The Euro squeezed higher as ECB officials communicated the ECB’s plans to buy peripheral debt. But is this as positive for the Euro as the market is trying to tell us at first blush?
EU tail risks unwound further in the wake of this afternoon’s ECB “announcement” that is effectively coming a day ahead of tomorrow’s scheduled ECB meeting and Draghi press conference. ECB officials announced the central bank’s intentions to buy an “unlimited” amount of (peripheral) bonds of up to three year maturities, but also said it would “sterilize” the purchases (few details on that side on the murky side of the equation). The idea of an official yield cap is officially off the table, though there will inevitably be a cap in the minds of the ECB leadership doing the bond buying. The effect of the announcement was fairly swift, as the single currency popped back higher after deepening the sell-off, thus taking it back to the middle of yesterday’s range and higher. The question is whether this is the Euro-positive development that the market is trying to say it is at first blush.
I have a hard time discerning whether there is more Euro strength in the near term on the reduction in the tail risk/positioning squeeze flows. This certainly appears to be a higher risk in the Euro/commodity currencies and possibly even in EUR/CHF trade as we have seen that pair come alive today. What could be happening is this: if we switch to a generally risk off market elsewhere and EU tail risks continue to unwind, the Euro will become a middle of the road to slightly stronger currency because of its liquidity. In such a regime, we would expect underperformance against the USD and possibly the JPY for a while. But elsewhere, the Euro might continue to strengthen further. But as I argue below, we can’t entirely remove the tail risks from the Euro as the challenges going forward are more political rather than a question of the ECB’s ability to act.
For now, I’ll stick with one date and two technical levels: a close below 1.2450 is a downside trigger and the 200-day moving average is a key resistance level. As for timing, how we settle at the end of next week (after the Dutch election, German Constitutional Court ruling and the FOMC meeting next Tue/Wed) is another key.
Bank of Canada
The Loonie finally woke up and smelled the volatility wafting over from the NZDUSD and AUDUSD crosses and USDCAD rallied a bit on the day, enough in fact to make it (so far) the day with the most upside since July. Momentum had fully come out of the pair ahead of today’s Bank of Canada meeting. There were few expectations surrounding today’s meeting, though expectations have tended higher (pricing in some fraction of a rate hike) since late July. While Carney continues to express the idea that rates will have to eventually rise, the near term discussion of the Canadian and global economy were rather dour and inflation wasn’t seen as a threat, so this flashed a green light for the CAD to weaken a bit as hike expectations were unfound a few bps in today’s trade. One can’t help but imagine that the stronger Euro has also played a role as EUR/hard asset plays have been popular in recent weeks and months.
Looking ahead
Look out for the Australian employment report out tonight. Tomorrow, let’s see what the ECB meeting brings, as well as the ADP number and ISM non-manufacturing, with the monthly US jobs report on Friday. Strong US data is the most interesting path for the market as it throws the QE3 timing up in the air again.
Economic Data Highlights
Australia Q2 GDP out at +0.6% QoQ and +3.7% YoY vs. +0.7%/+3.7% expected, respectively and vs. +4.4% YoY in Q1
China Aug. HSBC Services PMI out at 52.0 vs. 53.1 in Jul.
Sweden Aug. Services PMI out at 50.8 vs. 54.8 in Jul.
Norway Aug. PMI out at 48.7 vs. 50.1 expected and 49.1 in Jul.
Switzerland Aug. CPI out at 0.0% MoM and -0.5% YoY vs. +0.1%/-0.4% expected, respectively and vs. -0.7% YoY in Jul.
Euro Zone Jul. Retail Sales out at -0.2% MoM and -1.7% YoY as expected and vs. -0.9% YoY in Jun.
Canada Bank of Canada Rate steady at 1.00% as expected
Upcoming Economic Calendar Highlights (all times GMT)
US Weekly API Crude Oil and Product Inventories (2030)
Australia Aug. Employment Change and Unemployment Rate (0130)
Japan BoJ’s Shirakawa to Speak (0340)
John J Hardy,
SAXO BANK