FX Update: EUR jumpy on PMIs, Lagarde signaling policy review

The ECB meeting account showed a rather downbeat Governing Council that tried to gin up a feeling of “unity” among its members after discord over the restarting of QE in Draghi’s penultimate meeting at the helm. Concern in the minutes focused on the economic outlook and inflation remaining low for longer. There was a general lack of feeling that the ECB can do much about the situation, as fiscal policy is seen as a more appropriate response. It is surprising to me to see how many observers are looking for the ECB to continue chopping rates from here – when there is a widening consensus that negative rates actually become counterproductive when implemented for too long a period. Even incoming ECB president Lagarde has been out pledging a review of negative rates – and just before publishing this  piece we have Lagarde out this morning saying that Europe needs a new policy mix and that the ECB will review its strategy in the near future. The euro is actually selling off after the mixed to weakish flash November PMIs (softness only on the services side) and Lagarde’s announcement and we’ll take that at face value, but if the ECB policy focus is on fiscal policy measures and perhaps relief for banks (end of negative rates?) this could eventually prove euro positive – stay tuned. Note that Bundesbank’s Weidmann out speaking later as Lagarde also in Frankfurt today.

Yesterday saw the second slightly elevated US initial weekly jobless claims number, the first sign of such an elevation in months and with Q4 growth stumbling below a 0.5% annualized clip as per the two Fed surveys of current GDP, we wonder if the labour market weakness the bears on the US economy (we include ourselves in this lot) expect is finally ready to more consistently show up in the numbers. We won’t know until the week after next in the case of the monthly official numbers but a third weak reading next Friday. At the very short end of the US curve, we’re seeing increased activity in pricing in a Fed rate cut for the January and subsequent meetings, a compelling trade from a risk-reward angle as strong signs of a weakening US economy for the November and December data cycles could see the Fed lower rates at that meeting – even by 50 basis points if the numbers are sufficiently alarming (currently less than 20% odds of a single cut). But at the longer end of the curve, US treasuries were sharply weaker yesterday even as the equity market put in rather weak session and the USD was generally firm.

CAD firmed slightly after Bank of Canada Governor Poloz’s “fireside chat” yesterday as he generally failed to echo the degree of concern in Deputy Governor Wilkins’ speech earlier this week. He expended considerable effort fretting trade war spillover effects on Canada but argued that the economic is in a “good place overall” and is happy with the current policy rate. We argue that Canada could prove particularly vulnerable to a weakening US economy.

Chart: EURUSD
EURUSD weaker after a decelerating expansion in the services sector if we’re to believe the flash November PMIs out this morning and after ECB president Lagarde was out speaking this morning. The pair is down poking on the tactical support around 1.10550 again after a try at two-week highs yesterday a bearish development if a break lower holds, but the big downside pivot level is the psychological and Fibonacci support down near 1.1000, a break of which opens up for a full test of the lows and perhaps beyond.