The review of the ECB’s monetary policy strategy was announced in January 2020 by its policy-making Governing Council and the results were due to be published by the end of last year. Since then the review has been largely ignored by the markets, which have concentrated on the coronavirus pandemic, the ensuing global economic downturn, and more recently, the recovery from that slump and the prospect of rising inflation.

The ECB has already made clear that it has no intention of tightening policy near term, in line with other central banks that have described inflation as likely to be transient. The results of the review will likely reinforce that message by stating more formally that the ECB will tolerate inflation that it regards as temporary, and the Euro will likely ease further ahead of its publication as investors begin to focus on what it might say.
One outcome of the review could be a revised inflation target, with the ECB moving from the current definition of price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the Euro area of below 2%” The Governing Council clarified in 2003 that in the pursuit of price stability it aims to maintain inflation rates below, but close to, 2% over the medium term.  

EURJPY D1 07 19 2021 1528

 

This year that could change to a symmetric medium-term inflation target of 2%, with the ECB tolerating inflation above or below that level. In the current situation that would mean continuing low interest rates, bond-buying and quantitative easing even if inflation rises well above 2% so as not to throttle the recovery in its infancy.
Market pricing reflects expectations so Euro weakness could well precede publication of the review. That indicates traders will need to be on the lookout for hints about its contents from Governing Council members and in particular from ECB President Christine Lagarde. She dropped one such hint in mid-June, when she suggested to Politico. 

EURJPY W1 07 19 2021 1529

 

The UK is a week away from its scheduled reopening but it is expected that the Prime Minister will announce today that the date will be delayed by up to 4 weeks, with focus on easing the pressure on hospitals after another surge of cases related to the Indian (Delta) variant. The UK is expecting to have vaccinated all adults by the end of July and allowing for more immunization is thought to be one of the main reasons for delaying the reopening date.

The Pound has been holding up pretty well despite the increased likelihood of a delay, given it was likely already discounted leading up to this week. GBP/USD remains confined to its one-month range as bulls hold on to support just below the 1.41 mark. Traders are likely to focus on the large amount of economic data coming out of the UK this week, with special attention to the inflation data released on Wednesday. After strong readings in the US and China, expectations are for a 1.8% increase in consumer prices over the last year, which would bring inflation close to the Bank of England’s 2% target. 

GBP USD 20210614 14.26

A stronger reading will likely be supportive of the Pound as investors become more convinced that the central bank will start to act sooner rather than later as economic recovery gets underway. The BoE’s Chief Economist Haldane was top news last week when he made hawkish comments about the UK’s economic recovery and inflation expectations, leading to believe that the MPC could start announcing policy changes as soon as their next meeting on August 4th.


Despite an attempted break lower on Friday, downward momentum in GBP/USD has not improved much, but there is scope for the pair to attempt a new break below the lower bound of its current range at 1.4075. If we break below this level then there is pretty much a clear path towards 1.40. Alternatively, if bullish momentum increases then immediate resistance may be found at 1.4186, followed by the horizontal 1.42 line before testing the upper bound of the range at 1.4245. 

GBP USD 20210614 14.27

 

 

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Asia-Pacific markets may be set to experience a volatile week, with several potentially hard-hitting economic events on tap in the days ahead. That puts the risk-sensitive Australian and New Zealand Dollars in focus. Both weakened against the US Dollar last week even though the broad-based DXY index moved lower, which highlights the region's perceived risks.
Traders will be watching daily case counts and deaths with a keen eye. Domestically, the island nation has seen only two new cases over the last 48 hours, according to the Ministry of Health. Policymakers’ defensive stance on border travel will likely remain in place.
Later this week, the Reserve Bank of New Zealand (RBNZ) will release its interest rate decision. The consensus expectation sees the central bank holding the Official Cash Rate (OCR) at 0.25%. 

NZDUSD W1 07 12 2021 1301

Overnight index swaps show markets are pricing in a 73% chance of a hike at the November meeting. That is up from 48% one week ago. Second-quarter inflation data will follow the policy meeting on the very next day. Markets expect the consumer price index (CPI) to rise 2.7% y/y, up from 1.5% in Q1.
The New Zealand Dollar is off to an upbeat start against the Greenback, with NZD/USD up 0.15% to start the week. The currency pair is testing a level of resistance turned support along with a descending trendline. Some confluent resistance from the downward-sloping 20-day Simple Moving Average (SMA) will need to be cleared before a push higher. The MACD oscillator shows a bullish bias as its MACD line tracks above the signal line. 

NZDUSD D1 07 12 2021 1300

 

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All sectors apart from precious metals and livestock recorded strong gains led by crude oil, copper, corn and coffee. In response to these developments hedge funds and large money managers increased bullish bets across 24 major commodity futures by 3% to 2,358k lots.

Given the strength of the recovery a relatively small increase that was led by crude oil (25k), gas oil (17k), natural gas (+11.7k), corn (21.9k) and sugar (12.5). Other contracts such as copper (-6.3k) and both wheat contracts (-5.7k) were sold despite recording strong price gains. Potentially a sign that investors despite being dictated by the price action to be long are feeling somewhat uncomfortable with prices at multi-year highs and breakeven yields (inflation) that has been drifting lower during the past three weeks.  Commodity is the best performing so far in June driven by rising commodity prices. While rising oil prices have stolen attention lately we explain why investors should ignore the this rally in oil and gas majors. Instead we think investors should look long-term and bet on copper as it will become the new oil of our future greener society.

Copper 20210607 14.42

The energy sector today is still dominated by “old oil” companies and we have recently got questions about whether to invest in this industry since the industry has become cheaper relative to the overall market. While it is true the energy sector has become cheaper against the overall equity market and the outlook has improved with the rollout of Covid-19 vaccinations, the overall energy sector is trading at 12-month forward EV/EBITDA of 6.5, which is above the average since 2005. This period includes many years of far better fundamentals in terms of return on capital than what the industry can generate today.
The “new oil” that will fuel the green transformation and electrification of our economy is copper, which is much more intensely used than in our old industrial economy. Commodity analysts are split on the demand-supply balance, but from an equity perspective it matters more long-term what the demand outlook is. 

Copper weekly

EURUSD is fairly representative of the action across USD pairs as we watch whether this extension lower below the local 1.1848 pivot holds into the weekend. A solid rally back above is the first inkling that this late USD rally faces neutralization. And the kind of support from US treasury yields and rising US real yields that was in place back into the significant end-of-March low of 1.1704 are largely absent this time, with only support for the USD from the shift in Fed expectations, a shift that has faded more than a bit on today’s mixed US jobs report. A solid close above 1.1900 in the coming session or two could set the stage for the sense that the downside risk here has been avoided for now, likely reflected in other USD pairs as well in that event.

EURUSD D1 07 05 2021 1405

May have simply witnessed a significant position squaring by USD shorts as so much energy has come out of the inflation narrative recently, with the USD wrapped up in a reflexive way in that narrative as one of the leaders in weakening via negative real rates.
Jobs report doesn’t do anything to set the world on fire in terms of raising Fed expectations or treasury yields, and given the pivotal levels we have traded near lately in a number of USD pairs, may offer a fresh spot for new USD bearish positions. 

EURUSD W1 07 05 2021 1405 

 

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European banks have a considerable upside potential over the coming year if the mean reversion in the German 10-year yield continues amid rising global inflation. A steeper yield curve and positive yields in Europe could take European banks' price-to-book ratio back to the recent historical average of 0.8x and then beyond. The industry has improved over the past years with Deutsche Bank being.
Our view is that the value vs growth, higher inflation, and higher interest rates, will continue the mean reversion happening in the German 10-year yield and help European banks move back to the average price-to-book ratio since 2009 of 0.8x and likely beyond to 0.9x helped by macro policies. This means from current levels that European financials could see a 20-40% upside over the coming 6-12 months.

 Eu Stocks Banks Index 20210531 13.31 1

Australia May employment data delivered a big beat on expectations, the headline unemployment rate fell to 5.1% even as participation increased, rounding out the 4th largest quarterly fall in unemployment on record. Australian employment is now 1% above its pre-pandemic peak.

Notably the underemployment rate fell to 7.4% which is the lowest level in 7 years. Underemployment (those employed but wanting to and available to work more hours), another contributor to labour market slack, typically accounts for most of the weakness in wage growth, rather than unemployment itself. Numerous recent research concludes that in recent decades underemployment has had a stronger relationship with wage growth than unemployment.

Against this backdrop the spotlight remains on the RBA’s ongoing challenge to meet mandated price targets, achieving their goal of a tighter labour market, wages growth and hence inflation. And alongside this their ability to wind back accommodative policy settings.

AUD USD 20210628 12.13

 

Governor Lowe has stressed the RBA’s more reactive policy stance/inflation-targeting regime now requires actual, not forecast, inflation to be within the 2-3% target band before raising rates. This likely requires wages growth in the order of 3%, and a headline unemployment rate tracking 4% and probably below. The last time unemployment was close to 4% was back in August 2008. At present, the economy is far from full employment or full capacity, significant labour market slack remains, promoting weakness in wages and demand and limiting any underlying inflationary pressures. Despite those end goals remaining a long way off the economy continues to track a stronger economic trajectory than forecast.

The continued recovery in the labour market raises the probability that the RBA are perhaps too pessimistic at this stage and that rates will lift off sooner than expected. However, the decline in labour market slack required to promote sustained wages growth in the order of 3% remains an unknown. Although in combination with a continued decline in underemployment and emergent skills shortages with closed international borders cutting off migrant workers, there is evidence that wages are turning a corner and could soon accelerate. Lowe citing today that there could be more upward pressure on wages if border remains closed for another year.

Were the RBA to extend, this would signal that the bank does not expect inflation to be sustainably back between their 2-3% target until late 2024, and correspondingly lift rates until late 2024 and beyond. 

Australia 200 20210628 12.13

 

 

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Bank of Japan (BOJ) Governor Haruhiko said on Monday that each recession has different characteristics   that the difference in the severity of the downturn among industries, business types and occupations.

USD JPY 20210524 22.16

The Japanese yen has been very weak over the last twelve months on the argument that a global reflation is JPY negative, particularly with the steepening of global yield curves on the anticipation of a durable inflation cycle settling in at a time when Japan’s central bank has moved to explicitly cap its ten year yield at 0.25%. This has kept the yen very sensitive to rising long yields, especially this year and the rise at the longer end of the US and other yield curves. But a couple of developments here are reminding us that the JPY weakness has perhaps extended too far To these JPY-supportive factors we have to add the reminder overnight of Japan’s seeming immunity to rising prices elsewhere, even as its currency has been very weak over the last twelve months. The headline April CPI number was out at -0.4% year-on-year (-0.5% expected) and the core ex Fresh Food and Energy was -0.2% vs. -0.1% expected. Real yields in Japan, in other words are positive in April when US yields went to worse than -400 basis points in that month! The last missing piece that would drive a more determined JPY consolidation higher and possibly even a notable spike, as I discussed in a recent post, would be anything that spooked credit and saw a widening in credit spreads in corporate- and emerging market debt, something that has been largely absent as a factor since the pandemic broke out last year, although we are seeing some modest widening of US corporate credit spreads over the last couple of weeks.  

USD JPY 20210524 22.17

 

 

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AUDJPY D1 06 21 2021 1406

 

A powerful combination of factors lining up here against the Aussie and in favour of the JPY as the commodity complex has come in for a broad correction here.Was the reminder overnight in the form of the May CPI data out of Japan that Japanese real yields remain quite strong, while negative yields reign elsewhere. Looking for the risk of a JPY back-up for some time, but none unfolded until now, and the move could extend if long yields remain pinned lower and the sell-off in equities broadens (huge divergences last week in the US, with the median value stock down and quite badly, even as growth and momentum cheered the fall in longer yields). There’s certainly room for a considerable back-up in the JPY crosses without “breaking” anything, although any such move would likely have to see further downside pressure on long safe-haven yields and a significant further correction in commodities prices. AUDJPY is still within the multi-month range, but the focus looks lower if this move doesn’t immediately back up, perhaps eyeing the 100-day moving average, currently at 80.40, or even more to the downside if the market conviction in the trades that have proven so successful since the pandemic lows are in for a more significant consolidation.  

AUDJPY W1 06 21 2021 1408

AUD USD 20210517 13.06

 

AUDUSD is a decent proxy for this latest USD move lower as well as the ramp since the pandemic lows in key commodities prices that are drivers of Australia’s economy, including especially iron ore. In the recent cycle is China’s ban on importing thermal coal from Australia and some discussion that China may halt LNG imports as a next step after halting strategic economic dialog talks “indefinitely” recently. The weak US payrolls on Friday drove the pair above the prior 0.7800-25 resistance, but the price action has gone nowhere since, restrained chiefly by weak risk sentiment. Meanwhile, the RBA, while it has teased the July meeting as being in play for adjustments in guidance, remains in wait and see mode together with the Fed, so short term Australia-US yields spreads, and even 10-year yield spreads, for that matter, are not signaling huge support for a move higher  10 years a bit more so recently than the 2 year swap spread, which mid-range from the early March peak  Tactically, if the pair closes back below 0.7750, traders will have a bearish reversal on their hands, while we likely need a new jolt lower in the US dollar that shifts the fundamental indicators more sharply against the greenback to get the bullish case back on track.  

AUD USDweekly

 

 


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