FX Update: King USD rising again?

The euro was under renewed pressure yesterday in the wake of the German Constitutional Court ruling on the legality under German law of the ECB’s asset purchase programme. The court’s ruling was surprisingly ambitious in declaring the European Court of Justice’s reasoning on its assessment of ECB policy as inadequate. Importantly, it called for the ECB to address its concerns on “balancing” in particular within 3 months (balancing is the idea that the ECB has not sufficiently considered the deleterious effects of its asset purchase programme, like in keeping zombie companies alive, the impact on savers, insurance policy holders, etc.). The ECB issued a dismissive statement in response.

While the particulars here are knotty here and this won’t necessarily lead to any new outright showdown, the most important takeaway is simply that this only piles onto the overarching risk of further EU existential woes when you have the court of the largest EU economy threatening the bloc’s central bank and saying that is own central bank, the Bundesbank, may be required to stop cooperating with the ECB if concerns remain unaddressed or against German law. In the market, the euro sold off rather sharply, with EURJPY to new cycle lows below 115.00 as of this writing and the key EURUSD threatening lower as well, while Germany-Italy yield spreads widened, if modestly.

Elsewhere, markets were in rather good cheer, with a solid bounce overnight in equities after a bit of a stumble from very high levels into the close of equity trading yesterday in the US. With China back online after a holiday since last Thursday, there was perhaps some sigh of relief for risk sentiment as the onshore USDCNY exchange rate on saw a modest bump higher after the large surge in the offshore USDCNH rate on Friday as US-China trade tensions notched significantly higher. Nonetheless, this is an important background factor to watch that can move to the fore at any time. We note in our title and intro that the USD is at risk of rising again – the confirming factors for a larger scale new wave of USD strength would likely be a more pronounced bearish reversal in this equity market, a EURUSD below 1.0750 on a daily close, USDJPY bouncing back above 107.00 on a daily close, and the biggest of all, USDCNY trading above 7.20.

Chart: EURNOK
The EURNOK exchange rate is at the confluence of a number of interesting themes and influences, including crude oil, risk sentiment and EU existential risks – as the latter tend to only play out in the likes of EURUSD and EURJPY and unlike the Yesterday saw a massive surge in the front end of the crude oil futures curve, helping the NOK to firm and taking EURNOK to within hailing distance of the key consolidation lows above 11.00. It is worth noting that the longer term crude oil prices (from June 2021 onwards, Brent crude have yet to reach a new two-week high. To drive a significant NOK recovery, we need stronger sense that the world economy is on the mend and/or a change of attitude on whether the EUR Risks from existential concerns can broaden beyond EURUSD, EURJPY and EURCHF (as was the case during the EU sovereign debt crisis, though oil was above 100 dollars per barrel for much of that crisis, a key difference.)