Today’s European Central Bank, while unlikely to be the one that conjures up any fresh policy from the Bank’s Executive Council, is important for different reasons. As much as last month’s decision to further cut interest rates and launch an ABS plan to purchase assets from the continent’s banking system was what the market had been looking for, many questions surrounding the execution of the newly loose monetary policy remain.
Details of the ABS plan are due today. We are yet to discover how much the plan envisions to buy, how long it will last and what assets it will be targeting. We already know, if yesterday’s FT is anything to go by, that even the rather junky debt of Greece and Cyprus will be in the plan – something that the German members of the European Central Bank are said to be not a little bit displeased about.
We may also get an update on the TLTRO liquidity measures. Markets had expected that Eurozone banks would clamour for the funding and were looking for the uptake to be in the region of EUR150bn. They were left disappointed, however. Only, and I say only in a way that makes sense solely in financial markets, EUR86.2bn was taken up by the sector.
Both the headline and core rates of inflation in the Eurozone were confirmed at cyclical lows according to the preliminary figures for September released this week. The language around inflation from the European Central Bank has been amended to show that they are looking to “closely monitor the risks to the outlook for price developments over the medium term”. Medium term inflation expectations remain below the 2% target and, as long as it does, policy will remain accommodative.
The run of euro weakness seen in the past quarter has been impressive. We know that currencies used to be an implicit run-off from policy – because we are cutting rates, the currency will weaken – but they are now becoming an explicit part of the policy landscape. Just look at the movements in the Japanese yen since the beginning of the Abenomics plan. There is no doubt that the European Central Bank will be wanting to see a weaker euro in the coming quarter.
On the Japanese yen, former Finance Minister Fujii warned last night that the weakness in yen markets may trigger intervention to prop up the currency.
JPY is actually below the 109.00 level against the USD this morning, not because of the risk of an intervention by the Bank of Japan, but a generalised sell-off in the dollar. Dollar is lower against all of its crosses this morning as a combination of a disappointing manufacturing ISM and fears of an overextension began to weigh. Manufacturing growth only slipped to the lowest since June, but a large dip in employment within the sector seemingly was enough to convince dollar bulls to begin to take some cash off the table ahead of tomorrow’s payrolls announcement.
NZD whipsawed through yesterday’s session, initially strengthening following some profit taking on the intervention move, then weaker in the aftermath of a milk powder auction. The average price of a ton of milk powder fell to NZD2,443 – the lowest since August 2009. The price has fallen by 51% since February with milk and dairy products making up around a third of New Zealand exports leaning on GDP expectations.
The European Central Bank press conference at 13.30 this afternoon, following the 12.45 decision, is the main highlight, but data from the UK construction sector (09.30) and US initial jobless claims (also 13.30) are also due.
