EUR violently reverses higher post ECB press conference.
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Dollar/CAD is breaking above trend-line resistance in the 1.3220s this morning as the US Retail Sales figures for August beat expectations (+0.4% MoM vs +0.2%). This could technically halt the downward momentum of the market, in our opinion, should USDCAD be able to close today’s NY trade above this level, and usher in the wider 1.3100-1.3300 range we talked about after the Bank of Canada’s less dovish than expected hold to interest rates last week. With the ECB meeting now out of the way, the focus will now turn next week’s interest rate decision from the Fed. Market participants are still expecting Jerome Powell to cut interest rates one more time by 25bp, but there’s growing angst in the bond and money markets that this might be it. Global bond yields continue to rally this morning, with German bunds yields now above -0.50% and US 10s back above 1.80%. The December Eurodollar futures contract has now fully priced out another 25bp of cuts by years end, and the S&P futures are closing in on new all-time highs. We think Jerome Powell will be feeling a whole better heading into next week, and all it really took was some positive headlines on the US/China trade front, some re-pricing of “no-deal Brexit” risk, and now a German bond market that doesn’t believe the ECB. We see some near-term resistance today at 1.3250 in USDCAD.
OCT CRUDE OIL DAILY
Euro/dollar put in a bullish outside day pattern on the charts yesterday, after screaming higher at the conclusion of the ECB’s press conference, and the market’s upward momentum is continuing today with a clean break of trend-line chart resistance at the 1.1070s. So why did we get a sudden positive change in EUR sentiment? Wasn’t the ECB’s interest rate cut, the re-start to asset purchases, and the “we’re going to be doing this for a long time” tone to its forward guidance supposed to be a dovish development for markets? In theory yes, but here’s what we gathered from market chatter after the press conference:
1. While the ECB said it would restart it asset purchase program (QE) to the tune of 20blnEUR/month for as long as necessary starting on Nov 1, it didn’t raise their internal sovereign debt issuer limit rules (ie. how much of each countries bonds they’re allowed to buy). A number of analysts quickly came out saying QE could only last for 12 months on average, unless Christine Lagarde (the new ECB President come November) changes the rules. So perhaps this is not QE-infinity?
1. Mario Draghi apparently did not have unanimous consent from all ECB members for yesterday’s decision. According to Bloomberg, the Dutch, German, French, Austrian and Estonian central bankers all reportedly opposed the resumption of asset purchases. The Dutch central bank confirmed their stance this morning by issuing a press release. See here. So, is there a revolt brewing internally at the ECB and could Christine Lagarde be forced to reverse some of what we saw yesterday when she takes over?
1. Mario Draghi said there was unanimous consent amongst ECB members that fiscal stimulus measures needs to take over in Europe, and the that lack of having such measures in place up until now is the reason why the ECB has been ineffective with monetary policy. Is this a round about way of passing the buck and justifying why everything the ECB has done hasn’t worked? Did Mario Draghi just admit that the ECB is out of bullets? Well, if that’s the case, this might truly be their last hurrah and so there’s less of a reason to be dovish on rates (at least for now).
The fact that Mario Draghi went ahead with more of the same yesterday should be another wake-up sign that central bankers don’t know what to do anymore. It hasn’t worked for 10 years…so sure, let’s do more of it. Mario Draghi didn’t ride off quietly into the sunset (as we has hoped he would). He would have got the same response out of the German bond market and EURUSD had he done nothing. Instead, he just further ruined his legacy yesterday, in our opinion, and caused a “you-know-what show” for Christine Lagarde to deal with now.
This morning’s better than expected US Retail Sales print for August is now causing some broad USD buying to come in, and so we think EURUSD buyers might be put to the test at the level they broke above earlier (1.1060-70). Over 1.5blnEUR in options expire this morning around the 1.1050 strike as well.
DEC GOLD DAILY
Sterling is surging higher this morning after the UK’s DUP party said it would accept Northern Ireland abiding by some European Union rules after Brexit as part of a new deal to replace the Irish backstop. It also said it would drop its objection to regulatory checks in the Irish Sea, and when we combine this positive sounding Brexit news with a technical break for GBPUSD above chart resistance in the 1.3250s, there’s your reason to rally. GBPUSD galloped higher to the 1.2400 level, hesitated there for a bit at during the European AM, but has now vaulted higher amid a lack of meaningful chart resistance until the 1.2450s. Boris Johnson said this morning there was the “rough shape” of a Brexit deal to be done. “We are working incredibly head to get a deal…I would say I’m cautiously optimistic”. We think this morning’s breakout higher in GBPUSD is technically significant because we’ll now likely get a serious test of the market’s long-term downtrend. Watch 1.2470-1.2500 over the next week.
It seems the Australian dollar market is feeling a bit tired this morning. Yesterday’s gyrations caused by the inaccurate reporting of an interim China trade deal caused a false breakout above the 0.6880s, but the market avoided a negative technical development by closing above the 0.6860s (perhaps with the help of EURUSD's violent reversal higher). Follow-through EURUSD buying isn’t helping today though, nor are copper prices (which are surging 1.8% higher this morning amid the broad risk-on tone to global markets. So what’s wrong with the Aussie here? Perhaps we’ve rallied too much, too fast. The better than expected US Retail Sales report out this morning is also a reason for buyers to pause. We think the downward sloping price channel (0.6855-0.6875) will be pivotal for price action heading into next week.
DEC COPPER DAILY
A sharp reversal higher in German bund yields, after the ECB press conference concluded, brought the USDJPY buyers back yesterday. It brought them back because the German move brought back US 10yr yields as well. Dollar/yen managed to end NY trading on a high note, by closing above chart resistance 108.10, but it’s struggling a bit this morning as talk of Japanese exporter selling around the 108.00 level makes the rounds. The market’s inability to benefit from the good US Retail Sales report is also a bit concerning. Perhaps the market searches for buyers once again here. Japanese government bonds (JGBs) are falling apart today after the BOJ said it’s watching the lower threshold of its yield curve control program yesterday (-0.20%) and that "yields could be at a tipping point". The Japanese 10yr benchmark is now trading at -0.15%, which should come as a relief for the Bank of Japan, when it meets next Thursday (right after the Fed meeting) to announce its latest decision on monetary policy.
US 10YR BOND YIELD DAILY
Charts: Reuters Eikon
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