- ECB would pledge to backstop markets after a Brexit: Reuters
- China continues to set its currency reference rate weaker
- Unexciting FOMC needs to hold off on hawkish guidance
A reported ECB plan to shore up markets in the event of a Brexit sounds plausible. Pic: iStock
By John J Hardy
After a string of polls showing varying degrees of the Leave vote leading at next Thursday’s UK referendum, a poll commissioned by the Sun (whose editorial staff recently endorsed a Leave vote), showed a one point advantage for the Stay vote. Meanwhile, Reuters is reporting that unnamed European Central Bank officials are promising to keep financial market conditions orderly in the wake of a possible Brexit vote with swap lines to the European Central Bank.
No official comment was available from the ECB or the Bank of England on this, but it is quite plausible to see smoothing operations to prevent excessive volatility.
Market action was generally subdued overnight, after the recent risk aversion peaked late yesterday and ahead of the starting bell across Europe we have USDJPY well back above the 106.00 level and commodity currencies on the bid from fresh local lows. China continues to set its currency reference rate weaker, with USDCNY set to a new high for the cycle, though it rallied from that level overnight as USD strength generally eased.
The tactical focus here is on the FOMC meeting tonight, where we have a hard time seeing the FOMC cutting much of a profile, needing to hold off on hawkish guidance after the weak May data and on financial markets trembling ahead of the UK referendum.
If the Fed does want to do something interesting at the next meeting or two, it would be a start to flush the embarrassing dot plot to save future face and to announce that if the economy is weakening, the Fed simply does not have the tools to do anything about it, and then pointing its finger at the US government and saying that if it wants even nominal growth, it will need to announce a massive fiscal stimulus, which the Fed will be happy to cover with additional QE.
But the latter seems unlikely as the Fed still thinks that it is the market’s puppeteer and that its guidance and expression of confidence are the glue that holds economic confidence and global financial markets together.
Ultimately, however, it’s not, and a glance at the BoJ and the ECB over the last year shows that central bank credibility is eroding fast. An aside: could the US election be more poorly timed for any government or even Fed action if indeed the US economy is slowing here?
EURUSD is poking around in the downside pivot zone of 1.1200/25, but perhaps reluctant to make a break to the downside ahead of the FOMC and the greater uncertainty of next Thursday’s referendum.
We have considerable risk that the market churns around with no conviction until we can get to the other side of the vote next week, though a close below 1.1200 could set up at least a test of the 1.1100 support.
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Source: Saxo Bank
The G-10 rundown
USD – Timing is wrong for the FOMC to cut any kind of profile, though one has to imagine that a tactically dovish Fed is more or less priced into the market expectations at this point, given that Fed hike expectations are near their lowest since the market mayhem back in February.
EUR – Interesting to see the divergently weak euro yesterday as risk aversion was at its height. Is this saying something about the potential for a weaker euro in the event of a Brexit as much as a weaker sterling? Stay tuned.
JPY – The BoJ overnight unlikely to provide fireworks for the same reason as the FOMC, but also because the next round of easing from Japan is likely to see government fiscal stimulus combined with BoJ policy – something that will take longer to plan and coordinate.
GBP- Bouncing modestly as speculative positioning is already very short and the market needs to constantly apply negative energy and risk aversion to drive sterling lower from here. Hard to see a move much beyond the established ranges until after next Thursday’s vote.
CHF – Strength is easing after a test below 1.0800 overnight in EURCHF. The franc will continue to trade in synch with general risk appetite, and the Swiss National Bank may have little to say tomorrow, facing the same dilemma as other central banks that are meeting just ahead of next week. A particularly boring meeting statement could see CHF longs emboldened on any further risk aversion ahead of the referendum, however. Swiss two-year swap rates have plunged to minus 83 basis points.
AUD – Bouncing in sympathy with risk appetite and perhaps expectations of a dovish Fed, but remains under the kiwi’s thumb as long as we continue to trade below 1.0600 in AUDNZD. Looking for renewed AUDUSD weakness to reassert as long as we remain south of the 0.7500-0.7600 zone (with uncertainty on the outlook if we are pushing up into that zone). Australia jobs data up tonight.
CAD – A bit weaker than its other commodity currency counterparts. We prefer upside in USDCAD, but technically need 1.3000 for a better signal and some room for tactical USD selling if FOMC waxes more dovish than expected.
NZD – Watch out for Q1 GDP numbers tonight. Probed below the key 0.7000/50 area in NZDUSD, but then strongly rallied, keeping the bears at bay for now, though we suspect NZDUSD’s days above 0.7000 are numbered.
SEK – EURSEK nervous in the 9.30-38 zone and likely to correlate weakly (and negatively) with risk appetite as we await the UK referendum. Bad news for Europe generally multiplied in the export-leveraged Swedish economy.
NOK – EURNOK remains bottled up in the 9.20-40 range as oil refuses to send a signal and NOK correlates with risk appetite as long as markets are nervous.
Upcoming Economic Calendar Highlights (all times GMT)
- UK May Jobless Claims (0830)
- UK Apr. Average Weekly Earnings (0830)
- UK Apr. ILO Unemployment
- US May PPI (1230)
- US June Empire Manufacturing (1230)
- Canada Apr. Manufacturing Sales (1230)
- US May Industrial Production / Capacity Utilization (1315)
- ECB’s Weidmann to Speak (1400)
- ECB’s Constancio to Speak (1430)
- US FOMC Rate Decision (1800)
- New Zealand Q1 GDP (2245)
- Canada Bank of Canada's Poloz to Speak (2340)
- Australia May Employment Change / Unemployment Rate (0130)
- Japan Bank of Japan monetary policy statement (no time given)
— Edited by Michael McKenna
John J Hardy is head of FX strategy at Saxo Bank