FX Update: EUR waiting for fiscal. Beware Pence speech today.

The final ECB with President Draghi at the helm is up later today, with Draghi leaving amidst unprecedented turmoil in the ranks on the ECB’s latest restart of QE. Draghi will likely make a last gasp effort to make clear that fiscal stimulus is really the only policy tool left even if he formerly was ever ready to assuage the market that the ECB had more monetary policy tools in its arsenal to provide further easing. An FT article (paywall) discusses the “architect” of Germany’s strict debt limits, Christian Kastrop, a former finance ministry official, who is now out saying that Germany needs to issue massive debt to invest in infrastructure, technology, and climate initiatives to compensate for years of under-investment.

The US Federal Reserve is having a challenging time getting ahead of USD liquidity pressures  into year-end as fresh signs of stress in the system had the NY Fed out yesterday announcing an expansion in its daily repo operations to $120 billion ahead of month-end, up from the current $75 billion. What will the level be for the end of December rush to shrink G-SIFI balance sheets to avoid penalties? $300 billion? More?

The Riksbank supported SEK today – at  least in the knee-jerk reaction – in delivering unchanged guidance for “most probably” hiking in December rather than pushing the rate hike further over the horizon. However, the longer term guidance was lowered to zero for a “prolonged period”, suggesting that the Riksbank remains uncertain about the outlook for growth, and the statement also saw the bank retaining easing potential (rate cuts or expansionary policy “in some other way”) in the event “the economy were instead to develop less favourably.” GDP estimates for this year and next were lowered slightly, but the core CPI forecast for 2020 was raised to 1.8% vs. 1.7% previously. The subsequent price action suggests the immediate reaction might be overblown – other key elements needed to stitch together a SEK-positive story – like an upswing in the global growth outlook and EU (and Swedish) fiscal stimulus.

Interesting to watch how aggressively EM central banks like Turkey, out announcing a rate cut today, and the Russian Central Bank, which will cut rates tomorrow, can continue to guide for lower policy rates. Turkey is slashing rates as quickly as it can and in Russia’s case, it is likely happy with the exchange rate where it is and would like to bring as much easing as it possibly can to support a sluggish economy with lower rates. This will erode the carry potential for investors in Russian assets, of course, and present risks of outflows in the event risk sentiment swings to the negative side.

Chart: EURUSD
The euro stuck in neutral here as the market has many irons in the fire here – especially important  for the euro is whether the ECB signals from here that it is at the end of the road on rate cuts and QE and is ready to assist as an auxiliary to support fiscal initiatives across the EU. We have pointed out the importance in EURUSD of the 1.1210 area, the location of the 200-day moving average and a  major Fibonacci level. Already, the recent rally has neutralized the downside focus, but backfilling on the lack of EUR-positive catalysts is a risk, with 1.1000 as an approximate “pain threshold” for recent long positions.