FX Update: Euro malaise deepens. Sterling mounts comeback.
Summary: The bottom continues to fall out for the euro, which notched new lows for the cycle versus the US dollar as Covid and growth concerns weigh. Sterling is in part responsible for the weaker single currency as it has recovered all of the losses in the wake of the disastrous Bank of England meeting last Thursday on strong jobs data, the narrative and even fresh comments from Bailey. US October Retail Sales up today and an interesting measure of consumer activity in light of recent weak sentiment surveys.
FX Trading focus: The Euro in the dumps, in part as sterling mounts steep comeback.
The euro just keeps tumbling as the EURUSD didn’t even bother to respect the lower bound of the descending trend channel as yesterday’s action saw the pair accelerating lower below 1.1400. The backdrop, as noted, is one of a dovish ECB unwilling to signal the outlook for tightening, as the primary culprit of the latest bout of inflation will be attributed to the growth-killing spike in natural gas and power prices. After the enormous spike last month, natural gas prices settled recently in a range that is several multiples of longer term averages. And today we get a fresh spike higher in EU spot natural gas prices on the news that Germany is temporarily suspending the certification of the NordStream2 pipeline. That issue and the euro’s pain is clearly now linked to the stand-off at the Belarus-Poland border on the migrant crisis there and the Russian troops apparently massed at the Ukrainian border. A swift recovery for the single currency would require talks that remove these two issues and then a subsequent proper opening of theNordStream2 pipeline that crushes gas prices.
Too boot, yet another Covid wave is descending over EU countries, leading to fresh limits on activities and the fear of fresh lockdowns. Germany is heavily affected and announcing its highest daily case counts ever recently. The German coalition talks resulting in choosing the LDP’s Lindner as finance minister could be the next risk for Europe. As recently as yesterday, the latest is that the Greens and the LDP are at odds over climate policy-related spending.
Things are looking very different for sterling at the moment, which is also affected by the natural gas price situation, but where we have seen a flurry of more supportive developments. These include the news that Royal Dutch Shell plans to drop the “Dutch” from its name and move its headquarters and tax base exclusively to London, a vote of confidence in post-Brexit UK. As well, Bank of England governor Bailey was out saying that he is “very uneasy” on high inflation readings in a hearing before a parliamentary committee (though the market knows it needs to discount Bailey rhetoric after getting burned by a far more dovish BoE meeting last week than expected.) And then we had quite supportive September payrolls and October claims data today that was the first post-furlough scheme data points for the former, data that the BoE said it was important to have a look at before hiking rates. Odds are now tilting in favour of a December BoE meeting hike.
Chart: EURGBP
Some of the recent pounding on the euro has been at the hands of the very strong sterling, which as noted above, has recovered all of the losses from the terrible BoE meeting last week on a trifecta of fundamental (jobs), central bank jawboning and the Shell news. The yield spread between the euro and sterling is not yet at a new high for the cycle, and sterling has proved vulnerable to weak risk sentiment in the recent past despite the huge repricing of the forward curve for the Bank of England, so we may need to see a relatively positive backdrop to keep the course lower and beyond the big cycle lows from the entire post-Brexit vote of 2016 in the 0.8275 area.
The situation at the Poland-Belarus border and in Ukraine are affecting CEE currencies as well here, with EURPLN testing highs for the cycle ahead of today’s October core CPI data. A comeback int the general EU and euro outlook is step one for PLN avoid further weakness, with step two a resolution of the stand-off with the EU on rule-of-law issues. Finally, the Polish National Bank will have to prove that it is committed to get ahead of inflation. Elsewhere in CEE, Hungary’s central bank is set to announce rates today and expected to take the increment of hikes back to 30 basis points after curiously making two 15-bp hikes previously. The Czech central bank is the only credible central bank in Europe on fighting inflation.
Bank of Canada governor Macklem wrote an Op-ed in the Financial Times yesterday in which he wrote “For the policy rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer.” This helped BoC rate expectations and CAD higher in the crosses, with higher oil prices doing their bit to help as well. The 1.2500 area in USDCAD looks pivotal. Macklem made a point that one of the lessons of the pandemic and its aftermath is that central banks should “be prepared for the unexpected and be humble” suggesting that if inflation didn’t eventually recede as they expect and the are proven wrong, “we will adjust.”
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FX Trading focus: The Euro in the dumps, in part as sterling mounts steep comeback.
The euro just keeps tumbling as the EURUSD didn’t even bother to respect the lower bound of the descending trend channel as yesterday’s action saw the pair accelerating lower below 1.1400. The backdrop, as noted, is one of a dovish ECB unwilling to signal the outlook for tightening, as the primary culprit of the latest bout of inflation will be attributed to the growth-killing spike in natural gas and power prices. After the enormous spike last month, natural gas prices settled recently in a range that is several multiples of longer term averages. And today we get a fresh spike higher in EU spot natural gas prices on the news that Germany is temporarily suspending the certification of the NordStream2 pipeline. That issue and the euro’s pain is clearly now linked to the stand-off at the Belarus-Poland border on the migrant crisis there and the Russian troops apparently massed at the Ukrainian border. A swift recovery for the single currency would require talks that remove these two issues and then a subsequent proper opening of theNordStream2 pipeline that crushes gas prices.
Too boot, yet another Covid wave is descending over EU countries, leading to fresh limits on activities and the fear of fresh lockdowns. Germany is heavily affected and announcing its highest daily case counts ever recently. The German coalition talks resulting in choosing the LDP’s Lindner as finance minister could be the next risk for Europe. As recently as yesterday, the latest is that the Greens and the LDP are at odds over climate policy-related spending.
Things are looking very different for sterling at the moment, which is also affected by the natural gas price situation, but where we have seen a flurry of more supportive developments. These include the news that Royal Dutch Shell plans to drop the “Dutch” from its name and move its headquarters and tax base exclusively to London, a vote of confidence in post-Brexit UK. As well, Bank of England governor Bailey was out saying that he is “very uneasy” on high inflation readings in a hearing before a parliamentary committee (though the market knows it needs to discount Bailey rhetoric after getting burned by a far more dovish BoE meeting last week than expected.) And then we had quite supportive September payrolls and October claims data today that was the first post-furlough scheme data points for the former, data that the BoE said it was important to have a look at before hiking rates. Odds are now tilting in favour of a December BoE meeting hike.
Chart: EURGBP
Some of the recent pounding on the euro has been at the hands of the very strong sterling, which as noted above, has recovered all of the losses from the terrible BoE meeting last week on a trifecta of fundamental (jobs), central bank jawboning and the Shell news. The yield spread between the euro and sterling is not yet at a new high for the cycle, and sterling has proved vulnerable to weak risk sentiment in the recent past despite the huge repricing of the forward curve for the Bank of England, so we may need to see a relatively positive backdrop to keep the course lower and beyond the big cycle lows from the entire post-Brexit vote of 2016 in the 0.8275 area.
The situation at the Poland-Belarus border and in Ukraine are affecting CEE currencies as well here, with EURPLN testing highs for the cycle ahead of today’s October core CPI data. A comeback int the general EU and euro outlook is step one for PLN avoid further weakness, with step two a resolution of the stand-off with the EU on rule-of-law issues. Finally, the Polish National Bank will have to prove that it is committed to get ahead of inflation. Elsewhere in CEE, Hungary’s central bank is set to announce rates today and expected to take the increment of hikes back to 30 basis points after curiously making two 15-bp hikes previously. The Czech central bank is the only credible central bank in Europe on fighting inflation.
Bank of Canada governor Macklem wrote an Op-ed in the Financial Times yesterday in which he wrote “For the policy rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer.” This helped BoC rate expectations and CAD higher in the crosses, with higher oil prices doing their bit to help as well. The 1.2500 area in USDCAD looks pivotal. Macklem made a point that one of the lessons of the pandemic and its aftermath is that central banks should “be prepared for the unexpected and be humble” suggesting that if inflation didn’t eventually recede as they expect and the are proven wrong, “we will adjust.”
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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