FX Daily: EUR dips with ECB slowing hikes

EUR dips post-ECB while JPY rallies on bank stress
Group Research, Philip Wee05 May 2023
    Photo credit: Unsplash Photo

    The ECB downshifted to a 25bps hike in its policy meeting yesterday and announced that it will stop APP bond reinvestments in July. ECB President Lagarde added that the move does not signify a pause, and that further rate hikes are still necessary. Nevertheless, EUR/USD slipped towards 1.10 given a clear moderation amongst ECB hawks, which is likely prodded by very soft lending data in the Q1 ECB bank lending survey.

    US banks are again under stress. The US regional banks ETF fell by 5% overnight, taking its loss this week to 15% since First Republic entered receivership. News that a Canadian bank has withdrawn its proposed acquisition of a US bank, and speculation of other banks exploring strategic options, have all weighed on sentiment.  In our view, this recent sell-off no longer reflects deeper liquidity woes as deposits had stabilized, but it does flag investor caution over risks of capital shortfalls, dividend stoppage, and a deterioration in loans quality amid high rates.

    Amid such uncertainty, safe havens benefited. US Treasury yields slipped while the JPY rallied back to levels seen before last Friday’s BOJ meeting. The sharp JPY rally this week can be ascribed to a confluence of stretched JPY moves post-BOJ, heavy non-commercial short positions being trimmed, and thinner JPY liquidity with Japan out for Golden Week holidays. USD/JPY tumbled towards 134, while EUR/JPY also declined to 148.

    Bank of Canada Governor Macklem stated in a speech that the BOC is prepared to hike again if inflation doesn’t slow. A rate hike would be quite a turn given the BOC’s policy pause since January, with Macklem now saying that he is more worried about upside risks to inflation amid a still tight labour market. USD/CAD broke below 1.36 overnight, with markets likely to remember RBA’s surprise rate hike this month after a pause.

    China’s private manufacturing PMI for Apr corroborate a slowdown indicated by the official PMI, coming in at 49.5. The reopening has not bolstered manufacturing much with a global slowdown in goods demand. However, media reports of high mainland visitor numbers to Hong Kong and Macau during the Golden Week suggest that services should remain strong. This may reassure investors that China’s recovery is still intact albeit uneven, limiting RMB weakness.


    Chang Wei Liang

    FX & Credit Strategist


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