Chief Macro Strategist
Summary: The German constitutional court ruling on the illegality of some of the ECB asset purchase programme actions has sparked fresh EU existential woes this morning and are weighing on the euro and risk appetite more broadly. The ruling keeps EU politicians in the hot seat and EURJPY has had a look near the cycle lows again in the wake of the decision.
The US equity market came storming back into yesterday’s close and was on a very high note before the German constitutional court ruled on the legality of the ECB’s asset purchase programme (more on that below) perhaps on hopes for the shape of the recovery as California announced measures to lift lockdown restrictions. Front oil market contracts were likewise on the comeback trail and the US dollar was generally softer against the usual suspects (TRY a notable exception!) On today’s Saxo Market Call podcast we discussed whether some of this speculative energy is of the unhealthy variety and also discussed the status of the US dollar. The slide deck for that podcast offers a look at Bloomberg’s dollar index (slide 8), which has a very compelling technical line in the sand less than a percent below current levels – approximately coinciding with the EURUSD breaking back above 1.1000, AUDUSD back above 0.6500, USDJPY breaking down through perhaps 115.00, etcetera.
But interrupting the general cheer was the German Constitutional Court’s ruling this morning, which as of this writing saw the euro and Italian BTP futures under considerable pressure. The court dismissed part of the case with a 7-1 ruling, but raised objections to some of the ECB’s activities, and gave the ECB a 3-month ultimatum to “fix QE”, supposedly meaning that the Bundesbank can’t participate in the programme if the issues are not addressed. While the court ruled that the ECB programme is not in violation of the direct financing of government principle, it did raise objections about the “proportionality”, i.e., and said that the ECB’s move violate German law and the EU treaty. As the court wasn’t even ruling on the newer, PEPP programme, many are now seeing problems down the road for the legality of that programme. But the main message here is that the GCC has simply reminded the blatantly obvious: the ECB is increasingly operating as a force for mutualization for risk by beginning to violate the principles of purchases not based on the capital key (according to size of GDP of member countries), while there is no EU finance ministry or mutual debt. Hard to tell whether this is the spark for dramatic new pressure on the EU once again, but it is certainly putting the EU politicians’ feet to the fire.
Chart: EURJPY
The euro and especially EURJPY have taken quite a hit this morning in the double-take after the German Constitutional Court ruling, perhaps not because the court determines the EU’s future, but its ruling against some of the ECB’s activities could accelerate the crunch time for EU leaders to grapple what is truly necessary to get to the bottom of what ails the EU – its treaty and the lack of a solid foundation. The Euro and Italian BTP futures are feeling the existential pressure once again and EURJPY is suddenly eyeing the recent cycle lows again in the wake of the German court’s ruling – potentially opening up for a run toward 110.00 as a quick fix may be tough to come by.
The G-10 rundown
USD – the US dollar was weaker this morning in sympathy with strong global risk appetite – but pivoted after the German court ruling.
EUR – the euro under fresh pressure from the German court ruling – is this beginning of a major new wave of EU existential concerns or a short term distraction? Not sure, even with long term existential concerns for Europe ever-present. Already we have an EU meeting tomorrow, though one billed as a friendship conference with the Western Balkans.
JPY – interesting in the mix of things that as we lurched into “risk off” mode, the USD picked up against the JPY – but EURJPY an interesting one to watch as we note above on re-approaching the cycle lows.
GBP – pressure on the euro also being felt in EURGBP, though sterling losing out against traditional USD and JPY safe havens in the post-GCC ruling price action. The 0.8700 area in EURGBP and the lows below are an important pivot zone for the pair.
CHF – the SNB may be throwing heroic quantities of intervention in the market’s maw this morning as EURCHF looks inert despite the fresh pressure on the euro in the wake of the German court ruling.
AUD – the Aussie bouncing back but we keep a bearish watch on the AUDUSD chart as long as the pair remains below 0.6500. The RBA maintaining its usual sunny disposition overnight as the RBA baseline scenario is for a 6% hit to 2020 GDP, but for a v-shaped 6% recovery in GDP in 2021, and unemployment peaking out at 10%.
CAD – USDCAD meandering in the range as CAD got a minor boost from this surge in oil prices. Still looking higher for the pair as long as we remain above 1.4000, but we need to see a statement soon from the USD, which has been coiling and coiling in a shrinking range in broad terms.
NZD – the NZDUSD chart looks bearish if we remains below around 0.6100-25 after the reversal this week, though likely remains tightly coupled with global market sentiment direction.
SEK – a much better than expected Q1 GDP estimate boosts sentiment and puts EURSEK back toward the key sub-10.70 lows. As we ask with NOK below, is there some level of EU existential woe that finally supports the krona versus the single currency.
NOK – big bounce in oil has seen EURNOK nearing support – still looking for oil to remain in the driver’s seat, but wondering at what level of EU existential woes, if any, changes the equation here.
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