ECB Hints Taper is Coming – Euro Rises

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Market Drivers June 6, 2018
ECB hints that taper is coming
AUD GDP beats
Nikkei 0.36% Dax 0.38%
Oil $65/bbl
Gold $1296/oz.
Bitcoin $7600

Europe and Asia:
AUD GDP 1.0% vs 0.9%

North America:
USD Trade Balance 8:30
CAD Trade Balance 8:30

The euro rose in Asian and early European trade today after ECB speakers hinted that the QE taper is coming as the region is starting to reach the central bank’s inflation goals.

Klaas Knot, the President of Dutch central bank noted that it would be “reasonable” to announce the end of the asset purchases soon. His sentiment was echoed earlier by Peter Praet – ECB’s chief economist in what appeared to be a concerted effort by ECB officials to prep the market ahead of next week’s ECB meeting.

The hawkish rhetoric comes at a time of extreme uncertainty in the region as the new Italian government threatens to upend the fiscal norms and expand the budget beyond the limits imposed by the union’s rules. Italian fixed-income assets have come off the lows, but yields remain highly elevated compared to a month ago and promise to be a constant headache for European monetary authorities for the foreseeable future.

Still, the policymakers appear to be nonplussed by the drama in Rome and are focused on unwinding the monetary easing sooner rather than later. EURUSD rose through the 1.1750 in response to the news but stalled at that level for now.

Meanwhile, in Australia, the GDP beat the forecast printing at 1.0% versus 0.9% eyed. This was the best reading in 7 quarters, but personal spending added just 0.3% as slow wage growth and high household continue to weigh on the consumer. The Aussie moved up to .7650 but given the still neutral stance of RBA, the market would have to see several such positive prints in a row for the market to change its expectations. For now the pair is capped at .7700.

In North America, the focus turns to trade as both US and Canadian Trade data is due. The market anticipates that US trade balance remained the same at -49 Billion deficit, but that the Canadian deficit shrunk to -3.4B from -4.14B the month prior. The Canadian data will be of particular interest as the skirmish between US and Canada has intensified with one slapping tariffs on the other. Yesterday’s suggestion that US may prefer to do a bilateral deal with Canada rather than stay in NAFTA proved to be positive for the loonie, but the pair remains vulnerable to headline risk and if today’s trade data misses forecasts USDCAD could easily pop back above 1.3000 as the day proceeds.

Boris Schlossberg
Managing Director

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