The Euro brushed off attempts by the ECB’s Draghi to talk it down this morning. We'll see whether the German ZEW surveyor the FOMC can stop the euro’s powering stronger across the board.
The markets got nervy late yesterday in the wake of an FT article that seemed to challenge the growing consensus that the Fed is going to do everything it can to soft peddle the move toward tapering. The market reaction shows the degree to which the markets are becoming a farce, or at least a confidence game. It is clear that no matter how the Fed tries to communicate the taper, it must do so nonetheless. Some of the reaction may also be a display of how quickly markets react because of HFT and algorithmic trading. On the one hand, if you aren’t an algo, you have a hard time reaction to these news items when they cross the wire. On the other hand, the reaction is often far too swift and brutal.
It will be better for the Fed to come out with a clear message tomorrow than to rely on the Hilsenrath’s of the world to massage their message. The odd thing is the entire reaction of risk-off and a weaker USD. Someone suggested this might be about a move to cash instruments in the event of ongoing bond market volatility, as traders liquidate some portion of their U.S. treasuries on these rumours. I think the reaction is fishy, and that eventually a clear tapering message is hardly USD negative – particularly not for the USD/JPY pair. But “eventually” is not appropriate for now, so let’s keep an open mind.
ECB president Draghi was clearly trying to talk the euro a bit lower this morning, with comments aimed at countering the widespread impression that the ECB feels unwilling and unable to do anything new on the policy front any time soon. He said that the ECB can deploy many standard and non-standard measures if warranted, and stressed that ECB monetary policy will stay accommodative as long as necessary.
The RBA minutes dragged on the Aussie again, as the bank indicated it has room to cut rates further. It welcomed the weakness of the AUD in helping to rebalance growth in the domestic economy.
Looking ahead
The EUR/USD initially refused to sell off after Draghi’s attempt to massage it lower, but we have the ZEW survey out later this morning, which should give short term direction.
Otherwise, it’s clearly all about the FOMC tomorrow, on which I have commented above. I think the Fed will send a fairly clear message that a taper is on the way, which leaves it up to the market how it would like to react to that eventuality. We may be within weeks of more open speculation of who will replace Bernanke, who will likely have to announce his plans before the end of the summer. Obama himself said yesterday that Bernanke has stayed in his post “longer than he wanted” – which essentially seals the deal that a new Fed chairman is on the way.
Don’t forget that we have an SNB meeting up on Thursday – one that has zero expectations. If the market decides that the USD should find support on the other side of the FOMC and if the SNB gives any hint that it is gearing up for a move of the EUR/CHF floor, the action in USD/CHF could become quite interesting again after we see a significant advance in May that has been entirely crushed over the last three weeks. Except for one brief swoon in February of last year, the USD/CHF has been trading in the 0.9000 to 0.9900 range since late 2011, and I don’t expect a huge downside break, so the interest lies in finding signs that further support is coming in for the pair. This may take time if the EUR/USD refuses to correct well back through the 1.3200 area, unless the SNB shocks and a EUR/CHF rally does the heavy lifting. No SNB developments and no relief from the EUR/USD rally - and we get a probe of the 0.9000 support area again.
Chart: USDCHF
Upcoming Economic Calendar Highlights (all times GMT)
- UK May PPI Input/Output (0830)
- UK May CPI (0830)
- Germany Jun. ZEW Survey (0900)
- US May CPI (1230)
- US May Housing Starts (1230)
- US May Building Permits (1230)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Q1 Current Account Balance (2245)
- Japan May Trade Balance/ Current Account Balance (2350)
- Japan May Nationwide Department Store Sales (0530)