I think it’s probably time to start getting concerned about FX vol.
This morning’s dovish comments from Mario Draghi (“economic outlook on the downside,” “no convincing upward trend in underlying inflation,” etc. etc.) sent the euro tumbling, underscoring yet again how laser focused the market is on the utterances of policymakers.
“EUR/USD drops to fresh low under 1.0600, breached tech support from the 55-DMA and is testing the week’s low near 1.0580,” Bloomberg wrote, recounting the market’s reaction to Draghi’s presser. “EUR drop filled bids from 1.0625 to 1.0600, and also breached tech support near Tuesday low at 1.0598.”
Apparently, the only thing keeping traders from piling into the dollar is the uncertainty surrounding tomorrow’s circus in DC. “USD buying seen from short-term accounts, some caution over building sizable USD longs ahead of the Trump inaugural tomorrow,” one trader told Bloomberg.
To be sure, it’s nothing new for markets to trade off policymaker soundbites. That said, I’m concerned that in the fog of uncertainty (Brexit worries, concerns around elections in Europe, the looming showdown between the Fed and the Trump administration over dollar strength, the Politburo’s control over RMB policy, etc.) the divide between politics and monetary policy is disappearing. Indeed, political expediency may require that the two be merged. That could make it decidedly difficult for FX markets to determine who’s ultimately in charge and whose comments should be given the most weight.
That’s something we need to think seriously about going forward and I think the following charts back up my contention.
I guess we should not assume that Trump understands the importance of central bank independence. Other countries have more of it but we still manage to lecture them on its virtues. If I was generous I would assume that he has been confused by the combination of fiscal stimulus and QE.
Financial markets will penalize him (us) heavily if he leans too hard on ‘Mother’ (Volcker’s term). But then his ‘base’ might just yammer for a new Chair. Yeesh.
“I guess we should not assume that Trump understands the importance of central bank independence”…
No we should not.