FX market outlook

FX market outlook

Posted on Thursday, March 7 2019 at 10:11 am GMT+0000

BoC throws in the towel, spotlight turns to ECB


  • ECB meeting the main event today, focus will be on signals for loans to banks
  • Loonie sinks to two-month lows as BoC abandons rate hike plans
  • Elsewhere, stocks retreated without a clear catalyst – perhaps on profit taking

Will the ECB join the chorus of dovish central banks today?

All eyes will be on the highly-anticipated ECB policy decision today, and in particular on the updated economic forecasts and Draghi’s press conference at 13:30 GMT. The euro area economy continues to struggle, with the weakness in growth being more severe and longer lasting than the ECB had originally anticipated. This argues for economic forecasts to be revised down significantly today, and if so, for the ECB to signal some measures to cushion the economy from an even worse slowdown.

It’s unlikely the Bank will adjust its rate guidance – and push back the timing of the first rate increase for instance – as the situation isn’t dire enough yet. A more practical route would be to hint at a new round of long-term loans for commercial banks, the so-called TLTROs. Indeed, media reports teased as much yesterday, indicating the ECB will cut its forecasts by enough to justify another TLTRO operation. While a clear signal for TLTROs may trigger a negative knee-jerk reaction in the euro, any weakness shouldn’t be massive as this is probably the market’s base-case scenario by now. Considering also that EU-US bond yield spreads have narrowed in Eurozone’s favor lately, euro/dollar sellers could have a difficult time breaking below the 1.1250 – 1.1213 support territory; they may require some bigger catalyst to do so.

BoC throws in the towel, puts rate hike plans on ice

The Canadian dollar came under renewed selling pressure yesterday, sinking to a two-month low versus its US counterpart after the Bank of Canada shifted to a much more dovish stance, putting its rate-hike plans on ice. Policymakers indicated that the recent softness in both the domestic and global economy has been more pronounced than they had expected, which warrants a policy rate below the neutral range.

The key change, which also seemingly caught traders by surprise given the strong dovish reaction, was that the Bank formally abandoned its hiking bias, taking a page out of the Fed’s book and hinting it will hit the pause button on rate increases indefinitely. Markets for their part doubt that is happening, as Canadian OIS pricing now indicates a small probability (~12%) for a rate cut this year. Going forward, the loonie will likely take its cue mainly by oil prices, given the resurgent correlation between the two lately. In the more immediate term, tomorrow’s employment data out of Canada will also be crucial.

Equities retreat, dollar pauses for breath

In the broader market, risk appetite remained fragile, with US stock markets recording losses for a third session and their Asian counterparts following suit today, albeit without any clear trigger. Perhaps the absence of fresh positive catalysts is causing investors to lock in profits and trim their exposure, especially following the spectacular central bank-induced rally since the beginning of the year.

Elsewhere, the dollar index was little changed but closed marginally in the red, snapping its recent winning streak. The British pound, meanwhile, held up relatively well, surrendering very little ground even in the face of headlines quoting EU chief negotiator Barnier that the talks have been ‘difficult’ and that no solution to the Irish border issue has been found yet.