FX September 08, 2022 / 03:24 pm UTC

FX Daily Strategy - APAC, Sep 9th

By Adrian Schmidt

EUR under pressure after ECB meeting…

…in spite of hawkish stance which triggered a sharp rise in front end yields

EUR weakness may extend if confidence in the economy doesn’t recover

NOK and CAD data unlikely to have much impact, but both currencies should benefit from energy exporter status

EUR under pressure after ECB meeting…

…in spite of hawkish stance which triggered a sharp rise in front end yields

EUR weakness may extend if confidence in the economy doesn’t recover

NOK and CAD data unlikely to have much impact, but both currencies should benefit from energy exporter status


Friday should be a comparatively quiet day after the new heavy Thursday, allowing the market to reflect on the ECB decision and the subsequent market reaction. 

In the end, the decision seems to have been anchored on the staff projections of sharply higher inflation over the next few years, although the core inflation rate projected at the end of 2024 was the same as in the June projections at 2.3%. However, intervening inflation rates are expected to be much higher. Most of this is because of the sharp rise in gas prices between the two projections, and although gas prices (TTF) have dropped around 25% since the staff projections were made, they remain more than double where they were for the June round. This led to the more hawkish ECB stance, but the GDP forecast of 0.9% for 2023 was seen by many as optimistic. Indeed, the market reaction suggested that the more hawkish stance was seen as increasing risks of a deep Eurozone recession, with the EUR falling back on the crosses as well as against the USD even though 2 year yields have risen substantially in response. EUR/CHF showed a particularly sharp decline. 

We tend to concur with the view that the ECB action is unnecessarily aggressive, as there is no real need for the central bank to intensify a contraction in demand that is already underway because of the rise in energy prices and the consequent squeeze on real incomes. The ECB appear very focused on preventing a rise in inflation expectations, but these have risen only very modestly up to now, despite extremely high levels of inflation, and pay deals remain very moderate. So while there has been a 20bp+ rise in 2 year bund yields in response, the EUR continues to reflect the level of confidence in the European economy rather than respond to yield spreads, and this has diminished rather than increased with this ECB meeting. There may consequently be some further EUR downside from here unless the ECB can convince the market that their more positive growth forecasts are justified, or the EU produce some measures to cushion the energy price shock that increase growth expectations. 

For Friday we do have Norwegian CPI and Canadian employment data, but neither seem likely to move the markets substantially. EUR/NOK continues to largely follow movements in the S&P 500, although there has been a little independent life to it of late. For choice, we continue to see downside risks to EUR/NOK due to the gas price situation and the huge positive impact on the Norwegian external balance, even though Norges Bank will continue to limit the impact on the currency. 

Canadian employment data are expected to show a modest rise, but the CAD is also likely to continue to depend primarily on risk performance, although the latest BoC hike contained some suggestion of more dovish leanings which may mean the CAD has some downside risks, although the status of Canada as a major gas and oil producer makes it hard to be negative, especially at these levels which are low compare dot the typical correlation with energy prices.

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I, Adrian Schmidt, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.