Wednesday's FOMC outing showed the Powell Fed to be less model-driven than its predecessors, but the lack of any language confirming four 2018 rate hikes sent the dollar plunging lower.
Article / 18 July 2016 at 7:28 GMT

FX Update: ECB meeting to jolt EURUSD?

Head of FX Strategy / Saxo Bank
  • Turkish coup failure sees risky assets rebound
  • Instability will still weigh on foreign investment
  • Short kiwi remains a key trading theme for the week

Maiden's Tower, Istanbul
Go set a watchman: Politically, things in Turkey have returned to some semblance of normalcy but the weekend coup attempt will still impact much-needed foreign investment. Photo: iStock

By John J Hardy

The news late Friday of an attempted military coup in Turkey sent markets into a brief tailspin into the close, but the failure of that coup and apparent quick stabilisation saw risk assets globally reverting back to the levels prior to the news even as the lira remained on a more nervous footing (it did, however, manage a bounce).

The political situation could have longer-term residual effects as it reduces investors' willingness at the margin to invest in the country. Turkey's still sizable current account deficit (4% of GDP now, though that is vastly reduced from 2011 when it was near 10%) requires large capital inflows to offset.

Friday's US data was mostly strong, with the most important two releases, the June Retail Sales and the June core CPI data pointing to pressure on the Federal Reserve to hike rates.The Fed Funds futures continue to show the market getting dragged into pricing in another rate hike in small increments, such that we're now above 50/50 on a hike by the March 2017 meeting.

Overnight, we got the latest New Zealand CPI print, which missed expectations slightly at 0.4% QoQ and 0.4% year-on-year, not as big a shortfall as we feared given the very steep backup in the kiwi exchange rate over the quarter. 

Still, the market took it as a clear negative for the currency on the argument that the RBNZ has called for this Thursday's "economic assessment" release to firmly tilt guidance to the dovish side. Short kiwi is one of our trading themes for this week..


The chart is turning back lower here, though the full reversal signal only arrives with a push back down below the 0.7050/0.6950 area. The next major event risk for NZD is the economic assessment release from the Reserve Bank of New Zealand this Thursday.


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Source: Saxo Bank 

The G-10 rundown

USD - Friday's strong Retail Sales, Industrial Production and CPI data helping the fundamental case for the greenback, though the market remains reluctant to believe. In a week with few US data catalysts, we'll be watching for technical developments on the key USD charts - particularly EURUSD and AUDUSD and possibly USDCAD.

EUR - ECB supposedly coming with a more accommodative stance at this week's meeting and we are generally negative on EURUSD, which has entirely failed to commit technically in either direction lately, so a solid technical break below 1.10 is still needed to get the ball rolling for the bears. More important than any new ECB measures is whether the EU politically commits to a special deal for Italian banks, which are Too-Big-To-Fail.

JPY - The long wait for the July 29 Bank of Japan meeting continues, with official noises from Japan mostly pointing to helicopter money being seen as too radical for now, even if it has been clearly discussed. The focus could be more on basic fiscal stimulus (the difference between helicopter money and fiscal stimulus is the less discriminate nature of the former), with a baseline of ¥10 trillion perhaps already priced in. Would be surprised to see JPY weakness extending aggressively for now after the very sizable recent consolidation.

GBP - BoE Weale speech today could be key for setting the tone on the BoE's approach to the risks imposed by Brexit. With fiscal accommodation likely forthcoming, a focus more on stimulatory QE rather than rate cuts could eventually be seen as a positive for sterling. Would expect any possible sterling resilience to focus on EURGBP and possibly GBPCHF.

CHF - 1.0900 level in EURCHF struggling again and CHF getting a boost on the Turkish coup attempt news. A clearing of the Italian bank problem likely needed to put a firmer floor under EURCHF.

AUD - Strong versus the kiwi, but showing signs of slipping elsewhere, or at least an inability to push higher versus the USD. Friday's reversal from new local highs in AUDUSD could point to further bearish developments of interest this week.

CAD - Very weak Canadian manufacturing sales data on Friday contrasted with the strong US data and USDCAD bounced, though it remains mired in the range as the bulls have some proving to do. We prefer a focus higher, but require the technical break of 1.3100/50.

NZD - RBNZ assessment on Thursday seen as likely to provide dovish guidance as we suspect the kiwi's days of outerperforming are over and we have solid technical reversals in place in NZDUSD and AUDNZD.

SEK - EURSEK never developed momentum after trying to push back into the lower range – a weak performance from SEK. No data catalysts on the horizon this week.

NOK - EURNOK on summer holiday and no notable data this week – signals from oil market and risk appetite likely to provide whatever minimal push and pull for now.

Upcoming Economic Calendar HIghlights (all times GMT)

0815 – BoE’s Weale to speak on Brexit impact on monetary policy
1400 – US Jul. NAHB Housing Market Index

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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