Two Rookie C-Bank Leaders, One Question

The dollar resumed its fall on Wednesday as risk assets rebounded and two top central bankers will face questions about how they're dealing with strengthening currencies on Thursday. The Australian dollar led the way Wednesday while the yen lagged. Franc and the euro are the strongest and the Aussie is the weakest. Read carefully:  First is the ECB decision at 1145 GMT (7:45 EST, 15:45 Dubai) and Lagarde's press conference at 1230 GMT. Ashraf reminds us that usually euro has advanced higher right after the decision is announced before stabilising ahead of the press conference. 

The ECB and BOC leaders will both be in the spotlight today and both are facing the same question: How will strengthening currencies affect their plans. EUR and CAD are both up about 10% from the March lows and both currencies are near notable lines in the sand as EUR/USD nears 1.20 and USD/CAD flirts with 1.30.

The BOC decision was on Wednesday and it offered no hints on policy. Rates and QE were left unchanged as was the forward commitment to leaving rates on hold until 2% inflation is “sustainably achieved.” The statement noted stronger economic activity but warned on pandemic risks and highlighted inflation near zero.

BOC Governor Macklem will take questions at 1630 GMT and currency strength is sure to be one of them.

Up first is the ECB decision at 1145 GMT and Lagarde's press conference at 1230 GMT. Like Canada, nothing is expected at this meeting but there's a larger chance of more QE in December if inflation continues to undershoot. At the same time, the economic data has been stronger than anticipated and Bloomberg reported that a slight improvement in economic forecasts is coming. 

Interestingly, the BoC has usually adopted more of a laissez-faire stance on currencies. 

ECB chief economist Lane also put FX on the table on the same day EUR/USD hit 1.20 with a comment that “the euro-dollar rate does matter.” That helped to send the currency swiftly lower.

More importantly, it raised expectations that Lagarde will offer some jawboning regarding the currency. If she stays silent, the default will be for the euro to rise.

Overall, it sets up an interesting day ahead. Two rookie central bank leaders will be asked virtually the same question about strengthening currencies and low inflation. How they respond will be fascinating.

Saying too much is a minefield that would beg for follow-up action or a loss of credibility. Saying too little would be an endorsement of unwanted currency strength. Finding the right balance is almost impossible.