What will come of the weak EUR bear position holders as the 18-member single unit trades up through the psychological €1.3200 handle? Clouding some of this morning’s price action will be month-end demand but with word that Russian forces have seized a coastal town inside of Ukraine on Thursday morning, geopolitical risk is once again front and center. For most of this week, the EUR has mostly resided just ahead of its yearly lows (€1.3155), and somewhat handcuffed to a plethora of option barriers and month-end requests. However, it now seems that the market may have gotten too far ahead of the European Central Bank’s (ECB) outlook.
Trading had been mostly centered on current ECB expectations. Bunds and U.S. Treasury prices are beginning to give up some of their recent gains, allowing yields to back up, while the EUR advances outright on speculation of no new policy action actually happening at next week’s ECB meeting on September 4. Despite softer European data of late, sources indicate that ECB chief Mario Draghi and company are unlikely to act unless tomorrow’s European inflation numbers (harmonized index of consumer prices) show the eurozone sliding toward deflation. Nevertheless, the chance of new stimulus being introduced without first taking into consideration the impact of the targeted longer-term refinancing operation (TLTRO) program starting in a matter of weeks would not be prudent.
ECB Will Not Act Hastily
Speculation of a proactive ECB has grown since Draghi struck a dovish tone at the economic symposium in Jackson Hole, Wyo., last week where he indicated the ECB’s Governing Council could be moving closer to a quantitative easing (QE) program. Departing from his original speech text, Draghi noted last Friday “financial markets have indicated that inflation expectations exhibited significant declines at all horizons” in August. To date, eurozone policymakers have been transparent in their communications. The chance of an imminent stimulus is low even after Draghi expressed his concerns about market expectations of inflation. Time and again, he has repeated that the ECB is ready to respond with “all available tools should the need arise.” However, under the TLTRO program, the ECB expects +€1T to be snatched up and it will want to gauge the effectiveness of channeling money back into the “real economy” before becoming too trigger-happy. The ECB is definitely looking at a program to buy asset-backed securities and further details could be announced next week on structure and execution. The euro bear appears to be caught in the Jackson Hole euro stimulus vortex euphoria.
It not just policy expectations or month-end demand supporting the EUR this morning, there are also several yards of EUR/USD strikes nearby for Friday’s cut. On the topside, €1.3235-40 (€677M) and €1.3250 (€2B) being the most significant. On the downside, support is found cluttered near €1.32 for about €1.5B. All levels will act like a magnet at some stage. Not helping are contrarian Asian central banks. They are making the EUR bear’s life that bit more difficult in the final stretch of August. Asia’s central banks have been seen buying both EURs and GBPs overnight to pare back some of their ‘net’ shorts (dollar longs) in all likelihood. For the most part, reserve flows have been guiding the EUR/USD recently, and the Asian central banks’ supposed drawdowns are probably being used to smooth currency strength. That could add to the EUR’s current squeeze.
Weaker EUR Data Can Wait
A steeper-than-expected rise for eurozone M3 money supply this morning has helped to lift the EUR from its overnight lows. The broadest measure of money supply increased +1.8%, year-over-year, exceeding expectations (+1.4%). It’s a start, but well below the ECB’s reference value of +4.5% that eurozone policymakers consider consistent to maintain an inflation rate just below +2% over the medium term. In Germany, Hesse (+0.0%, month-over-month, +0.7%, year-over-year) and Bavaria (+0.1%, month-over-month, +0.8%, year-over-year) consumer-price indexes (CPI) were reported largely unchanged on the month, providing no surprises or support for the EUR. However, softer German jobless numbers (+1k, month-over-month) and eurozone loan data will continue to work to curb the EUR’s bullish reaction. Nevertheless, the market seems singularly focused on tomorrow’s eurozone CPI, so a further short-squeeze is highly likely. A modest market correction rather than a one-directional flow is healthy for price action.
Russia Is Not Immune
The Micex Index is plummeting amid the increasing focus on the involvement of Russian soldiers in Ukraine. This is not new news; however, the sudden uptick in focus suggests that Europe needs to show some sort of unified front. Risk-aversion price action will continue to see a pre-weekend uptick — only natural because of event risk exposure. Gold has risen for a third consecutive day as tensions between Ukraine and Russia support the metal’s safe-haven appeal. Thus far, it has added $1.46 an ounce to $1,283.91, while slowly moving away from its two-month low of $1,273.06 it hit last week.
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