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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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