Euro/dollar above parity ahead of Eurozone inflation data
Equities stay wounded as central banks show more teeth
Canada’s GDP to add to the case of a 75bps hike by the BoC
ECB remarks and natural gas setback hoist euro
The euro was the main gainer against all the other major currencies in the last 24 hours, with king dollar settling in second place. Concerns expressed by several ECB rate-setters over its depreciation, their willingness to take rates higher than previously estimated, and the latest slide in natural gas prices may have encouraged traders to enter euro long positions or abandon existing shorts after several unsuccessful attempts to break below 0.9910 against the greenback.
For the first time since August 19, euro/dollar successfully posted a daily close above parity, adding to hopes that further recovery may be in the works. Another leg north may materialize as soon as today, when the Eurozone’s preliminary inflation numbers come out. Expectations are for the headline harmonized index of consumer prices (HICP) to hit a fresh record of 9.0% yoy, which could only add to speculation over a 75bps hike by the ECB at its upcoming gathering.
Having said all that though, even if euro/dollar rises a bit more, as long as it stays below the 1.0350/60 zone, its prevailing downtrend would be intact. The economic backdrop also implies that downside risks have not vanished. Yes, natural gas prices have dropped sharply this week, with the Dutch futures falling more than 20%, as Europe continues to build up supplies in anticipation of the winter. Still, the current levels are simply where prices traded just last week, and looking at the bigger picture, Dutch prices are up more than 1000% since last year.
Therefore, consumer prices may continue to bite in the months to come, even if the ECB acts more forcefully moving ahead. Recent history has shown that euro-traders have been more worried that the central bank will only assist in dragging the Euro area into recession, than trusting it to relieve them from the pain of high consumer prices. As such, more aggressive action may be seen as stepping harder on the brakes of the economy.
Stocks extend slide on hawkish central-bank rhetoric
Most European indices, except for the DAX, finished their session slightly in the red, with the risk aversion accelerating during the US session. All three of Wall Street’s main indices tumbled around 1%, and again, even though marginally, Nasdaq was the one to suffer the most. This adds to the narrative that market participants continued to abandon risk-linked assets due to central-bank rhetoric, especially in the US. Indeed, the loonie, the aussie, and the kiwi were the main losers of the last 24 hours.
Yesterday, New York Fed President John Williams echoed Chair Powell’s view that interest rates are likely to continue rising and stay high “for some time”, by saying that the Committee is unlikely to cut interest rates at all next year. Now, with the prospect of a 2023 reduction still factored in, there might still be room for disappointment. More hawkish language could start convincing investors that a cut is more their desire rather than the Fed’s, and thus add further pressure to equities and other risky assets.
Canada’s GDP may cement the case of a BoC triple hike
Besides the Eurozone’s inflation numbers, Canada’s GDP data is also on today’s schedule, with the annualized qoq rate for Q2 expected to have risen to 4.4% from 3.1%. Something like that could add to the case of another bold action by the BoC at its upcoming gathering. Investors are currently assigning a 75% probability for a 75bps hike and improving economic growth could take that number higher.
However, that doesn’t necessarily mean the Canadian dollar could shine in a similar fashion as its US counterpart. It didn’t do so even after the last BoC meeting, when officials delivered a 100bps hike. It seems that the currency is wearing its risk-linked suit, rather than the one tailored for local monetary policy, and with risk-appetite non-existent, it may continue to perform poorly against its neighboring US dollar.