removed from her taking the post and Draghi was already dovishly inclined – so let’s see if there is immediate further fallout. 

JPY – the yen rising to the top as yields continue to drop globally and the threat of Trump tariffs likely limits the potential for a policy response from the BoJ and Abe government. 105.00 is the next traffic area lower if the 106.78 lows fall.

GBP – sterling dropped on the Carney speech yesterday and is now not far from both the important 1.2500 level in GBPUSD and the 0.9000 level in EURGBP. A terrible UK June Construction PMI yesterday from the UK – worst since 2009 at 43.1 vs. 48.6 in May.

CHF – EURCHF is back lower as CHF getting absorbing some of the lower yield energy together with the JPY – the next key downside area is 1.1000 there.

AUD – the Aussie looks buoyant here versus the US dollar and was supported overnight by the latest massive trade surplus number – Australia’s largest ever. Historically a massive current account deficit running nation, the positive surge in the country’s current account fundamentals over the last couple of years is providing significant offsetting pressure from the risks of a domestic credit crunch.

CAD – USDCAD treading water, actually an impressive feat, given the ugly decline in crude oil prices  yesterday. Looking for a follow up move lower eventually if the USD is turning down here, but risk to 1.3200-50 if the US data doesn’t cooperate with the USD bears.

NZD – AUDNZD teasing here in attempting to look at 1.0500 yesterday but not quite making it – more constructive on an upside view there on a strong close above that level. NZDUSD, meanwhile, contending with an important  resistance zone around 0.6700-50.

SEK and NOK – Scandies traders appear to be on a summer holiday – interesting to see if today’s Riksbank stirs the pot – EURSEK broke the 10.60 support level over a week ago but stalled out ahead of the next level here close to  10.50. The Riksbank meeting this morning hardly likely to bring a hawkish message, but the market knows that. The June Services PMI out of Sweden dipped just below 50, its lowest reading since 2013 (when EURSEK traded near the now unimaginable 8.50 level.)

Upcoming Economic Calendar Highlights (all times GMT)

0730 – Sweden Riksbank Meeting
0715-0800 Euro Zone Final Jun. Services PMI
0830 – UK Jun. Services PMI
0900 – Sweden Riksbank Press Conference
1215 – US Jun. ADP Employment Change
1230 – Canada May International Merchandise Trade
1230 – US May Trade Balance
1230 – US Weekly Initial Jobless Claims
1345 – US Final Jun. Markit Services PMI
1400 – US Jun. ISM Non-manufacturing
1400 – US May Factory Orders

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