Dovish Draghi dines on haws-Weekly 15Jun18

ARTICLE / 59 minutes ago

Dovish Draghi dines on hawks

Michael O’Neill

FX Trade Strategist /



· ECB and FOMC combine to crush EURUSD

· BoE policy meeting headlines an otherwise dull week ahead

· USDCAD kicks off another leg higher


Now you see it. Now you don’t. Multiply by 13.38 billion. Photo: Shutterstock

By Michael O’Neill

Osteria Francescana is a Michelin 3 Star restaurant in Modena, Italy. A twelve-course tasting menu will cost you €270. Adding the wine pairing option is another €180. If you bring a date and pay for parking, you just made €1,000 disappear, or US $1,156.00. That is an impressive feat, but it pales in comparison to what European Central Bank President Mario Draghi accomplished on June 14.

He made US $13.38 billion disappear.

Most of the loss occurred in less time than it would have taken the Osteria Francescana diner to finished the third course.

The $13.38 billion number is reasonably accurate. The Bank for International Settlements Triennial Central Bank Survey in September 2016, estimated that the daily spot FX turnover in April 2016 was US $1.70 trillion or €1.49 trillion. EURUSD lost 0.0290 points from its post-ECB statement peak to the Asia trough. Simple multiplication gives the result.

Traders eagerly anticipated the June ECB policy meeting. They expected the governing council to announce an end date for the quantitative easing program. It is the first step toward policy normalisation. However, they but were cautious as they had been disappointed in the past.

EURUSD rallied 5.4% between January and April, 2018, before Draghi appeared to defer a QE statement until later in the year. They didn’t want to be fooled again.

They weren’t. The ECB said that net asset purchases would end by December 2018. EURUSD popped on the news.

Then “Dovish Draghi” struck. The policy statement also said:

“we decided to keep the key ECB interest rates unchanged, and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path.”

EURUSD collapsed. The move was exacerbated by Wednesday’s Federal Open Market Committee decision. The Fed raised interest rates by 0.25%, putting the Federal Funds target rate at 1.75%-to-2.00% and suggested that two more increases were likely in 2018. The hawkish tone to the Fed statement sharply contrasted with the ECB message and EURUSD paid the price.

The EURUSD technical are bearish while prices are below 1.1800, looking for a break of support at 1.1490 to extend losses to 1.1364. (61.8% Fibonacci retracement level of the April 2017- February 2018 range)

Chart: EURUSD daily with Fibonacci retracement levels

Source: Saxo Bank

The FOMC statement (and broad US dollar strength) wreaked havoc on the Canadian dollar, which was already suffering from the risk of a trade war with the US.

The Bank of Canada deferred a rate increase in March because of “growing uncertainty from trade policy developments.” That uncertainty faded in April and May after US and Canadian officials expressed optimism for a renegotiated North American Free Trade Agreement. The May 30 BoC policy statement was considered hawkish with many analysts pencilling in a rate hike in July. Those forecasts came under duress after the G-7 war of words between Prime Minister Trudeau and President Trump. Trade woes got worse on June 14. Italy announced that it would not ratify the European Union’s free trade agreement with Canada. USDCAD rallied supported by widening Canada/US interest rate differentials

USDCAD has climbed from 1.2526 to 1.3152 since April 16. The uptrend is intact while prices are above 1.2920 with the break above the 2018 peak of 1.3125 targeting gains to 1.3200 and then 1.3375.

The silver lining in the cloud is that depressed level of the currency gives the BoC plenty of room to raise interest rates.

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

Major Events: Thursday: Bank of England policy meeting. There is plenty of room for GBPUSD volatility. UK data has been mixed, diminishing the risk of a rate hike. However, a hawkish statement would underpin sterling.

Thursday: Swiss National Bank policy meeting

ECB Forum on Central Banking June 18-20: there will be no shortage of top Central Bankers providing insight including ECB President Draghi, and Fed Chair Jerome Powell

Major Data: Friday Eurozone “flash” PMI. They should have limited impact due to their proximity to June 14, ECB meeting.

Canada: Friday CPI and retail sales: Better than expected data will help set the table for a July rate hike.


Canada G-7 – more of a fight club than a forum-8Jun18

Canada G-7 – more of a fight club than a forum

Michael O’Neill

FX Trade Strategist /



· US dollar grinds higher ahead of major event risk

· G-7 meeting may be more acrimonious than genteel

· Weak Canadian employment data underpins USDCAD


Big grins at the summit in Taromina, Italy, last year. Who’s laughing now?

Photo: Wikimedia Commons

By Michael O’Neill

The Canada G-7 meeting in Charlevoix, Quebec is beginning somewhat acrimoniously. It will not be a forum where leaders of the industrialised nations can meet in a relaxing atmosphere to discuss issues affecting the international community. Instead, it is shaping up to be a politician’s version of the UFC.

Prime Minister Justin Trudeau is the host. He is proud of the themes and leader’s programme for this meeting. They are: a) Investing in growth for everyone. b) Advancing gender equality and women’s empowerment. c) building a more peaceful and secure world. c) Preparing for jobs of the future. d) Working together on climate change, oceans, and clean energy.

The leader’s agenda has a glaring omission. There isn’t a time-slot scheduled for free trade and tariff discussions. That may change. The evidence is this tweet sent on Thursday morning: “Isn’t it Ironic? Getting ready to go to the G-7 in Canada to fight for our country on Trade (we have the worst trade deals ever made), then off to Singapore to meet with North Korea and the Nuclear Problem…But back home we still have the 13 Angry Democrats pushing the Witch Hunt!”

Prime Minister Trudeau and French President Emmanuel Macron used a photo op on Thursday to send a warning to President Trump. They said they would warn the President that his tariffs will “backfire and harm America’s workforce.”

The thin-skinned President was not likely to take kindly to criticism from a couple of youngsters 25-30 years his junior. He didn’t. Within hours of the statement, he tweeted his reply: “Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers. The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.” A few hours later he took another shot at Justin Trudeau. “Prime Minister Trudeau is being so indignant, bringing up the relationship that the U.S. and Canada had over the many years and all sorts of other things…but he doesn’t bring up the fact that they charge us up to 300% on dairy — hurting our Farmers, killing our Agriculture!”

Late last week, Trump floated the idea (again) of having bilateral discussions with Mexico and Canada. On June 5, National Economic Council director Larry Kudlow said that Trump’s preference is to negotiate separately.

The Washington Post reported that President Trump wanted to skip the meeting altogether. He has since confirmed his attendance. However, he must have read the Leaders Programme for Saturday, June 9, because he is bailing, early.

The faces have been slapped; the gloves are off. In G-7 Fight Club, the only rules are Trump’s rules.

Loonie’s feathers get plucked

It should have been a good week for the Canadian dollar. It wasn’t. On May 30, the Bank of Canada issued a hawkish statement, hinting at a July rate increase and leaving the door open for more. However, the positive Canadian dollar sentiment didn’t survive the month end, and trade jitters have been the catalyst. That’s when the US slapped tariffs on Canadian steel and aluminium imports, even though the Nafta renegotiations are still ongoing. Fears about the demise of Nafta and concern about a hawkish conclusion to the June 13 Federal Open Market Committee meeting are underpinning USDCAD.

The Canadian labour report didn’t do the Canadian dollar any favours either. The weaker-than-expected data raises questions about governor Poloz’s optimistic economic outlook while increasing the currency’s downside risk to adverse trade news.

USDCAD is in an uptrend from February while prices are above 1.2750 with a break above resistance in the 1.3165-1.3225 area opening the door to further gains to 1.3500

Chart USDCAD daily with long term support and resistance levels noted.

Source: Saxo Bank

The week ahead:

Major Events

Tuesday: North Korea/US meeting in Singapore.

Wednesday: FOMC meeting and press conference: Market expects 25 bp rate hike. The Committee may give a “hawkish” tweak to the statement.

Thursday: European Central Bank policy meeting: Markets expecting news of an end-date for QE, as hinted at by ECB chief economist Peter Praet.

Friday: Bank of Japan policy meeting

Major Data

Tuesday: UK employment report. Unemployment rate is expected to be unchanged at 4.2%

US May CPI: forecast 0.2%, unchanged from April.

Wednesday: UK CPI, PPI and Retail Sales. CPI is expected to rise 2.6%, y/y vs April 2.4%, y/y increase.

Thursday: Australia employment is expected to add 18,2000 jobs with a drop in the unemployment rate to 5.5% from 5.6%.

Friday: EU harmonised CPI. YoY rate expected to rise to 1.9% from 1.2% Also, US industrial production and capacity utilisation data.


For whom the tariffs bell tolls Loonieviews weekly 1Jun18

For whom the tariffs bell tolls

Michael O’Neill

FX Trade Strategist /


· US nonfarm payrolls surprises to the upside

· Italy forms a government giving risk aversion a reprieve

· President Trump tweeting down the tariff trail

By Michael O’Neill

The 1940 Ernest Hemingway book titled, “For Whom the Bell Tolls” is a Pulitzer Prize-winning (then losing) classic about the brutality of the Spanish Civil War. If President Trump were to rewrite this classic novel, the title would change to “For Whom the Tariffs Toll.” It would not be a classic. and wouldn’t win any prizes.

On May 31, Trump announced that he was implementing tariffs on steel and aluminium imports from Canada, Mexico, and the European Union, citing national security. National Security? Who should be afraid of whom? The length of the international boundary line of the US/Canada border, excluding Alaska is 3,987 miles (6,416.5 km), which Canada may find difficult to defend.

The Canadian military consists of 88,000 personnel, 415 aircraft including 120 vintage fighters, 50-year-old helicopters and 80 tanks. The Navy boasts 63 vessels which include 4 used submarines, bought in 1998, from Great Britain.

Mexico has 383,575 military personnel, no fighter planes, no tanks and a Navy with mostly patrol craft. The European Union doesn’t have any military. (Of course the individual countries making up the bloc, do.)

On the other hand, the USA has 2,083,000 military personnel, 13,362 military aircraft including 5,765 fighter planes and attack helicopters. They also have 5,884 tanks and 415 naval vessels including 20 aircraft carriers.

President Trump is right about a threat to national security, but it is Canada and Mexico who are threatened.

The implementation of the steel and aluminium tariffs may merely be an aggressive negotiating tactic by the Americans. They do not go into effect until July 1, which leaves 30 days for back-pedalling. Toronto’s Global News reported Prime Minister Trudeau had planned to fly to Washington earlier in the week, to sign a new Nafta deal. When Vice President Pence said the new agreement had to include a “sunset” clause, Trudeau baulked. The prime minister believes that a complicated tri-lateral trade deal would be worthless if it just lasted five years.

If the tariffs are grandstanding and a Nafta deal was close, it is conceivable that they will be reversed in short order, at least as far as Mexico and Canada are concerned. The EU is a different kettle of fish, but they are far better equipped to deal with a trade war. Europe prospered for thousands of years before they even heard of America.

Americans may be hearing tariff bells tolling, but the world is watching the “Gong Show” and waiting for Trump to get “gonged.”

Canada GDP and BoC at odds

On May 30, the Bank of Canada released a mildly hawkish policy statement after leaving interest rates at 1.25%. The BoC has thrown "caution” to the wind, literally. The April 18 and March 7 statements closed with this phrase: “Governing Council will remain cautious in considering future policy adjustments.” The May 30 statement replaced “cautious” with “gradual.”

USDCAD plunged when the deleted word was noticed, falling from 1.3018 to 1.2838. Strategists had visions of 1.2500 dancing in their heads, and all they needed was for the May 31 Q1 GDP data to confirm the economic outlook seen by policymakers at the BoC. It didn’t happen. On May 31, Canada’s Q1 GDP disappointed markets. It only rose 1.3%, missing the forecast of 1.7% and was the third quarter of sub 2.0% growth.

USDCAD soared, but the rally stalled just below 1.3000. The domestic data cupboard is bare until the middle of next week leaving USDCAD with a bullish bias and tracking broad US dollar moves.

Chart: GDP and final domestic demand

Source: Saxo Bank

Highlights: The week ahead

Major Events:

Monday: Traders will likely ignore the G7 Finance Minister meeting communique from the weekend gab-fest.

Tuesday: Reserve Bank of Australia policy meeting and statement.

Major Data:

Monday: Australia Retail Sales, UK May Construction PMI

Tuesday: Eurozone and UK PMI data

Wednesday: Australia GDP, US Trade, Canada Trade

Thursday: Australia Trade, Eurozone GDP

Friday: China Trade, Canada Employment Report

Highlights- the week that was

Major Events:

FX markets were moribund on Monday because of UK and US holidays.

Italian politics dominated trading all week. President Sergio Mattarella’s rejected the pending new coalition government’s choice for economics minister. The pasta hit the fan. EURUSD plunged to 1.1511 from 1.1638. Reuters said that short-term Italian bonds had their worst day since 1992. US 10-year Treasury yields lost 5.31% at one point on Tuesday. By the end of the week, the two leading Italian parties were still working to form a coalition government.

President Trump levied tariffs on steel and aluminium imports from Canada, Mexico, and the European Union. USDCAD and USDMXN soared.

Thursday was month end. Reports of massive EURUSD buying for portfolio rebalancing purposes proved correct, but the bulk of the move occurred on Wednesday.

Major Data

Wednesday: A slew of US economic reports including Q1 GDP were weaker than expected undermining the US dollar.

Thursday: Eurozone May CPI rose 1.9%, well above the 1.6% forecast giving EURUSD a lift. Weaker than expected Canada Q1 GDP lifted USDCAD. US economic reports were robust, led by a surge in Chicago PMI to 62.7 from 57.6 in April. Oil prices got a boost after EIA reported a 3.6 m/b decline in weekly crude inventories.

Friday: Japan Nikkei Manufacturing PMI at 52.8 (forecast 52.5) underpinned USDJPY. Eurozone Markit PMI a non-factor. UK Manufacturing PMI beat expectations and GBPUSD rallied.

US Nonfarm payrolls surpassed the 188,000 forecast and gained 223,000 new jobs. The unemployment rate of 3.8%, was the lowest in 18 years.