When doves cry – a Mario Draghi story
March 8, 2019
Sterling continued to sell off against USD yesterday, but did manage to take advantage of the broad euro weakness seen in the wake of the European Central Bank Press Conference. Yesterday, government sources said that it is unlikely that anything will change with the EU in the next 48 hours as the Attorney General, Geoffrey Cox, continues to battle in Brussels to seek concessions over the Irish backstop. Today, Theresa May travels to the Brexit town of Grimsby before making a last-ditch dash to the Belgian capital this weekend. Meanwhile, The Sun reports Geoffrey Cox has returned after negotiations stalled. Today may be a dull day for sterling, but investors will likely take up positions in advance of the weekend and heightened volatility next week, causing some movement in the pound. This is best evidenced by the demand inflows for protection against sterling weakness in the next week which has begun to push up the price.
The Euro plunged to 18-month lows against USD yesterday, after the European Central Bank reacted to the worsening economic outlook with a fresh round of long term loans. The ECB’s forecast for Eurozone Gross Domestic Product growth in 2019 was slashed to 1.1% from 1.7%, while forecasts for when inflation would rise to the ECB’s 2% target were once again pushed further into the future. The usual dovish rhetoric from Mario Draghi was in full flow, with the ECB President warning that the Eurozone was facing “a period of continued weakness and pervasive uncertainty”. In addition to extending the duration of its promise not to hike rates, the ECB’s chosen tool for responding to the deteriorating outlook was a package of new Targeted Long Term Refinancing Operations – essentially long term loans to banks. The euro has managed to drag itself slightly higher from yesterday’s lows, but equity markets were not significantly buoyed by the TLTRO news, possibly due to the limited macro impact of the measures compared to the ECB’s asset purchase program. This morning’s euro data has been mixed, with German Factory Orders collapsing 2.6% in January but French Industrial Production beating expectations to grow 1.3%.
US dollar had a field day yesterday, dominating with strong gains across the board due to headwinds elsewhere and only the Japanese yen being able to keep up with the greenback. This was the seventh day of gains in a row for the dollar, having the dollar reach its highest level since the start of the year. One reason for this sustained 2019 dollar strength is the fact that output data remains strong for the US economy so far. Another reason is less flattering for the greenback, as other currencies are experiencing woes of their own, which suggests king dollar at the moment merely rules the land of the blind. Today the US jobs report will be in full focus. The million dollar question is how well the US economy is able to continue to churn out employment and wage growth, while the first signs of fatigue are starting to show in manufacturing surveys now.
A scant two weeks ago the loonie proudly carried the title of best performing G10 currency of the year so far, a moniker the winds of chance have since then blown out of sight for the currency for now. After two weeks of flat oil prices, Gross Domestic Product data suggesting a standstill in economic growth and the Bank of Canada losing its hawkish bias, the loonie found its legs again yesterday. The currency stabilised against the US dollar, while terrain was reclaimed against most of the G10. A strong jobs report today may put a firmer floor under the Canadian dollar, if it conveys the economy is still resilient enough to create jobs growth and wage increases, despite the recent slowdown. However, another disappointment would have the sobbing loonie ready for a one way trip to the FX asylum as it implies its prospects for a rebound are significantly deteriorated for the remainder of the year.