EUR-crosses Highly Vulnerable with ECB Meeting in Two Days
- Remains important to look at the big picture for US Dollar.
- As FX market volatility stays elevated, it's a good time to review risk management principles.
While this week isn't so heavy on the data side for the US Dollar, it is an important week for several of the other major currencies, in particular, the Canadian Dollar, the Euro, and the New Zealand Dollar. The situations their three central banks are facing couldn't be more different.
For the Canadian Dollar, the Bank of Canada has recently adopted a neutral tone thanks in part to the election of Justin Trudeau as prime minister. As covered immediately after the election in October, and then again after the BOC meeting in January, we believe that the prospect of fiscal stimulus is enough to keep the BOC at bay. This shift in policy rhetoric has produced a major turning point for the Canadian Dollar.
For the Euro, the European Central Bank is far from neutral: it needs to be decisively dovish if it wants to make an impact. Rates markets are already pricing in another 10-bps rate cut this Thursday, and without unloading their 'big bazooka,' it's very possible that the ECB is simple rewinding the clock and putting the first week of December 2015 on replay.
For the New Zealand Dollar, the Reserve Bank of New Zealand doesn't enjoy the clarify that either the BOC (neutral) or the ECB (dovish) enjoys. On one hand, inflation expectations are slumping as the globe shifts further into negative rate territory, putting pressure on long-end New Zealand government bond yields. While the RBNZ doesn't want to see these expectations fall too dramatically, it is balancing this view against elevated activity elsewhere, particularly in the housing market. Much like in December, the RBNZ is in a quandry with how to present it's case to market participants.
--- Written by Christopher Vecchio, Currency Strategist
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