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Research Market strategy
by Swissquote Analysts
Daily Market Brief

ECB: The currency war is on, buy high beta EM despite pullback

European Central Bank tries to restrain the EUR/USD, but it won’t work

By Yann Quelenn

Unsurprisingly the European central bank has held its rates steady yesterday at 0% for 17th consecutive month. The ECB meeting took place against a backdrop of strengthening of the single currency. The EURUSD pair has reached 1.16 for the first time in two years.

ECB President Mario Draghi appeared dovish, certainly in an effort to calm down financial markets and the euro appreciation. Markets did not buy it and they still believe that further tightening are on the roadmap and this sentiment is largely boosting the Eurodollar.

While he mentioned in June that the ECB monetary policy would follow the Eurozone recovery, which had already been interpreted as hawkish by markets at the time, he appeared yesterday concerned about the Eurozone inflation path. He mentioned that the current QE could be increased. In other words, a larger volume of bonds could be purchased and with larger duration.

In our view, this is unlikely. We believe that the bonds scarcity in the markets would prevent such a possibility and Draghi’s verbal intervention was more of an attempt to devalue the euro. At next September meeting will be discussed the bonds purchase and it is clear that the program will be held unchanged until its term in December just because the ECB cannot increase it. The single currency is definitely on its way up.

Buy high-beta emerging-market currencies such as Indonesian rupiah

By Peter Rosenstreich

As was widely expected the Bank of Indonesia held its key 7day repo rate at 4.75%. Yet the overall effect and tone was slightly dovish. The decision was based on the central banks effort to keep a balanced approach between supporting recovering economic growth and maintaining financial vigilance. On the growth front BI indicated that the economic recovery would decelerated but continue at a decent pace on the back of solid export expansion.

BI forecast anticipated GDP growth at 5.0% to 5.4% in 2017. Despite the stable growth and holiday season inflation remained subdued well within the 4% 2017 target area. In regards to the IDR, the banks was not concerned over recent appreciation as the price movement was due to stable capital inflows. We anticipate policy strategy will remain unchanged with a bias towards easing to support slowing growth for the remainder of 2017. BI decision to not begin slashing rates and overall risk supportive environment should further support our view to be long carry, specifically IDR.

Expectations for a Fed December 25bp rate hike continue to decrease (helped by Yellen’s dovish comments) while the ability for the Trump administration to pass anything of value is in significant doubt. In addition ECBs Draghi was unable to convince the markets that his next more would not be towards normalization which resulted in massive USD selling.
Thin summer trading volume often distorts the meaning of normal market moves, such as the case with the risk of trading today. Yet this would be an opportunity to reload longs on high beta and interest rate EMs for conditions are prime for further upside momentum.

 
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