Experts expecting policy of Fed, European Central Bank to change

Next week looks pivotal for the USD and the EUR on central bank meetings as the Fed and the European Central Bank are likely set to shift guidance, Head of FX Strategy at Saxo Bank John Hardy told Trend on June 8.

“The euro was finally held back after its attempt to put on a show of support as the fresh widening in Italian yield spreads has become too loud to ignore,” he said. “The 2-year Italian benchmark yield pulled all the way to 165 basis points yesterday. The idea has emerged after recent official and unofficial noise from ECB president Mario Draghi and company that they are happy to keep both eyes on hopes that inflation expectations in winding down policy later this year and ignore Italy’s woes, perhaps hoping that the pressure from rising bond yields will provide its own discipline. Even if the ECB plays tough and spells out a schedule for winding down quantitative easing later this year, it is hard to see the euro sustaining any rally as long as Italian yield spreads are this elevated.”

Emerging market currencies are weak in broad terms, led by a struggling Brazilian real which notched new local lows yesterday and is near the 4.00 level versus the US dollar again for the first time since the early 2016 lows in EM’s fortunes, he added.

“The Brazilian central bank head said yesterday that no emergency meeting will be held and that it will continue to offer currency swaps and may provide liquidity from reserves,” Hardy noted. “This didn’t seem to reassure the market, which perhaps wants an emergency hike akin to the recent Central Bank of Turkey move in late May. That move and yesterday’s 125 basis point rate hike from the CBT have stabilised TRY despite EM wobbles elsewhere. India’s central bank also surprised with a 25-basis point hike this week, its first hike since 2014. In Argentina, the IMF has signed off on a massive three-year $50 billion bailout deal, which the Financial Times says fund chief Christine Lagarde has sized to bolster confidence.”

 

Hardy noted that situation in Japan is also unpredictable.

“Japan saw its Q1 nominal GDP revised lower to -0.4 percent from the prior -0.3 percent estimate, a rather sorry performance given the Bank of Japan’s ongoing attempt to generate inflation,” he added. “The trade-weighted JPY was up a few percent in Q1 from the prior quarter and likely contributed to the weak performance. But a number like that reinforces the idea that the BoJ is in no hurry to tighten policy and that the main upside path for the yen is via a drop in yields elsewhere, which makes the moribund low rates in Japan look less unattractive. The JPY managed a bounce after spiking all the way to 110.00+ in USD/JPY and the even more impressive recovery in EUR/JPY as high as 130.00.”

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