Article / 08 May 2014 at 7:32 GMT

FX Update: Surprise side is clear for today’s ECB meeting

Head of FX Strategy / Saxo Bank
• AUD rallied on strong data
• German fundamentals just could be at odds with optimism
• Might Draghi & Co. surprise with something new?

By John J Hardy

Australia was out with another solid jobs report overnight, beating expectations slightly after the previous month’s strong data (thus avoiding the common mean reversion phenomenon this time around). The unemployment rate remained steady at 5.8 percent rather than ticking higher. AUD responded by pulling to new local highs versus the greenback and rallying more impressively versus the Kiwi. The 1.0900 level is a key focus for that pair if we are to see broader signs that the Kiwi’s days as the strongest G10 currency are over. Still, if we look at Australia’s 2-year swap rates, we’re not seeing any momentum building in the forward rate view, so I wonder if the locally bullish technicals have much further potential here. 

Germany’s March industrial production figures disappointed after the even more dispiriting release of March factory – is this a budding story even as the market is taking the line that Eurozone growth fundamentals are picking up? Stay tuned.

Yesterday’s testimony from Fed chair Janet Yellen was generally dovish, as the market thoroughly expected, though there was enough hope expressed that the economy remains on the mend that the market avoided any detectable shift in forward expectations of the Fed’s policy trajectory.

A bigger splash on risk appetite yesterday came as Russian president Putin announced he was pulling troops away from the Ukrainian border and told "Russian separatists" to postpone the referendum on secession.

Looking ahead

We have a Norges Bank policy meeting today. Norwegian rates at the front of the curve have been generally higher since late January, so we need to get a bit of a pickup in Norges Bank rhetoric to the hawkish side if we are to get further NOK upside from here. Technically, the key EURNOK pair is poised near the 8.20 range lows and the 200-day moving average a bit higher as we go into today’s meeting. The gap risk is large either way on surprises.

ECB preview

The key focus is of course the ECB meeting and bank chief Mario Draghi's press conference. It feels like the market is leaning quite hard on the ECB not doing much today – meaning that the surprise side would be Draghi actually taking new easing steps rather than merely talking the dovish talk. These could include an official cessation of SMP sterilisation and more specific and firm forward guidance on a coming ECB plan to bring relief to European banks’ balance sheets (some facility structured to kickstart the asset-backed security market or something of that nature – get ready for a new three- or four-letter acronym that we’ll all throw around daily for the next two years).


Draghi could, conceivably, stop dithering and start acting on SMP sterilisation or banks' balance sheets.
Photo: Hannelore Foerster


The technicals don’t matter much here as we face a key event risk with today’s ECB meeting, but let’s see what unfolds and where we close today. A close above the local highs would possibly setup a move toward 1.4100+, though big round levels are often extremely sticky in EURUSD (perhaps due to central bank reserve adjustment activity around key levels.). To the downside, a close that erases most of the last rally leg (perhaps below about 1.3850) would offer bears a glimmer of hope.


Source: Bloomberg and Saxo Bank

EURUSD knocking on the 1.40’s door is also a factor in favour of acting today rather than at the June or July meeting. I think the odds are higher than the market appreciates for a move today, though they may be equal to the risk that we get nothing concrete just yet from the Draghi ECB and have to toy with EURUSD above 1.4000 for a few weeks until we begin to anticipate the EU parliamentary elections and the June ECB meeting. Let’s call the market 80/20 on no ECB move and me 50/50 with the hope that we see a real policy move.

I expect the usual radio silence from the Bank of England announcement window today. The market awaits next week’s quarterly BoE inflation report for more policy input.

Watch today’s Canada housing starts numbers. I suspect 2014 is the year the Canadian housing market bubble, far larger in per capita terms than the US bubble ever way, finally starts to unwind. 

Economic Data Highlights 
  • UK Apr. RICS House Price Balance out at 54% vs. 55% expected and 57% in Mar.
  • New Zealand Apr. QV House Prices out at +8.4% YoY vs. +8.8% in Mar.
  • Australia Apr. Employment Change out at +14.2k vs. +8.8k expected and +21.9k in Mar.
  • Australia Apr. Unemployment Rate steady at 5.8% vs. rise to 5.9% expected
  • China Apr. Trade Balance out at +$18.46B vs. +$16.7B expected and +$7.7B in Mar.
  • Germany Mar. Industrial Production out at -0.5% MoM and +3.0% YoY vs. +0.2%/+4.4% expected, respectively and vs. +4.7% YoY in Feb.

Upcoming Economic Calendar Highlights (all times GMT)
  • Switzerland Apr. CPI (0715)
  • Sweden Apr. Average House Prices (0730)
  • Norway Norges Bank Rate Announcement (0800)
  • Norway Norges Bank’s Olsen holds press conference (0800)
  • Norway Mar. Industrial Production/Industrial Product Manufacturing (0800)
  • UK Bank of England Rate/Asset Purchase Target Announcement (1100)
  • Eurozone ECB Rate Announcement (1145)
  • Canada Apr. Housing Starts (1215)
  • Eurozone ECB’s Draghi holds press conference (1230)
  • Canada Mar. New Housing Price Index (1230)
  • US Weekly Initial Jobless Claims (1230)
  • US Fed’s Evans to Speak (1325)
  • US Fed’s Tarullo to Speak (1330)
  • US Fed’s Yellen Testifies to Senate Budget Committee (1330)
  • US Weekly Bloomberg Consumer Comfort Survey (1345)
  • Switzerland SNB’s Danthine to Speak (1630)
  • New Zealand Apr. Credit Card Spending (2245)
  • China Apr. PPI/CPI (0130)
  • Australia RBA Monetary Policy Statement (0130)

— Edited by Clare MacCarthy


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