The ECB policy meeting on Thursday is going to be a doozie

Outlook: We get US trade today, but it’s the Beige Book that will grab attention. Richmond Fed Barkin sets the stage with a remark to the FT that a 4% Fed funds rate would not surprise him. Mester and Brainard also speak today. Critics can scan the Beige Book seeking anything resembling a dove, but to no avail. The Bank of Canada meets today and is expected to do 75 bp. Tomorrow, Mexico reports August CPI, likely to feed expectations of the central bank matching the Fed with 75 bp but not until the next policy meeting on Sept 29.

We get a fresh Atlanta Fed update today. Remember last week it was a stunning 2.6% (from 1.6%).

The ECB policy meeting on Thursday is going to be a doozie. Expectations are still running high for front-loading with 75 bp, but even if it’s 50 bp, tightening is the stance via other methods, specifically the asset purchase program (APP), still in high gear, and PEPP, plus July’s TPI (Transmission Protection Instrument) aiming to limiting divergences in bond spreads. Surprisingly, sentiment is more negative than indicators validate, as Econoday points out: “… not only is the ECB now much more focused on tackling inflation than bolstering growth but the Eurozone economic activity has actually been outperforming market expectations anyway.” This is a vote for 75 bp. 

The euro is not (so far) matching yesterday historic low. While the euro is still hanging on by its fingernails, we have other record lows in other currencies. Sterling fell 1.1443, a 29-month low.

More dramatically, dollar/yen rose over ¥144 for the worst reading since August 1998. It’s about a 20% depreciation for the yen and sure enough, faint whispers of intervention are in the air. FinMin Suzuki said recent yen moves are "somewhat rapid and one-sided," a bit more pointed than other recent comments. “We’ll keep watching the markets with a high sense of urgency, and if the moves continue we’ll respond as needed.” This is still far off a line in the sand and expresses more concern for the pace of the move than the actual level (which feeds Japanese inflation a little but benefits exports by more).

We haven’t had BoJ intervention since Fukushima in 2011, a special case. Before that, it was 1998 and the rate was about 147.65. But critics say to intervene now would be to spit in the ocean because it’s the relative rates forcing this move and Japan can more easily and cheaply change that by getting rid of the rate cap.

The dollar/renminbi is also overly firm. See the chart. Breakouts like this are abnormal and lead to tears.

The most noteworthy thing about the FX landscape is the euro consolidating while other currencies are catching up, so to speak. There seems to be some underlying firmness in the euro that is inexplicable, unless we think that fending off recession as much as possible via debt funding is viable. This is also what seems to be happening in Britain, too, despite the Conservatives’ usual abhorrence of public debt. We have not reached emergency levels yet but breakouts like these can end badly when big traders start closing out positions and set off landslides.

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