See the latest Australian dollar analysis here:
DXY was firm last night as EUR slipped on new ECB guidance. But the broader risk rally goes on. DXY still looks poised for a grind higher:
The Australian dollar is still a dead cat bouncing:
Oil and gold did better:
But not miners as iron ore doubts grow:
EM stocks are OK:
Aided by more curve flattening:
Which growth stocks loved:
Westpac has the wrap:
The ECB left its policy settings unchanged, as was widely expected. On bond purchases, the message remains that the emergency program will run at least until the end of March 2022, and buying will continue at a “significantly” faster pace than early this year. Forward guidance was changed, though, and is now more dovish than previously: “the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.”
US weekly jobless claims were higher than expected. Initial claims rose 419k (est. 350k), and continuing claims were 3.236m (est. 3.100m). Existing home sales in June rose to 5.86m (est. 5.90m, previous 5.78m). The Kansas Fed activity survey rebounded to 30 (est. 25, prior 27), while the June Chicago Fed national activity survey fell to marginally above trend at 0.09 (est. 0.30, prior 0.26).
Europe: Markit manufacturing and services PMIs are due for the Euro Area, Germany, and the UK.
UK: Retail sales are expected to dip 0.1% in June; some switching to services spending should occur as the reopening progresses. July GfK consumer sentiment will be supported by the relaxation of restrictions, but the accompanying lift in cases may test confidence (market f/c: -8).
US: Both the Markit manufacturing (market f/c: 62.0) and services (market f/c: 64.5) PMIs are at or near record highs. As we move from the rebound phase to a more sustainable expansion, these elevated reads will balance out.
Here’s a little more on the ECB from Goldman:
The Governing Council left all key policy parameters unchanged attoday’s meeting, as expected, but operationalised its new monetary policy strategy by updating the forward guidance language in the Monetary Policy Decision and the new Monetary Policy Statement.Rate lift-off is now conditional on inflation being forecast to reach 2% “well ahead ofthe end of the projection horizon.” President Lagarde emphasized that the new guidance reflected the ECB’s commitment to compensate for limited easing room with greater persistence, and to tolerate “a transitory period in which inflation ismoderately above target.” Beyond guidance changes, the Council saw the Euro a reaon track for strong growth in Q2 and Q3 (with balanced risks), but did not discuss QE at this meeting. With the baseline outlook still intact, we continue to look for a reduction of the PEPP purchase pace at the September meeting for Q4 back to Q1 levels. The September meeting might alsobring a more concrete discussion of the conditions that will ultimately be required forPEPP to end, which we expect to centre around the robustness of the recovery.
We shall see. I expect a decent recovery for Europe but not as good as the US version on neither reopening nor ongoing expansion given the former’s exposure to a slowing China and the latter’s more aggressive fiscal outlook.
Hence, EUR will underperform USD over the cycle and add downside pressure to AUD.