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Draghi Prattles, Dollar Rattled
Draghi made a half-hearted attempt to talk down the euro but the inevitability of the taper ensured his efforts failed. The euro led the way in a broad dollar rout. A handful of notable events are coming up in Asia-Pacific trading. A new USD trade has been added, bringing the number of open trades to 5; 3 in FX and 2 in indices.
Draghi confirmed the inevitable in his press conference, that the ECB will make some kind of decision in October regarding the QE programme. Leaks later showed that the staff was preparing a set of options that would give the Governing Council to buy more bonds but the market continues to push the narrative that a taper is certain. That meant a quick rally to 1.2059 before a pullback ahead of the cycle high.
As the euro climbed, the US dollar sagged -- partly due to the incredible hurricane that's headed towards Florida. The path is still uncertain but the most-likely forecast takes it straight towards the Miami area in what would be another hit to GDP. We send our thoughts to those in its path and expect the dollar to bounce if the forecast shifts.
The bond market continues to warn about trouble in the US despite a bill to extended the debt ceiling. Ten-year yields hit 2.03%, which is the worst since election night. That helped to send USD/JPY to 1.0804, which is the low since April.
USD/CAD was in the spotlight as flows took over and pushed the pair down to 1.2119, breaking the May 2015 low and setting up a test of 1.20.
The Australian dollar finished at the best levels of the day and 80 pips above the Asia-Pacific lows. It will be in focus later with July home loan numbers expected to show a 1.0% increase at 0130 GMT. That will be followed by an appearance from Debelle at 0300 GMT.
Japan is likely to get some enthusiasm-dampening news with 2Q growth expected to be revised down to 2.9% from 4.0% in the last revision. Also on the agenda is a key speech from the Fed's Dudley at 2300 GMT. He's the final core member on the schedule before next week's FOMC. George also speaks at 0015 GMT.
Trade Idea Wrap-up: USD/CHF – Buy at 0.9450
USD/CHF - 0.9501
Most recent candlesticks pattern : N/A
Trend : Down
Tenkan-Sen level : 0.9528
Kijun-Sen level : 0.9545
Ichimoku cloud top : 0.9571
Ichimoku cloud bottom : 0.9556
Original strategy :
Buy at 0.9465, Target: 0.9590, Stop: 0.9430
Position : -
Target : -
Stop : -
New strategy :
Buy at 0.9450, Target: 0.9550, Stop: 0.9415
Position : -
Target : -
Stop : -
As the greenback has slipped again today, suggesting near term downside risk remains for weakness to 0.9470, however, if our view that low has been formed at 0.9428 last week is correct, downside would be limited to 0.9450 and bring another rebound later. Above 0.9595-00 would suggest low is possibly formed, bring test of 0.9653-55 resistance, break there would bring another rise to 0.9680 but break there is needed to add credence to this view and extend gain to resistance at 0.9698-99.
In view of this, we are inclined to buy dollar on further subsequent decline. Below 0.9450 would risk weakness towards said support at 0.9428 but break there is needed to signal recent decline has resumed and extend further fall to 0.9390-00 first.
Pound Rally Continues on Strong UK Housing Report, Weak US Jobless Claims
The British pound has resumed its upward movement in the Thursday session. In North American trade, GBP/USD is trading at 1.3094, up 0.40% on the day. On the release front, British Halifax HPI picked up speed, with a strong gain of 1.1%. This easily beat the estimate of 0.2%. In the US, unemployment claims jumped to 298 thousand, well above the estimate of 245 thousand. On Friday, the UK releases Manufacturing Production, which is expected to improve to 0.3%.
The red-hot US labor market appears to have cooled off, as recent employment indicators have been weak. On Thursday, unemployment claims jumped to 298 thousand, the highest level since April 2015. This follows weak readings in July for nonfarm payrolls and wage growth. However, the sharp rise in jobless claims can be attributed to Hurricane Harvey, which led to thousands of displaced workers in Texas filing for unemployment benefits. Unemployment numbers could remain high in upcoming weeks, until flooded areas are able to get on their feet and reconstruction projects begin, which should translate into lower jobless numbers.
One of the biggest losers in the Brexit saga will be the City of London, which stands to lose its status as the primary financial hub in Europe. There are plenty of players across the Channel casting an eye on the spoils after Britain leaves the European Union. Frankfurt and Dublin are the two main contenders, with Paris and Amsterdam are also hoping to lure large financial companies when they downsize operations in London. On Wednesday, Deutsche Bank chief executive John Cryan argued that Frankfurt is ideally suited to take over from London as the financial hub for European banks, saying it has the structures in place to take over from London. Analysts estimate that London could lose up to 30,000 jobs in the financial services sector, with clients moving up to 1.8 trillion euros in assets from the UK to the continent. Germany could gain 30% of these jobs, which would mark a huge post-Brexit boon for the country.
Trade Idea Wrap-up: GBP/USD – Buy at 1.3000
GBP/USD - 1.3092
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 1.3075
Kijun-Sen level : 1.3075
Ichimoku cloud top : 1.3022
Ichimoku cloud bottom : 1.2983
Original strategy :
Buy at 1.3000, Target: 1.3120, Stop: 1.2965
Position : -
Target : -
Stop : -
New strategy :
Buy at 1.3000, Target: 1.3120, Stop: 1.2965
Position : -
Target : -
Stop : -
Although cable has risen again in NY morning, loss of near term upward momentum should prevent sharp move beyond 1.3140-50 and reckon 1.3175-80 would hold from here, risk from there has increased for a much needed correction to take place later today or tomorrow.
In view of this, would not chase this rise at current level and would be prudent to buy cable on subsequent pullback, below 1.3050 would bring minor correction to 1.3030-35 but reckon previous resistance at 1.2996 (now support) would limit downside and bring another rise. Only below the lower Kumo (now at 1.2983) would abort and signal top is formed instead, bring weakness to 1.2950 first.
Trade Idea Wrap-up: EUR/USD – Stand aside
EUR/USD - 1.2010
Most recent candlesticks pattern : N/A
Trend : Up
Tenkan-Sen level : 1.1993
Kijun-Sen level : 1.1984
Ichimoku cloud top : 1.1924
Ichimoku cloud bottom : 1.1909
New strategy :
Stand aside
Position : -
Target : -
Stop : -
Euro’s intra-day brief rally has dampened our bearishness and gain to resistance at 1.2070 (last week’s high) cannot be ruled out, however, break there there is needed to revive bullishness and signal recent upmove has finally resumed and extend gain to 1.2100, then towards 1.2130-40 but near term overbought condition should limit upside today.
In view of this, would not chase this rise here and would be prudent to stand aside in the meantime. Below 1.1960-65 would prolong consolidation and weakness to 1.1925-30 cannot be ruled out but break there is needed to signal an intra-day high is formed, bring weakness to 1.1900, then towards 1.1865-70 later.
Trade Idea Wrap-up: USD/JPY – Sell at 108.75
USD/JPY - 108.55
Most recent candlesticks pattern : N/A
Trend : Down
Tenkan-Sen level : 108.56
Kijun-Sen level : 108.73
Ichimoku cloud top : 109.14
Ichimoku cloud bottom : 108.84
Original strategy :
Sell at 109.55, Target: 108.55, Stop: 109.90
Position : -
Target : -
Stop : -
New strategy :
Sell at 108.75, Target: 107.75, Stop: 109.10
Position : -
Target : -
Stop : -
As the greenback has dropped after meeting resistance at 109.40, suggesting recent decline would resume and break of previous support at 108.13, break there would extend recent downtrend to 107.75-80 and possibly towards 107.50, however, near term oversold condition would prevent sharp fall below latter level and reckon 107.20-25 would hold today, bring rebound tomorrow.
In view o this, we are still looking to sell dollar on recovery but at a lower level as 108.90-00 should cap upside. Above 109.00 would suggest an intra-day low is possibly formed but only break of said resistance at 109.40 would confirm and signal recent decline has ended instead, bring a stronger rebound to 109.70-80 first.
Euro Fluctuates after ECB; Little New from Draghi
The European Central Bank revealed little new about future policy at the end of its two-day policy meeting today, keeping interest rates and the size of its asset purchases unchanged as expected. Although ECB officials had been signalling that policymakers would not be ready to make a decision on scaling back their stimulus program at the September meeting, there were expectations that President Mario Draghi would use today's press conference to lay the groundwork for a possible October announcement.
However, Draghi stuck to familiar language at his press briefing, only saying that the Governing Council have had a "very, very preliminary" discussion on reducing monetary stimulus. He gave his strongest hint yet that the central bank will likely be ready in October to decide on its next move but neither did he commit to such a date.
The biggest surprise from the ECB today was probably the decision not to make any changes to the forward guidance. In fact, the announcement statement was completely unchanged from the previous meeting's, with the Bank even maintaining its bias to increase the size of its bond purchases if necessary. This led some analysts to think that the markets may have misjudged the ECB's readiness to begin tightening policy.
But despite the ECB's unexpected dovishness, the euro shot up by 1% to above $1.20 while Draghi spoke. The euro had been on the up in the hours prior to the ECB's decision and press conference, and jumped to a one-week high of $1.2059 when Draghi didn't appear to show particular alarm over the surging currency. However, as the press conference progressed and Draghi gave clearer indications that the euro strength would be an important factor in setting policy, the single currency fell back to around just below the $1.20 level.
Draghi said that the appreciation in the exchange rate has tightened financial conditions in the Eurozone and would need to be monitored, adding that the strength of the euro would influence policy decisions if it had a downward effect on inflation. "The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability" Draghi said.
The euro's sharp gains in recent months have already forced the ECB to slightly lower its inflation forecasts for 2018 and 2019 by 0.1 percentage points to 1.2% and 1.5% respectively. However, they were kept unrevised at 1.5% for 2017. Growth forecasts were largely unchanged except for 2017, which was revised up from 1.9% to 2.2%. Draghi described growth as robust and broad based, but said patience was needed with regards to inflation.
The ECB only expects inflation to hit its target of close but below 2% by 2020, suggesting that the road to unwinding quantitative easing will be very slow and long.
Euro Shines Despite Draghi’s Warning about FX Volatility; Dollar Tanks
The euro rose higher on optimism that the ECB would soon taper its QE program while the dollar dropped on weak economic data and as another major hurricane is set to hit the United States.
In the day's most anticipated event, the European Central Bank refrained from changing policy although some analysts were expecting an announcement regarding the tapering of its asset purchase (QE) program. Despite the dovish outcome, euro/dollar rose sharply, rising north of 1.20 to 1.2058, just shy of the previous week's 1.2069, which was its highest level since December of 2014. Trading in the pair was volatile today, moving between 1.1920 and 1.2050.
During the press conference that followed the announcement, ECB President Mario Draghi warned against excessive volatility in the euro as he showed some signs of displeasure from the recent surge in the single currency. The market pretty much ignored Draghi's concerns and pushed the euro higher. Euro/pound also rallied to only briefly pierce the 0.92 mark but dropped back to around 0.9175. The euro also rose to trade above the 131 level against the yen, in a broad move higher for the currency.
Draghi also upgraded the ECB's growth forecast to 2.2% this year (from 1.9% previously), while also downgrading the inflation forecasts of the next two years – to 1.2% and 1.5% for 2018 and 2019 respectively. While promising to keep the 60 billion euros a month pace of QE steady until the end of the year, Draghi said there would be an update on what would happen to QE next year when the ECB next meets in late October. This probably more than anything set off speculation that tapering would be announced during that meeting and gave the euro bulls an excuse to push the currency higher (together with the growth upgrade).
The dollar was today's easy target for the strong euro. In an indication of the distorting impact of Hurricane Harvey on US economic statistics, weekly initial jobless claims climbed to 298 thousand compared to 236 thousand the previous week. According to analysts, US economic statistics during the next 2-3 months will be influenced by the storm and with Hurricane Irma also closing in on Florida, the impact of hurricanes could be pronounced during the last four months of the year. The hurricanes are expected to have only a temporary impact on the US economy but they could also make the Fed's task of raising rates again this year tougher. The dollar found little support from the previous day's surprise deal between President Trump and Congressional Democrats for a 3-month extension of the Treasury's debt ceiling combined with aid for hurricane victims.
The dollar was under pressure against the yen as it dropped to around 108.60, while the pound climbed to briefly trade above the 1.31 level against the greenback. This was a fresh 1-month high for pound/dollar. The loonie, which made significant gains after yesterday's Bank of Canada rate hike but then returned a portion of those gains, managed to slightly take out those lows of USD/CAD today as it traded at 1.2137 – a 27-month low.
The remainder of the US session and Friday's Asian session will be busy in terms of Fed speakers as Mester, Dudley and George will be speaking. New York Fed President Bill Dudley's speech will be closely looked at as he may give hints on what the Fed chair Janet Yellen is thinking ahead of the September 19-20 rate-setting meeting.
In commodities, gold rose to as high as $1347 an ounce –a 1-year high- as the precious metal took advantage of the dollar's weakness and the uncertainty over North Korea's possible new missile test over the weekend. Oil was a little lower at $48.86 a barrel.
ECB: Monetary Policy Unchanged, But Changes to be Announced this October
The European Central Bank (ECB) left monetary policy unchanged, leaving interest rates on its refinancing operations, marginal lending facility, and its deposit facility unchanged at 0.00%, 0.25% and -0.40% respectively. Monthly asset purchases of €60 billion will continue at least until the end of 2017, depending on the evolution of the outlook for inflation and progress made toward the 2.0% target.
During the press conference, President Mario Draghi mentioned that the bulk of decisions on changes to the ECB's monetary policy, particularly its asset purchase program, will likely be made at the October 26th meeting. Moreover, at today's meeting the ECB governing council discussed different scenarios concerning changes to its current monetary policy, including the tradeoffs between the scenarios, their length and size, and related pros and cons.
New ECB Staff macroeconomic projections show an upward revision to economic growth for 2017 (up +0.3 ppts to 2.2%), but the growth outlook for 2018-19 remains unchanged at 1.8% and 1.7%, respectively. Headline HICP inflation was revised down in 2018 largely owing to exchange rate pass-through from euro appreciation (-0.1 ppts to 1.2%); similarly HICP inflation in 2019 was revised down by 0.1 ppt to 1.5%. Trend inflation measures were also revised down by 0.1 ppt in 2018 to 1.3%, and revised down about 0.2 ppts to 1.5% for 2019.
Estimates on labour productivity growth were revised up for 2016 and 2017, and broadly unchanged thereafter relative to the June projection. This may imply that trend labour productivity growth, and thus potential output growth, in the Euro Area may have been running a bit firmer than previously estimated since the Euro Area recovery began in 2014.
Market reaction was mixed. EURUSD surged above 1.20 after the press conference began at 8:30am EST while Euro Area bonds were heavily bid. However, after the press conference ended the EURUSD dipped below 1.20.
Key Implications
The Euro Area economy has been on fire, with growth averaging about 2.3% over the last three quarters – roughly double the estimate trend pace of growth. Job growth has been strong, and the breadth of the recovery across nations and industries has been impressive. This is largely why the ECB is contemplating the removal of some monetary accommodation, which is likely to start with a steady reduction in asset purchases next year.
Despite the rosy growth outlook, the lack of a sustainable uptick in inflation will ensure a very gradual removal of monetary accommodation by the ECB. The rapid appreciation of the euro in recent months provides further headwinds on the inflation front, as evidenced by downward revisions to the inflation outlook today. Nevertheless, the ECB remains convinced that given the outlook for strong economic and employment growth that it's just a matter of time before inflation converges to its 2.0% target.
The lack of inflation is not just a European phenomenon. A notable uptick in inflation has been missing in a number of advanced economies, including Canada and the U.S., despite strong economic performances. One culprit may be mismeasurement, including the difficulty in estimating trend economic growth and unemployment rates in real-time. On that note, upward revisions to labour productivity estimates for the Euro Area may imply that trend labour productivity growth may have been higher since 2014, suggesting that perhaps there is more economic slack than was previously measured. The presence of more economic slack would be consistent with weaker inflation, explaining at least part of the current inflation puzzle.
European Central Bank Meeting Outcome
Today has certainly been an explosively volatile trading session for the Euro, despite the European Central Bank leaving its key interest rates and bond purchase stimulus program unchanged.
The real action started during Mario Draghi's press conference, where Euro bulls and bears were engaged in a fierce tug of war as investors tried to get a fix on the implications of his speech. Although Draghi stated that the recent volatility in the Euro required close attention and is a source of uncertainty, he skillfully prepared the market to expect a QE tapering announcement in October. However, if the Euro continues to trade higher, it could be pushed out to December.
Market players seemed more interested in Europe's encouraging macro-fundamentals. With the economy expanding more than expected in the first half of 2017, it presents a strong argument to taper QE. However, a QE taper is likely to strengthen the mighty Euro further, which may fuel concerns over the inflation outlook and growth prospects. A key takeaway from September's ECB meeting and something which may continue to support the Euro, is Draghi's statement that the bulk of QE decisions will be taken in October.
From a technical standpoint, the EURUSD remains bullish on the daily charts. The breakout above 1.2000 should encourage a further appreciation towards 1.2080 and 1.2140, respectively. In an alternative scenario, repeated weakness below 1.1970 is likely to trigger a selloff towards 1.1900.