Forex Institutional Research: Commerz Bank FX Daily

Forex Institutional Research: Commerz Bank FX Daily

Key quotes from the Commerz Bank FX report: 


After ECB President Mario Draghi had signalled at the ECB meeting in March that further rate cuts would be unlikely his comments were followed by a confusing game of PingPong amongst ECB speakers: Peter Praet seems to be of the view that interest rates may well be lowered further, while Benoît Coeuré considers this to be less likely. So what is going on? How much further will interest rates ease? What is decisive is whether or not the ECB is considering a multi-tiered rate system along the lines of the SNB or BoJ. A system of this nature with rate tranches or allowances would provide the opportunity of lowering the key rate further without putting undue strain on the banking system. The minutes of the March meeting today should provide some insight into the Governing Council’s view of a multitiered rate system. If the ECB signals openness towards such a system, weak inflation and economic data may put renewed pressure on the euro. However, if it becomes clear that there is no majority amongst the members, it is clear that rates will have reached the lower limit soon, which in turn will provide support for the euro bulls. Praet’s comments on the instruments at the ECB Watchers Conference will also be of interest against this background. It is possible that Vitor Constancio will also provide some insight into the subject at the question and answer session following the presentation of the ECB annual report in front of the EU Parliament’s Economic Committee. In other words, it may be worth keeping an eye on the ECB today.


According to the FOMC minutes the debate amongst FOMC members was very lively and controversial in March, in particular as Esther George voted in favour of a rate rise. But the underlying sentiment reflected the cautious attitude taken by Fed chair Janet Yellen. What is of interest is the fact that 11 FOMC members – up from 7 – now see downward risks for their inflation projections and that almost all of these 11 members also saw downward risks for their core inflation forecasts. Moreover the subject of low inflation expectations seems to be taken more seriously as many members see evidence of deterioration or, an absence of improvement, in indicators of long-term inflation expectations as contributing to increased downside risks for inflation. Risks for the growth and inflation outlook are omnipresent, but nonetheless some members see reasons for a rate hike in April should the data allow that. How does the FX market see things? While Yellen as the head of the Fed is still playing top-dove the market is rightly putting pressure on the dollar. And as Yellen has another opportunity to speak in a debate with her important predecessors Volcker, Greenspan and Bernanke today, the USD’s lot is difficult. That means the 1.14 mark in EUR-USD remains attractive


We have written much about the yen recently. There is one aspect that I would like to mention again though. The Head of Government Shinzo Abe made every effort to counteract the words of Chief Cabinet Secretary Yoshihide Suga on the yen by underlining in an interview that “we must definitely avoid competitive devaluation“. That was exactly what the London Accord of February 2013 had been aiming for. So why are Abe’s words of interest then? He is the host of the next G7 summit which will be held on 26th and 27th May in Ise-Shima. The weekend before that the Finance Ministers and central bank governors will be meeting in Sendai. Ahead of the summit the host Abe now explicitly confirmed the accord. Honni soit qui mal y pense: no doubt Abe does not want to get into trouble at the G7 summit for the BoJ focussing too much on the yen so as to ensure that its monetary policy retains some effectiveness. In my view he is trying to calm the political waters ahead of the summit. Once the visitors have left he or Central Bank Governor Haruhiko Kuroda can refer to “disorderly movements“ and “excessive volatility“ on the FX markets to their hearts content – the two tolerated exemptions for interventions – so as to be able to intervene to weaken the yen. So we must not be surprised if stronger rhetoric towards the yen will take a while to arrive – despite Suga’s promise and the breach of the 110-mark in USD-JPY.

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