Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Euro Holds Above Yesterday's Lows Even After The ECB Denies The FT Story

By Marc ChandlerForexSep 17, 2021 06:32AM ET
www.investing.com/analysis/euro-holds-above-yesterdays-lows-even-after-the-ecb-denies-the-ft-story-200602254
Euro Holds Above Yesterday's Lows Even After The ECB Denies The FT Story
By Marc Chandler   |  Sep 17, 2021 06:32AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The week is winding down and risk-appetites seem vulnerable even though the MSCI Asia Pacific pared its first weekly loss in four, led by gains in Tokyo and Hong Kong. With those gains, Japanese markets turned positive for the week, while Hong Kong's loss was narrowed to just below 5%. Europe's Dow Jones STOXX 600 gave up its initial gains and is lower near midday in Europe. If it does not recover, its losing streak would extend to three weeks, the longest since before the vaccine was announced. US futures are heavier ahead of today's massive expiration of equity futures and options. The 10-year US Treasury is steady around 1.33%, while European yields are mostly 2-4 bp firmer. The US benchmark yield is up by less than a single basis point on the week, while eurozone rates are 3-5 bp higher.

For its part, the US dollar is sporting a heavier bias against most of the major currencies, led by the Australian and Canadian dollars. On the week, the Norwegian krone is the strongest (~0.7%) ahead of an anticipated rate hike next week. Emerging market currencies are mixed today, leaving the JP Morgan Emerging Market Currency Index slightly lower. It is off about 0.4% for the week, the second consecutive weekly decline.

Gold tumbled 2.25% yesterday, its biggest fall in a month, but after falling to $1750 yesterday is near $1765 near midday in Europe. Oil is trading a bit heavier, and November WTI is threatening to end a five-day rally that has carried it from a little below $68 a barrel to almost $73. It is slipping below $72 today. Iron ore continues to plummet. The Chinese contract fell for the 13th session in the past 14 for a 25% drop this month. Copper is more than 1% higher on the day to reduce this week's loss to 2.5%. Coming into today, the CRB Index is up 1.5% for the week, the fourth consecutive weekly advance.

Asia Pacific

China's Xi had expressed an interest in joining the successor of the Trans-Pacific Partnership late last year, and within 24 hours of the new security pact between the US, the UK, and Australia, Beijing formally applied. This seems like political posturing. Last year, China launched its own regional trade pact, which included, among others, Japan, South Korea, and Australia. That pact has not stopped China from boycotting various Australian products, primarily over Canberra's foreign policy alignment with the US. Moreover, not counting the US, the new TPP only has four members that are not in China's Regional Comprehensive Partnership:  Chile, Peru, Canada, and Mexico. Many members may be reluctant to turn China down straight away, and it might be accepted as a working party, but it is not a sure thing. Numerous Chinese policies seem to go against the spirit if not the letter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, like the flow of data, the role of state-owned enterprises (which appears to become more dominant lately), and protection of intellectual property. Ascension requires unanimity, and it does not require much of a stretch to assume that full membership is blocked, eventually. Press reports recount how President Trump withdrew from the TPP; few acknowledge that both of the leading Democratic challengers in 2016 (Clinton and Sanders) were also opposed. As an aside, the UK has formally applied for CPTPP membership in February.

China will launch the "Southbound Link" next week that will draw mainland capital into Hong Kong. It complements the 2017 Northbound Link" that drew HK funds into the mainland. These bond links, in turn, complement the equity links with Shanghai (2014) and Shenzhen (2016). Beijing is gradually opening its capital account but in a very controlled and deliberate manner. An annual quota for the "Southbound Link" will reportedly start at CNY500 bln (~$78 bln). There will be a daily quota as well. The yuan is still not convertible and purposely so. The introduction of the digital yuan at the Winter Olympics early next year will not make it convertible. Beijing is loath to give up its control. Still, the gradual opening of the capital account is a constructive development.

The dollar was testing JPY109 in the middle of the week and is now knocking on JPY110. The rise in US yields yesterday provided the catalyst. Also, there are options at JPY109 that expire next Monday and Tuesday for over $1 bln each day. Above JPY110.00, initial resistance is seen by JPY110.20. The greenback has not been above JPY110.45 since August 13. The Australian dollar has steadied after falling to roughly three-week lows yesterday near $0.7275. The outside down day recorded yesterday has not seen any follow-through selling. In the European morning, it is approaching $0.7325, where a A$2.5 bln option expires today. We suggested the yuan's strength this week when it saw its best level in three months was a function of a squeeze in China's money markets. The pressures appear to be easing, at least for the moment, and the Evergrande debacle continues to unfold. Still, with the help of the larger dollar gains and the PBOC open market operations, the dollar is finishing the week back inside the previous CNY6.45-CNY6.50 range. The PBOC injected a net CNY90 bln into the money markets as it begins preparing for quarter-end and the weekly long holiday at the start of next month. Today's reference rate was set at CNY6.4527, a bit firmer than the CNY6.4520 the market anticipated.

Europe

The euro fell $1.1750 after the strong US retail sales and Philadelphia Fed survey, and it had stabilized in a narrow range in the trough before news broke that ECB's Chief Economist Lane told a private group of German bankers that ECB models showed that the central bank's 2% inflation target would be hit in 2025, a year earlier than many economists expect. The euro rose almost a quarter of a cent on the news. The ECB has taken an unusual step to deny the report that the Financial Times broke. On procedural grounds, there ought to be rules about such official meetings privately with market participants. It can show favoritism and has the central bank contributing to the unfair asymmetries of information. On substantive ground, so what?  It is not like the ECB has a robust track record of forecasting inflation in two years, let alone four years. The ECB publishes forecasts for the current year and the next two. That means its latest official forecast extends to 2023. In December, the staff will extend the forecasts to 2024. In June, Lane and his team forecast CPI at 2.2% this year, 1.7% in 2022, and 1.5% in 2023. We note that in the three years before the pandemic, EMU inflation averaged 1.5%. 

The UK reported abysmal August retail sales. The median market forecast in the Bloomberg survey anticipated a 0.5% gain. Instead, a 0.9% drop was reported. It was the fourth consecutive monthly fall, which is the longest slide since 1996. Adding insult to injury, the July series was revised to show a 2.8% drop rather than that 2.5% fall initially reported. The Bank of England has sounded somewhat more hawkish recently, and given the stronger than expected CPI, the market appears to have priced in two hikes next year. The BOE meets next week. At the same time, fiscal policy is set to tighten. Chancellor Sunak is to present the budget next month. The unexpected drop in retail sales saw the implied yield of the June 2022 short-sterling futures contract ease half of a basis point. The yield is up about three basis points this week after rising 4.5 bp last week. At an implied yield of 45 bp, the market seems to expect the BOE to look past the virus-induced pullback in consumption.

The euro has clawed back some of yesterday's loss, even after the ECB denied that FT story that had helped it recover off the $1.1750 low. Broadly speaking, the expiration of two large options today ringfence the euro. The first is a 1.2 bln euro option at $1.1745, and the other for roughly the same amount is struck at $1.18. If, after expiration, the euro punches through $1.18, more offers may hold it below $1.1820. Barring a close above $1.1815, the euro would have fallen for the second consecutive week for the first time in two months. Sterling finished yesterday below $1.38 for the first time this week and is struggling to re-establish a foothold above it since the retail sales disappointment. Sterling is off about 0.35% this week at $1.3790, after falling about 0.25% last week.

America

The US data had consistently disappointed expectations in recent weeks, but yesterday's retail sales report blew away expectations, and The Philadelphia Fed's September survey was also stronger than expected. Ten of the 13 categories of retail sales rose. Car dealers were one of the exceptions. Excluding autos, the 1.8% rise was the strongest in five months. The core measure, which excludes autos, gasoline, food services, and building materials, jumped 2.5%. In addition, back-to-school purchases and the distribution of the child tax credit helped lift retail sales. Although the weakness in August jobs growth and the softer than expected core inflation may have given some participants doubts about whether the Fed will take another step toward confirming tapering in Q4 when it meets next week, the retail sales report appeared to ease such anxieties.

The week ends quietly for economic data from North America. The highlight is the preliminary University of Michigan's consumer confidence report. Recall that it had fallen sharply in August (to 70.3 from 81.2) to its lowest level in a decade. This seems to have overstated the case, and it should correct a bit in September. The 5-10 year inflation expectation will also draw attention. It rose to 2.9% in August but peaked at 3% in May. The NY Fed conducts its own inflation expectations survey, and its survey out earlier this week was elevated at 4%. Fed officials have cited surveys and market-based inflation measures to ascertain inflation expectations.

The US dollar has chopped in a CAD1.26-CAD1.27 range this week. There is an option for a little more than $935 mln at CAD1.27 that expires today. The exchange rate has seemed particularly sensitive to the broader risk appetites, for which the S&P 500 offers a reasonable proxy. Canada goes to the polls on Monday, and the continuation of the status quo with a minority Liberal government is the most likely scenario. The greenback finished August near CAD1.2615. The US dollar rose to a six-day high against the Mexican peso yesterday near MXN19.97. It has not traded above MXN20.00 since Sept. 2, but it would probably take a move above MXN20.03 to signal an upside breakout. It may not happen today, but that is the direction we expect in the first part of next week.

Euro Holds Above Yesterday's Lows Even After The ECB Denies The FT Story
 

Related Articles

Kathy Lien
FX: Big Week Ahead, What To Watch By Kathy Lien - Oct 25, 2021 13

Inflation and GDP reports from the U.S. and Eurozone along with three central bank monetary policy announcements makes for a busy trading week. Big tech names, like Amazon...

Euro Holds Above Yesterday's Lows Even After The ECB Denies The FT Story

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email