KTM FX Weekly: Policy divergence remains in play
We want to open this week’s note on discussing the latest central bank moves in the G10 block. As readers are aware, last year’s pandemic dragged the interest rates to historic lows. Fast-forwarding to the current date, major economies bounce back strongly on pent-up demand led by stimulus injected by central banks into the economy.
Rewinding to last week’s events, the RBNZ and BOE changed the path to the aggressive mode by preparing to withdraw the current monetary stimulus.
RBNZ cited “Monetary Stimulus Reduced.” The Reserve Bank of New Zealand announced that it would halt additional asset purchases under the Large-Scale Asset Purchase (LSAP) program by 23 July 2021. The kiwi dollar popped to the news, and the Kiwi banks raised the mortgage rates to rise as a response. Now three OCR hikes are priced in by the end of 2021.
Macros perspective, compared to the eurozone, Kiwi country is small, but its central bank is most aggressive among the G10 nations. Technically, the cross-currency EURNZD is developing the death cross pattern on the weekly chart-it needs close attention. Please see the chart below.
Besides, the Bank of England’s MPC member Michael Saunders stated that “if activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2% target on a sustained basis.”. If you discounted the “if” word, simple the above statement suggests BOE too following tampering footprints. We will discuss the EURGBP technical view in a separate article.
Coming to our subject currency, the ECB policy meeting is the next highly watching event this week. Readers should remind that this will be the first official policy meeting since the ECB introduced a 2% symmetrical inflation target. We are focusing on the communication around PEPP (Pandemic Emergency Purchase Programme). A mild dovish tone could send the euro to 1.1600-1.1630 levels, which will be a buying zone to us.
Technically, at all time frames, the classic Head & Shoulder pattern is clearly visible with bearish indicators on the weekly and monthly charts. In case of neutral bias, current oversold daily indicators could send the euro to 1.1900 and 1.1980 levels.
If we didn’t compare the euro area with the US, the latest data suggests Europe is catching up on the growth side led by services and manufacturing sectors. If you are bullish on the common currency, then buying the euro against the Yen and Frank are the better pockets to look at the moment. Looking at the EURUSD, we expect September would be a crucial month for the euro bulls. Any downside approach around 1.16 offers better risk-reward.
In the September ECB policy meeting, one could expect the comments on PEPP, and the upcoming German election is expected to raise the volatility. The economy side Europe will catch the speed in Q3 is our base scenario and the German election in September/ end of Q3 is the key driver to the common currency.
“In terms of political risk, the upcoming German election is expected to deliver a status quo result with Greens as a key player in the next coalition government,” Manulife Investment Management reported in their Q3 Global Macro Outlook.
July ECB meeting: The communication will be towards a dovish stance in regards to the inflation note. We expect lower rates until ECB sees the inflation reached the newly set 2% symmetric target.
Nordea says, “A mild dovish surprise could flatten the curve out to the 10-year point as well as support further widening of ASW spreads and tightening of intra-Euro-area bond spreads, especially if bond purchases are likely to remain elevated for longer”.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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