Euro, Euro, Euro

It will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar.

That’s from Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, and it tells you pretty much everything you need to know about the mood on Thursday.

Callow is of course referring to the attempt to walk back Mario Draghi’s “we’ll look through transitory weakness in inflation” comments that hit the wires on Tuesday and set the stage for the single currency to rise to its highest level against the dollar since June of 2016.

Euro

EURUSD1

As we noted on Wednesday, options traders are now the most bullish on the euro since at least before the US election.

“Many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB,” the above mentioned Sean Callow went on to say, hinting that rate differentials could continue to compress, thus lending further support to the euro.

RateDiffs

Draghi’s comments came at the ECB Forum on Central Banking in Sintra, Portugal, and he wasn’t the only one sounding hawkish. The BoE’s Mark Carney said Wednesday that the MPC may need to raise rates despite a weakening economy. That’s got the pound on a tear, up seven days in a row against the dollar (the longest winning streak since April 2015) to the highest since May 25:

GBPUSD

“Carney comments have been a game-changer for shorts, which have unwound their exposure amid demand for fresh longs by leveraged names,” a London-based trader said overnight.

“It could move up toward $1.35,” Lee Hardman, a foreign-exchange strategist at MUFG in London, said on Thursday, adding that “The Bank of England is probably closer to raising rates than many people had anticipated.”

Well yeah, Lee – clearly.

As Bloomberg goes on to note, “investors will also be looking at a Parliament vote on Prime Minister Theresa May’s legislative program due London afternoon time, with a vote on the full program scheduled for later in the day.”

“Should Prime Minister Theresa May fail to obtain an implicit vote of confidence, then we would expect the British pound to react badly across the board as political uncertainty would escalate,” strategists at UniCredit SpA, including Vasileios Gkionakis, wrote in a note to clients. They believe “the market may be jumping the gun in the case of the Bank of England” as investors seemed to ignore that any rate increase is conditional on the trade-off between lower activity and higher inflation continuing to lessen.

Meanwhile, German yields got yet another excuse to rise as bund futures dipped after Saxony CPI release, sliding to session low of 162.64 (-81 ticks). Saxony CPI has a strong correlation to headline German inflation and it rose +1.7% y/y versus +1.6% previously.

Bund

Meanwhile, WTI held on to gains as U.S. crude production fell the most in almost a year, which took some of the pressure off.

U.S. production -100k b/d last week, most since early July, the EIA said yesterday. The decline was likely driven by field maintenance in Alaska and impact of tropical storm Cindy.

CL

Of course the inventories picture remains bearish as stockpiles are still more than 100m bbl above 5- year seasonal average. “Demand is positive so it comes down to what happens on the supply side of the equation,” Michael McCarthy, CMC Markets chief strategist in Sydney said this morning.

Here’s a snapshot of global equities:

  • Nikkei up 0.5% to 20,220.30
  • Topix up 0.6% to 1,624.07
  • Hang Seng Index up 1.1% to 25,965.42
  • Shanghai Composite up 0.5% to 3,188.06
  • Sensex up 0.3% to 30,938.89
  • Australia S&P/ASX 200 up 1.1% to 5,818.10
  • Kospi up 0.6% to 2,395.66
  • FTSE 7401.82 14.02 0.19%
  • DAX 12606.30 -40.97 -0.32%
  • CAC 5216.38 -36.52 -0.70%
  • IBEX 35 10675.30 -27.40 -0.26%
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