John Hardy, the head of foreign exchange strategy at Saxo Bank Saxo Bank, talks about how the European Central Bank meeting on June 5 would affect and move the currency market.
What is the asset class and geography you are focused on?
I focus 99 per cent of my time on the 10 to 12 most-traded currencies, including the Mexican peso, Canadian and US dollars, Swedish and Norwegian krona, Japanese yen, and Australian and New Zealand dollars.
What is the outlook for the month ahead?
This month does contain a number of interesting event risks, so plenty could happen in the shorter term. The market will be focusing on the important European Central Bank (ECB) meeting on June 5, as they have clear expectations for new policy action that the market will react to one way or another. My expectation is that we have seen a top in the euro, as the ECB is about to swing into action with new policy measures — but measures that may be more aimed at supporting bank lending and getting credit to the economy rather than pumping asset prices like the US Federal Reserve has done with its asset purchase programmes. In recent months, the market may have over-anticipated the ECB’s ability to spark an asset price rally like the one seen in the US over much of last year. It looks like the ECB will move forward with negative rates, which will also discourage euro buying. Euro/US dollar may never trade 1.4000 again if the ECB moves sufficiently strong at the meeting and subsequently. If the ECB does too little at this meeting, on the other hand, 1.4000 might just trade — but it won’t likely stay that high for long because the ECB is determined to keep the risk of deflation from a higher exchange rate from materialising. There will be a quick and large response if the euro doesn’t weaken further. Also, we have the US Federal Open Market Committee meeting on June 18, in which the Fed will make its latest projections on the economy and for the Fed Funds rate through 2016. The market has taken expectations for Fed dovishness back to medium-term extremes, so it is hard to see how the outlook can go any further south for the Fed from here.
Another development I am looking for over the next one to three months is whether general risk appetite suffers a setback as the market frets the ongoing Fed reduction of accommodation. Volatility of the major currencies could continue a while longer, but historically these episodes quickly yield to strong market moves. History doesn’t repeat, but things are looking too quiet lately.
What are the main risks to the outlook?
The main risk to my expectations is if the market decides that whatever the ECB comes up with isn’t enough to discourage euro buying. More broadly, my general feeling that markets are excessively complacent could be sorely challenged if emerging market currencies and other risky assets continue to push strongly higher from here on the general ongoing belief that it doesn’t pay to worry because the central banks simply won’t allow anything bad to happen.
What is the best investment at the moment?
Among the major currencies, I think the US dollar remains primed to do well in the months ahead. It was near its weakest levels in years recently, but managed to pull back from the brink, even as the outlook for Fed action is as quiet as it has ever been over the last year or more. The potential for upside should pick up if the US economic data continues to improve. I like being long on the US dollar versus the euro, and against the Australian and New Zealand dollars.
What was the best investment you were involved in?
One of the better trading successes I had over the past few weeks was getting short the euro during [ECB president Mario] Draghi’s press conference on May 9 when I saw how quickly the EUR/USD pulled back from 1.4000 after he began to discuss possible ECB measures, even though his remarks were rather offhand and made during the question and answer session. It showed that the euro longs were a weak hand and easily disappointed. Indeed, the euro/US dollar has pulled back sharply since then.
What was the worst?
Over the past couple of weeks, I have tried to position myself for a larger rally in the US dollar against a couple of the currencies it has failed to rally against, namely the Canadian dollar and British sterling. I took the positions in the options market, but the currency pairs failed to move much, even if they’re moved in the right direction from the time I made these trades. That’s the challenge with looking for buying options — you can be right about the general direction but fail to get paid if the move is not sufficiently large.
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