Risk appetite didn’t work in favor of this European tandem last week, but the euro managed to score some wins on hawkish ECB commentary. What’s coming up next?
Medium-tier economic data
There’s not much in the way of top-tier releases from both the Swiss economy and euro zone this week, but there are a few medium-tier reports worth paying attention to.
First is the ZEW economic sentiment readings from Germany and the euro zone. Market watchers are expecting to see a drop from 5.1 to -0.8 for the former, reflecting a return in pessimism, and a dip from 13.4 to 7.3 for the latter.
Next up are the final CPI readings due on Wednesday. No revisions to the flash headline CPI of 1.4% and flash core CPI of 1.0% are eyed, but any significant adjustments could still impact ECB tightening expectations.
Overall risk sentiment
In the absence of major releases, risk sentiment could still dominate price action for both the franc and euro for the rest of the week, possibly leaving both currencies more vulnerable to movements of commodity currencies again.
This week pay close attention to how traders will price in the U.S.’ airstrikes in Syria and the possibility of tensions escalating in the region.
Last Week’s Price Review
The euro is currently mixed but a net loser for the week (as of 1 pm GMT). And looking at the overlay of EUR pairs below, we can see that the euro’s price action was also somewhat mixed and there are even clear instances of diverging price action, such as after Chinese President Xi Jinping gave his speech. And this diverging price action heavily implies that the euro was being bossed around by its peers.
Having said that, there were periods when the euro showed uniform price action. The first such instance happened on Tuesday, apparently as a reaction to ECB Governing Council Member Ewald Nowotny’s hawkish comments.
Nowotny gave his first hawkish comment during a prepared speech wherein he said that:
“Now I think it is time for a gradual normalization of monetary policy. This normalization requires a delicate balancing of measures as well as careful sequencing in time.”
After that, Nowotny was interviewed by Reuters during Tuesday’s London session. And as noted in Tuesday’s London session recap, Nowotny said that the refinancing rate, which is the ECB’s key policy rate, likely won’t be moving up soon.
However, Nowotny said that he sees no problem with hiking the deposit rate first:
“I would have no problem with moving [the deposit rate] from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the [main refinancing] policy rate.”
Nowotny also called for faster pace of policy normalization during the Reuters interview when he said that:
“One of the strong arguments for moving perhaps a bit faster [with policy normalization] is exactly to have some room for maneuver if we should see some deterioration in the economic condition.”
Euro bulls apparently liked Nowotny’s hawkish comments. Unfortunately, an ECB spokesman (who’s a real kill-joy) later came out and stressed that Nowotny’s hawkish views are his own and don’t necessarily represent the ECB’s view.
And so the euro’s price action became a mixed mess again… until euro pairs (except EUR/JPY and EUR/CHF) began encountering broad-based bearish pressure on Thursday a few hours before the ECB minutes were due for release.
There’s no clear reason for the euro’s weakness, though.
Sure, there was a report showing that total industrial production in the Euro Zone fell by 0.8% in February instead of rising by 0.1%. However, the euro was also sliding about an hour before that report was released, so we can’t really pin the euro’s weakness on that, unless there was a leak or traders were opening preemptive positions ahead of the report.
Another possibility is that traders were opening preemptive positions ahead of the ECB minutes.
And speaking of the ECB minutes, I noted in Thursday’s London session recap that there wasn’t really anything new. Even so, the minutes reinforced the idea that the ECB is trying to take a neutral stance because “the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.”
In addition, the minutes took a swing at the euro’s relative strength when they noted that “the exchange rate appreciation could be expected to have a more negative impact on inflation.”
This is not really new since ECB Overlord Draghi also complained about the euro’s relative strength during the March ECB statement when he said that euro strength “might weigh on inflation down the line as it does not fully arise from stronger euro area fundamentals.”
Anyhow, follow-through selling persisted for a few hours after that before things calmed down again.
The euro’s price action then became mixed again come Friday before getting a final bearish kick when ECB Governing Boar Member Smets gave a speech during Friday’s morning London session since Smets basically echoed the ECB minutes’ cautious message.
There was some follow-through selling, but buying pressure eventually returned. Although that may have just been due to short-covering since there weren’t any fresh catalysts.
The Swiss Franc
The Swissy is on course to closing the week as the second worst-performing currency yet again (as of 1 pm GMT), which would also mark the fourth consecutive week of Swissy weakness.
Price action on the euro and the Swissy were actually similar (as usual). Although the Swissy was clearly more vulnerable on Tuesday, likely because of the risk-on vibes at the time.
However, the Swissy’s vulnerability persisted on Wednesday, even though risk aversion made a strong comeback due to heightened geopolitical tensions between the U.S. and Russia over Syria.
There’s no clear reason for the Swissy’s weakness on Wednesday and most (practically all) market analysts were just silent on the issue. However, it’s possible that the SNB may have been sneakily weakening the Swissy again to dissuade safe-haven flows in favor of the Swissy.
After all, the SNB did say during the recent SNB statement that the SNB will continue to intervene in the forex market in order to make Swiss franc investments less attractive (*cough* currency manipulator *cough*).