Back in August 2016 Jackson Hole, the central bankers decided that it was time to push yields higher by exiting monetary policy stimulus gradually. From there on yields rose as the major central bankers changed their tone supported by growth, inflation and US fiscal stimulus. Yesterday’s ECB seems to have broken that coordination between FED, BOJ and ECB. As the FED turned hawkish the ECB has been overtly dovish creating a divergence which cannot immediately narrow.
Seems like recent EU data and the new Italian government has spooked the ECB or perhaps in another interesting theory the trade war between the US and EU is manifesting into a currency war. ECB took out all rate hike expectations in the next 1 year as it asserted that interest rates would remain same till the summer of 2019. Then the way Draghi spoke was very similar to 2015 when the entire purpose of the monetary policy press conference was to hammer the Euro. Yesterday’s price action will make a lot of strategic Euro bulls change their stance and I would think that we could see Euro heading towards 1.1451 and perhaps even lower before it finds a bottom. On the other hand the 10-2 year spread in the US bond market has slipped to its lowest since 2007 at 37 bps. This indicates waning confidence in sustainability of inflation and sustained rate hikes. This for now should indicate limited upside for USDJPY.
Euro has in the recent past shown a strong correlation with CNH and therefore a selloff in Euro would at the least prevent any INR appreciation. USDINR 1m NDF has shifted to 10p right from around 6p yesterday while TRY, ZAR, MXN, KRW continue to depreciate. FIIs continue to pull out significant but not huge sums every day. With the break of 67.80 the new range shifts to 67.80-68.50 as we would continue to see Euro weakness and EMs losing out. CMP 67.90, Range 67.80-68.10.
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