- ECB promised major policy assessment for today's meeting
- Draghi has little room to manoeuvre, besides six-month extension
- We might see broad risk-off should Draghi disappoint today
By John J Hardy
The last European Central Bank meeting saw Mario Draghi saying as little as possible while promising a major policy assessment at this meeting. It is far from clear what the policy assessment can bring in the way of new easing beyond extending the horizon of the problem, as the rate of ECB purchase is already difficult for the sovereign- and corporate European bond markets to absorb. The only, if unlikely, surprise from the ECB would be a change to the capital key that would allow a higher rate of purchase of EU peripheral debt on the argument that transmission of policy is uneven.
But what does an ECB disappointment look like? The broad fallout might be risk-off as the dominant theme of the moment is the reach for yield. That could mean the riskier currencies turn tail, with less certainty that this means a stronger euro relative to the other major currencies, even if it rallies against the commodity and EM currencies.
Elsewhere, we saw a far more dovish Bank of Canada policy statement yesterday than expected (see below CAD comments), the Japanese growth numbers were revised slightly to the strong side and the stronger than expected Chinese trade data gave the Aussie a nominal boost. (Should be noted that endless evidence points to severe manipulation of export reports as Chinese onshore entities/individuals seek to get capital out of the country.)
We called the 1.1200/50 area the pivot zone for EURUSD recently, but the 1.1275 area 61.8% Fibo retracement is perhaps the last upside swing area of interest if Draghi is unable to impress the market with further ECB measures today. To the downside, the support zone at the 200-day moving average and recent lows is the obvious downside trigger.
The G-10 rundown
USD – The Fed’s beige book overnight was as boring as the name and failed to trigger notable interest. The USD outlook hinges on the “reach for yield” theme and the degree to which the ECB encourages or discourages the theme, i.e., general weakness in the major currencies as traders plough into EM currencies and AUD and NZD.
EUR – See above comment on USD re EUR. The expectations into the ECB seem rather hazy and it is unclear how much more easing Draghi can deliver.
JPY – anticipation surrounding the September 21 Bank of Japan and Federal Open Market Committee two-fer seems to be fading as signals from the BoJ are mixed (clearest signal has been Kuroda’s interest in more negative rates) while the FOMC is seen as off-line. At the same time, this isn’t driving JPY strength as the theme is to buy the higher yielders.
GBP – The squeeze on sterling shorts stopped short of the key 1.3480/1.3500 resistance and posted a local bearish reversal that could mean a test of 1.3250/00. EURGBP likely to see the most volatility over the ECB today – 0.8500 is the next resistance there.
CHF – USDCHF trying to hang onto the last Fibo retracement levels (0.9670 was the low yesterday and the 61.8% retracement). In EURCHF, meanwhile, 1.0900 looks like the latest bull/bear line.
AUD – The Aussie boosted on Chinese trade data and challenging above 0.7700 in AUDUSD, as the recent 0.7756 high approaches, and above there, the final 0.7835 high of the year.
CAD – Bank of Canada much more dovish than expected , and a couple of key data points coming up over the next two days. Note that focus has intensified in housing after the new rules for foreign (Chinese) buyers in Vancouver has pricked the bubble there.
NZD – AUDNZD plunged to fresh new lows on broad NZD strength yesterday – weekly close is important here after the break of the 1.0313 low – a rally back above and we have divergent momentum setup, while if the break holds, the focus shifts down toward parity, with the actual multi-decade low from April 2015 at 1.0021.
SEK – EURSEK in a tradable reversal as the 9.50/52 area has been taken out by the latest reversal and bears/range traders may look to fade upticks for a try toward 9.40/9.38 if Draghi able to keep a lid on the euro today.
NOK – With the rally in oil overnight on US supplies data (careful – driven by bad weather preventing port loadings), EURNOK down challenging the key 9.15/9.20 zone and could see meaningful follow through toward 9.00 if Draghi manages to talk down the euro.
- Upcoming Economic Calendar Highlights (all times GMT)
- 1145 – ECB Announcement
- 1230 – ECB Draghi Press Conference
- 1230 – Canada Jul. New Housing Price Index
- 1230 – Canada Jul. Building Permits
- 1230 – US Weekly Initial Jobless Claims
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank