FX Update: Draghi Needs The Bazooka At Today’s ECB

 | Jun 03, 2015 05:13AM ET

We saw a vicious squeeze across the board in euro, purportedly on the prospects of an imminent deal between Greece and its creditors as well as a higher CPI print.

The Financial Times, among others, suggests that the deal put together by Greece’s creditors is so far from what the Greek side finds acceptable that it remains very much in doubt.

Eurogroup president Anton Dijsselbloem said yesterday that we could still be weeks from an agreement, but the market has taken things into its own hands a bit, judging from the euro squeeze and the pickup in EURCHF.

The potential for further upside in the latter may be considerable (several hundred pips) if we move toward a deal that keeps Greece in the union and is a “permanent” solution, ie, not some deal that merely extends the deadlines another few weeks/months.

Today is European Central Bank meeting day, and Mario Draghi’s performance at the press conference will be critical as one of the significant drivers of the euro squeeze higher was another spike in European sovereign bond yields yesterday – particularly bunds.

This is a follow up move after an enormous bond sell-off in late April/early May and comes despite a furious rate of ECB quantitative easing purchases that are ironically intended to keep bond rates (and one would think, bond market volatility in particularly) at very low levels – particularly for the periphery.

Peripheral yields have moved even more over the cycle since late April, although yesterday’s move was more intense in German debt. What can Draghi and company do to engineer a sentiment shift in European bond markets?

Draghi will need to come up with a big bazooka announcement today to get ahead of the bond market moves – something even akin to the July 2012 “whatever it takes” speech.

Australia’s GDP came in slightly stronger than expected and yields pulled higher still as the market unwinds Reserve Bank of Australia cut expectations out the curve, but we remain convinced that the market is the wrong way on both the RBA’s intentions and the prospect for Australia’s economy. And a few weeks from Q3, the Q1 data is ancient history…

Chart: USDJPY

While the USD bulls have suffered a major setback until EURUSD gets back below the 1.1065/1.1000 zone again, USDJPY is still in the clear and has plenty of room ahead of key support levels, starting with the 38.2% Fibo around 122.70 and the ultimate zone toward 122.00/121.50. Looking for a strong follow up move higher from wherever we find support if the US data today and Friday impresses.