Macro: Sandcastle economics
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FX Update: ECB wrap, sterling eyes flash PMIs
John J. Hardy
Chief Macro Strategist
Summary: Sterling tries to rally on the bump in Flash January UK PMI readings this morning, but the initial rally stumbles. Elsewhere, currencies are eerily immune to ongoing coronavirus concerns, while the EURUSD has pushed to new lows for the year on a damp squib of an ECB meeting that brought few hints of policy moves of interest in the foreseeable future from the ECB.
Sterling should be the most interesting currency on the move this morning in the wake of the stronger than expected UK flash PMI surveys for January this morning (manufacturing at 49.8 vs. 48.8 exp. And 47.5 in December and services up at 52.9 vs. 50.0 in Dec.), but the price action is hesitant after a kneejerk strengthening move. For sterling hopefuls the price action is least promising in GBPUSD, where notable new highs in a local context in the wake of the release were quickly reversed. Do we risk going quiet on sterling again as we await trade deal headlines?
The market continues to avoid reacting to the coronavirus outbreak in China, with the exception of commodities (especially industrial metals like copper), unless we are to read some of the bid in safe haven fixed income as stemming from this source of concern, though even there, yields were dribbling back higher from yesterday’s lows as the US 10-year trades around the pivotal 1.75% area here.
The ECB meeting yesterday was largely read as a damp squib by the market as the statement rolled out the usual language that the rate was likely to remain at current levels or lower until inflation target reached. In the press conference, Lagarde discussed the policy review but refuse to make any notably points on key areas like here impression of the Riksbank’s move away from negative rates and her thoughts on negative rates in general. On the question of the policy review, her outlining of the review as unlikely to produce a thorough “revamp” and suggestion that tinkering with the inflation target would be the only outcome looked disappointing. Some noted a language shift on signs of an inflation pickup as more hawkish, but that wasn’t the market’s conclusions as Euribor contracts out the curve priced the ECB rate 18-24 months from now a few basis points lower than they did before the meeting.
Chart: GBPUSD
I am writing this just a few minutes after the stronger-than-expected January flash PMIs out of the UK this morning, and we will need the rest of the day to draw conclusions on the price action here, but it is rather disappointing to see local highs in sterling in a number of crosses immediately rejected after pumping higher on the good news. Caution here for sterling hopefuls unless this latest setback is overcome.
The G-10 rundown
USD – the US dollar is edging stronger again more broadly after the reaction to the UK PMI’s, though still not making waves against EM yet – Fed outlook needs a jolt for more notable USD directional move.
EUR – the signaling from ECB President Lagarde yesterday disappointing the market if we only end with a nudge of the ECB’s inflation targeting language at the end of this year’s policy overhaul. Will be on the lookout, however, for hints that the policy review is focusing on the deleterious effect of maintaining negative rates over the longer term. Otherwise, fiscal policy signals, if any, would be a key catalyst.
JPY – the yen failing to get a bid from the coronavirus issue and looks a bit adrift, though if we look at the crosses a bit interesting to note the EURJPY deepening its recent reversal – that may continue and accelerate as long as safe haven fixed income is bid and especially if the market rediscovers the concept of risk off.
GBP – sterling was strongly bid earlier on the flash PMI release but not following through higher and in fact reversing the initial move – a tactical disappointment.
CHF – EURCHF continues to look heavy and the next area of interest is down below 1.0650 as the ECB review didn’t spark buying interest for the EUR.
AUD – some weakness late yesterday and in the crosses could be mild transmission into AUD from the coronavirus and a weaker commodity complex
CAD – USDCAD settling lower after the heavy CAD selling in the wake of a dovish turn from the BoC on Wednesday – still prefer looking higher for the pair as long as 1.3100 area supports. Canada Nov. Retail Sales release up later today.
NZD – kiwi boosted on higher CPI figures, though we note a lack of reaction in NZ rates and question how much strength this can drive as AUDNZD approaches the assumed “absolute potential “ in the 1.0300 to parity area.
SEK – the krona rather inert and interesting to see zero transmission from ECB meeting yesterday – global/EU growth outlook and fiscal policy catalysts may be the only factor that can spark upside SEK interest (or dramatic risk off, historically SEK negative).
NOK – short Norwegian rates continue to slide after the Norges Bank yesterday fretted signs of a weakening domestic economy while waxing hopeful on the global outlook. Would expect EURNOK to pressuring on 10.00 if oil slides much further on a pickup in coronavirus concerns, for example.
Today’s Economic Calendar Highlights (all times GMT)
- 1330 – Canada Nov. Retail Sales
- 1445 – US Markit Flash PMI
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