The Great Euro Debate Heats Up Ahead Of Jackson Hole

By Heisenberg

There’s a lot of commentary floating around out there this morning about the euro ahead of Jackson Hole.

The single currency’s relentless rise heading into August was starting to weigh on eurozone equities and needless to say, excessive FX strength isn’t something that’s welcomed with open arms by central banks that are still engaged in a balls-to-the-wall effort to stoke inflation.

The ECB minutes sounded the alarm on FX “overshoot” and whereas just a little over a month ago, everyone was convinced Draghi was set to use Jackson Hole as an opportunity to telegraph an ECB policy shift (bullish euro), now there are concerns he’ll do the opposite.

Here’s Bloomberg’s Mark Cudmore:

  • The base case for most investors is that Jackson Hole will bring no major immediate policy insights. But there’s a reasonable, and widely discussed, risk that Mario Draghi will try to jawbone the euro weaker
  • With rates markets already pricing the probability of another 2017 rate hike from the Fed as a one-in- three chance, Janet Yellen can’t afford to surprise dovishly if she wants to maintain long-term credibility and retain any flexibility for the December rate decision
  • Given she’s speaking on financial stability, there’s an obvious possibility she’ll discuss the idea that central banks sometimes need to tighten even when inflation is below target. That would be interpreted as a hawkish signal
  • That means both central bankers are clearly skewed to surprise negatively for EUR/USD. Given these are theoretically separate topics/angles, they should be independent variables, so the chance that at least one of the two occurs and hurts EUR/USD is significant
  • Despite all this, EUR/USD hovers within 1% of its two-year high and almost 2% above its 200-DMA. Speculative positioning remains net long even if overall bullishness is down a bit recently

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  • Which just adds to the reasons to be bearish EUR/USD. The impact of any Draghi hawkishness, or Yellen dovishness, would be minimal because the market is already positioned in line with those structural stories
  • Conversely, markets appear to be ill-prepared for either or both of them to say something that’s negative EUR/USD
  • None of this logic is particularly profound. The noise created by all the chaos in Washington has effectively killed off traders who were too early in seeking to play for a dollar bounce
  • But the risks around the Jackson Hole meet-up haven’t shifted. As a result, EUR/USD is likely to suffer ahead of the symposium, with a chance it gets truly battered by official comments at the gathering

Duly noted, but on the other hand, there are political risks here.

“Investors expecting Mario Draghi to talk the euro lower from his platform at Jackson Hole this week may have to wait a bit longer [as] there seems to be little to justify any jawboning given that EUR/USD is below the midpoint of its range in the past decade,” Mark Cranfield wrote earlier today, adding that “Mr. Draghi will be aware that publicly addressing the question of excessive euro strength at a time when the euro zone is running huge trade surpluses with non-EU nations will not be well received in Washington.”

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Another Bloomberg macro blogger, Anchalee Worrachate, picked up on the same issue, noting that while “the data on Friday showed Europe’s surplus dropped to the lowest level since August 2014, a decline in the surplus at this pace may not be enough to alter the bigger, positive picture for the EUR in the near term.”

Fund managers at Carmignac Gestion SA and JPMorgan AM agree, suggesting today that “any attempt to stall the euro’s rise may prove futile for European Central Bank President Mario Draghi.”

This is something you want to keep an eye on – remember, just because it isn’t on your personal radar, doesn’t mean it’s not important.

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