Has the strength of the EURO become a real issue for the ECB and EU growth? We are close to that point in our opinion – We expect Draghi and ECB to start warning about the "speed of the move" and slowly but gradually pricing out further Fed hikes as inflation (in the US…) is subdued at best and falling at worse.
Both internal and external factors are slowing while economic data is coming off. This "normally" leads to ECB raising the yellow flag and ultimately the red flag hence we feel EUR/USD above 1.1800 is a medium term sell. This also coincides with rising "financing" cost and shortage in US funding dollars.
Bias: Short EURUSD with two-day close above 1.1950 as a stop
We have been very constructive on the euro since early this year based on the economic pick up our models registered through 2016 into 2017. Before the French election we were very isolated in this view:
and after the French election we pointed out that European equities probably had peaked.
The market and technicals indicate that 1.2000 is in reach, however we will go neutral here on both the euro and the US dollar after considerable time of "selling it"….
Draghi will not do a "Trichet" and hike rates or even normalize before end of his term. No one has heard from Trichet since his departure, and Draghi will not want that destiny. (Draghi's term ends October 31, 2019)
Furthermore there are now clear signs that the strong euro is hurting European exporters and growth;
The STOXX 600 peaked in May and is testing support levels right now and relatively since Macron's election in May the European stock market (despite massive flow- and momentum support) has trailed the US stock market as illustrated below. (The indices both indexed to 100 as of end of April.)
This is the S&P 500 and STOXX600 Index @ 100 @ 04/30-2017 (just after French election)
A further reason for some concern would be the "relatively" tighter monetary conditions:
Although conditions are easy, there has been a big swing (-40 bps) since the last ECB meeting…
On the dollar side my good friends at Nedbank Neels Heyneke and Mehul Daya do some of the best work on dollar liquidity:
This chart looks at how the "debt ceiling" can become a real issue for "excess dollars" – Neels and Mehul expect the Risk-on phase could be replaced by risk-off as the deadline draws closer. Similarly, the currency swaps have reversed from easy to less easy – best represented by 1-year basis swaps for JPY:
The steep trend towards "plenty" of liquidity seems to have reversed..
Finally, the more boring data, economics also indicates that the impressive run in European growth is fading.. here seen by first Citigroup's Surprise Index and below that in the 10 Y bond spread between Germany and Italy & Spain (Yes it's small but it has reversed)
Finally,
This chart courty of Theis Knuthsen, CIO of Saxo Private Bank is interesting…..these levels of European High Yield has "mean-reverted" sharply higher…
The upcoming calendar event is below – today it was announced that Draghi will not talk policy at Jackson Hole August 24-26th which indicates he is biding his time to take a decision on the Euro, inflation or not and next move.
| 08/17/2017 13:30 | EC | 1) | ECB account of the monetary policy meeting | ||
| 08/22/2017 14:00 | PO | 2) | ECB's Constancio Speaks at Economists' Congress in Lisbon | ||
| 08/23/2017 09:00 | EC | 3) | ECB's Draghi Speaks in Lindau, Germany | ||
| 08/24/2017 19:00 | IT | 4) | Bank of Italy Governor Visco Speaks in Rimini Draghi @ Jackson Hole | ||
| 08/31/2017 14:20 | AS | 5) | Bundesbank's Dombret and Austria's Schelling in Alpbach | ||
| 09/01/2017 08:30 | AS | 6) | ECB's Nowotny in Panel Discussion in Alpbach, Austria | ||
| 09/07/2017 13:45 | EC | 7) | ECB Main Refinancing Rate | sep-07 | |
| 09/07/2017 13:45 | EC | 8) | ECB Marginal Lending Facility | sep-07 | |
| 09/07/2017 13:45 | EC | 9) | ECB Deposit Facility Rate | sep-07 |
The data meanwhile continues to deteriorated indicating now is the time to go square and wait for next impulse.
The one single risk, if we're right, is that Emerging markets may have peaked for now. We know that US is everything in direction, much of this years performance in risk on has been driven by ample US Dollar liquidity as shown above and the negative convexity play by desperate investors chasing equity return in risk parity and ETF Funds.
We are now neutral Emerging market looking to time a big short into a dollar liquidity shortage into debt ceiling end of September
Conclusion:
Euro, dollar, EMG, and risk-on is a few weeks away from low (or high) – the liquidity (less) and credit impulse (less) will start to exert financial gravity by end of August going into September.
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
Phone: +45 39 77 40 00 | Direct: +45 39 77 62 23 | Mobile: +45 51 54 50 00
Research: http://www.tradingfloor.com/traders/steen-jakobsen
Please visit our website at www.saxobank.com
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