Intraday Market Thoughts

Lagarde Cautiousness & Biden's Taxes

Apr 22, 2021 22:33 | by Adam Button

All market chatter is about Biden's taxes & their impact on shares and cryptos. But let's discuss that ECB decision first-- The economic outlook is improving in Europe, yet you wouldn't know it from Lagarde's Thursday comments after the ECB decision. The yen was the top performer while the kiwi lagged. Biden's tax proposal is discussed below. The Markit surveys are up next. Below are the messages on upcoming EURUSD descent issued to the WhatsApp Broadcast Group 30 mins ahead of the ECB announcement. The volatility & subsequent selloff followed as foretold.

Click To Enlarge
Lagarde Cautiousness & Biden's Taxes - Whatsapp Ecb Euro Apr 22 2021 (Chart 1)

Expectations were for the ECB to leave PEPP purchases unchanged and that's exactly what they did. However there were some who thought the could pre-announce a return to a slower pace in June but that didn't happen and leaks from deliberations showed it wasn't even discussed.

What was more of a surprise was how somber Lagarde remained. Eurozone economic data has improved considerably since the start of the year and consistently beaten estimates. That was seen again Thursday with consumer confidence rising to -8.1 from -10.8.

Lagarde forecast that growth would 'firm' later in the year and said business investment had been good but there was nothing like the show of confidence we saw from the BOC. In offering a hint at why, Lagarde pointed to a lower level of fiscal support.

The euro sagged after the press conference and briefly broke below 1.20. Much of the decline was on risk aversion in large part due to risk aversion on a pending Biden proposal to raise capital gains taxes. That was something he campaigned on but it evidently took the market by surprise Thursday.

Biden's Tax Proposal

The preliminary tax announcement consists of raising the top income tax rate from 37% to 39.6% and levying income and capital gains tax rates for earners of more than $1mn. Combining these hikes with the those from Obama's health care reform, the cumulative capital gains tax rates on the wealthisest bracket would surpass 43%. Markets sold off on the announcement, but it is not unconceivable for markets to push back up to new highs, before a fresh wave of selling hits ahead of the new legislation.

The day ahead features most of the global manufacturing and services PMIs from Markit. The increases in these metrics in the past 2-3 months have been swift but what's particularly stark is the jump in pricing. Every comment in the KC Fed on Thursday was a nod to supply chain disruptions, soaring commodity costs and labour shortages. “It is very difficult to handle the increased business with supply chain issues across all materials and finding anyone who wants to work,” was one. "Entry level pay will need to be increased. This will create pressure on all other positions,” was another.

موعدنا اليوم في غرفة شركة إكس أم لجلسة الأسواق

Apr 22, 2021 13:32 | by Ashraf Laidi

.ننتظركم الساعة الرابعة عصرا بتوقيت مكة في غرفة إكس إم مع أشرف العايدي .أنقر على الرابط للمشاركة

موعدنا اليوم في غرفة شركة إكس أم لجلسة الأسواق - Xm Banner Room 2Pm Uk 4 Pm Saudi (Chart 1)

The Dam Cracks, ECB Up Next

Apr 22, 2021 12:15 | by Adam Button

Euro at the highs ahead of the ECB decision, with speculation of a possible surprise announcement to taper asset purchases. The Bank of Canada's decision to taper and hint at an earlier rate hike is a crack in the global central banking consensus. The surprise move was a big boost to the Canadian dollar--biggest percentage daily gain in 11 months. The ECB is up next. Announcement at 12:45 pm London, followed by the press conference 45 mins later. Traders should expect lack of unanimity regarding the decision, during and after the press conference. 
Click To Enlarge
The Dam Cracks, ECB Up Next - Eurusd Apr 22 2021 (Chart 1)

As we warned here, the Bank of Canada dialed back QE to $3B/week from $4B/week and brought forward the timeline for when the output gap closes to 2022, which is another way of saying that's when they plan to hike.

The market was not expecting that and what was a true surprise is that BOC Governor Macklem didn't temper the moves with any anti-CAD jawboning or strong caution. There was nothing like a dovish taper. Instead, the BOC boosted its Canadian GDP forecast to 6.5% this year from 4.0% and increased 2022 as well, while also raising the global growth view.

At one point, USD/CAD had fallen 200 pips from pre-announcement levels. The market got caught leaning the wrong and the pair went from a one-month high to a one-month low in 70 minutes. There was a modest bounce late to put the pair back at 1.25000 but the spot to watch now is the 1.2470-60 support zone for further follow through. The positive risk tone the emerged Wednesday will help but the loonie might need some help from commodity prices.

In the bigger picture, the turn in central banking has arrived. The ECB decision is up next and that might include a hint (or commitment) to its own tapering in June when the latest forecasts are published. Eurozone data has far outpaced estimates over the past two months as the economy shrugged off lockdowns.

In the ECB's case though it will be seen as more of a technical move or unwind of the extra buying announced in early March following the bond tantrum.

The market will also be watching the Fed, RBA, and BoE to see who follows Canada. While this is a crack in the dam, it will break when one or two of those follow. When that happens, volatility in FX will dramatically increase.

The Great Monetary Turn Begins

Apr 21, 2021 14:53 | by Adam Button

The pandemic led to the most-aggressive deployment of monetary policy in history but its success means it's already time for withdrawal, something that will begin with the Bank of Canada on Wednesday. The loonie lagged Tuesday ahead of the decision while the yen led the way as risk aversion struck.  Canadian CPI came in under expectations, lifting USDCAD to new session highs of 1.2650s. The crucial BoC decision is next. Watch the 100-DMA in USDCAD @ 1.2670. 

In just over one year, the Bank of Canada has accumulated more than 40% of government bonds outstanding. Even for a challenge like covid-19, the pace of bond buying has been too fast. In November, Macklem made the first move to slow purchases but combined it with a duration extension and successfully finessed it as a technical move.

In Wednesday's decision there is likely to be a true taper to $3B/week from $4B. Such a shift isn't entirely expected and they could wait a bit longer but the central bank has backed itself into a corner. Macklem said that owning more than 50% of outstanding bonds could affect market functioning and even a taper to $3B will put them over that limit in months.

A shift is also entirely justified by the fundamentals. New forecasts for GDP growth this year are likely to be boosted to 6% from 4% even with the latest lockdowns. On top of that commodity prices are high, the reopening timeline is moving forward, this week's Federal budget is stimulative, home prices are sizzling, global growth has been resilient and US stimulus will spillover.

In spite of all that, the consensus view is that Macklem will try to engineer a 'dovish taper' by jawboning on the loonie or moving the goalposts on the output gap to by pledging an inflation overshoot.

Both those things may happen but actions speak louder than words and a taper puts the BOC on the path to tightening.

USD/CAD hit 1.26 in a retracement this week on broader risk aversion but there's plenty to like about the loonie once markets settle.

The BOC decision is at 1400 GMT with a press conference an hour later. Also note that Canadian CPI will be released at 1230 GMT and with headline and two-thirds of the core measures expected above 2%, risks are towards something that could make the BOC think about earlier tightening.

The Great Monetary Turn Begins

Apr 21, 2021 14:53 | by Adam Button

The pandemic led to the most-aggressive deployment of monetary policy in history but its success means it's already time for withdrawal, something that will begin with the Bank of Canada on Wednesday. The loonie lagged Tuesday ahead of the decision while the yen led the way as risk aversion struck.  Canadian CPI came in under expectations, lifting USDCAD to new session highs of 1.2650s. The crucial BoC decision is next. Watch the 100-DMA in USDCAD @ 1.2670. 

In just over one year, the Bank of Canada has accumulated more than 40% of government bonds outstanding. Even for a challenge like covid-19, the pace of bond buying has been too fast. In November, Macklem made the first move to slow purchases but combined it with a duration extension and successfully finessed it as a technical move.

In Wednesday's decision there is likely to be a true taper to $3B/week from $4B. Such a shift isn't entirely expected and they could wait a bit longer but the central bank has backed itself into a corner. Macklem said that owning more than 50% of outstanding bonds could affect market functioning and even a taper to $3B will put them over that limit in months.

A shift is also entirely justified by the fundamentals. New forecasts for GDP growth this year are likely to be boosted to 6% from 4% even with the latest lockdowns. On top of that commodity prices are high, the reopening timeline is moving forward, this week's Federal budget is stimulative, home prices are sizzling, global growth has been resilient and US stimulus will spillover.

In spite of all that, the consensus view is that Macklem will try to engineer a 'dovish taper' by jawboning on the loonie or moving the goalposts on the output gap to by pledging an inflation overshoot.

Both those things may happen but actions speak louder than words and a taper puts the BOC on the path to tightening.

USD/CAD hit 1.26 in a retracement this week on broader risk aversion but there's plenty to like about the loonie once markets settle.

The BOC decision is at 1400 GMT with a press conference an hour later. Also note that Canadian CPI will be released at 1230 GMT and with headline and two-thirds of the core measures expected above 2%, risks are towards something that could make the BOC think about earlier tightening.


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