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Praet’s ‘No Taboo’ means ‘more ECB QE’ and weaker euro
Yen gained in Tokyo, Japanese stocks traded south on uncertainties before the BoJ meeting. The US dollar could soon slip below 120 against the yen, yet euro-dollar is definitely comfortable above 1.10 mark for the moment as FOMC is given almost no chance of hiking the interest rates at this week’s meeting.

The euro above $1.10 may not last however as the ECB is ready to fight full-hearted to prevent any appreciation in the euro. ECB’s Praet said there is ‘no taboo’ on ECB’s policy path.

‘No Taboo’ is naturally interpreted as ‘ more QE from December’. Hence, it is just a matter of time for the EURUSD to resume its slide toward 1.08/1.05 band.

The euro demand as funding currency, which is responsible for its metamorphosis into a ‘safe-haven’ currency at times of carry unwind, is still a sizeable upside risks on the euro-complex. And the negative euro rates will certainly not be helpful to eliminate any of the motivation for the cheap euro funding. Even less when the Fed will start raising the US rates.

DXY tops at 97, US 10y yields are back below 2.05%.

The Fed could take a breather as US lawmakers found a common ground on budget to avoid a second government shutdown in three years.

We had no doubt that a deal on the US debt ceiling would be reached to avoid any default risk walking into the election year. However, the concretisation of an agreement between the White House and US lawmakers will certainly remove some political uncertainty for Fed as it starts its two day meeting.

The Fed is expected to maintain the status quo. And frankly, a Fed rate hike could even be inappropriate given that all leading central banks, except the BoE, are stepping back to unorthodox monetary policies. Status quo per se is a sufficient hawkish divergence for the Fed. Raising the US rates could cause an inappropriate USD appreciation and the Fed would then be the only one to blame.

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