Market News & Insights
21 July 2017

Euro Defying Gravity?

Central bankers have been ruling the roost the past 24 hours, with Mario Draghi the pick of the bunch. The ECB President, perhaps unwillingly, talked the euro strength up to fresh 8 month highs in EUR/GBP, while up near two year highs against the dollar. While the ECB’s guidance didn’t change with Draghi even leaving the door open to additional easing if required. It was the banks lack of concern on the surging euro that sent traders into a frenzy. He noted that the movement in bond price, asset price and exchange rates, “remain supportive”. This was enough of a signal for traders to go long the euro.

This move by Draghi was rather surprising given that in the past around these levels the Central Bank have been quick to quash euro optimism. Draghi, a man who was prominent in the past for his ability to manipulate markets without actually acting, appears to have dropped the ball on this occasion with the euro now pushing new highs. The ECB will be weary of the impact that tapering will have going forward, as if you recall the impact on the dollar when the Fed’s own taper tantrum back in 2013 saw EURUSD topple from 1.40. The ECB President certainly won’t want the euro to rebound back to these previous levels any time soon, so we may see him thread more carefully next time round.

Read yesterday’s brief for further information the currency impact: https://www.cleartreasury.co.uk/markets-mull-mixed-messages

While currency traders reacted sharply to Draghi’s comments, global bond markets reacted in a more calm and calculated manner. Markets here seemed to have taken the fact that Draghi and co. still maintained a dovish outlook, once bitten, twice shy. The 10 year US Treasuries yield dropped to 2.238 percent, while the 10 year German Bund yield also closed down to 0.531%. Stock markets were also mixed, with the FTSE closing stronger due to the weak pound, while European markets slipped back on the stronger euro.

Lessons can be learnt from the RBA, where the AUD hit fresh 2 year highs against the dollar after minutes from the RBA showed that the Central Bank saw 3.5% as their neutral level. Similar to the ECB, the RBA have been quick in the past to act when their currency attracted unwanted moves higher. We saw this last night when, RBA’s Deputy Governor Guy Debelle, put a halt to AUD strength last night when he stated that rates there didn’t have to rise in line with global peers. This comment wiped out recent gains in the AUD against the euro, while also gave back some of its gains against the dollar and pound.

Today’s economic calendar is quiet today. EURUSD took out the 2016 highs yesterday at 1.1617, pushing to 1.1673 this this morning, and eyeing 1.18. A break back below 1.1480 would signal a pullback. EURGBP took out the .89 level and now looks to retest the .9000 level and last year’s highs at .9300.

 

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