ECB on tap – no rate cut expected, but could we see a set up meeting for a rate cut down the road? Also, the US employment report could move market more than recent reports if it proves a surprise to consensus.
RBNZ vote of confidence
The RBNZ’s vote of confidence in the economy and view that the unemployment rate is overstated boosted the kiwi strongly overnight, with two-year NZD swap rates vaulting a fairly chunky 9 bps overnight. This removed much of the forward projections looking for a rate cut from the RBNZ in the year ahead, with only about 11 bps of easing for the 12 months forward now priced in. AUD/NZD swooped lower on the news and NZD/USD challenged two-month highs before backing off a bit.
Odd Australia employment report
The Australian employment report was nominally positive, with better-than-expected payroll growth, though full time positions were negative on the month. The huge drop in the unemployment rate was tough to explain from the payrolls or the small change in the participation rate. AUD/USD tried to rally on the news, but stayed within the mind-numbing 80-pip range that has reigned for the last two weeks as 12-month forward Australia STIRs rallied several ticks and the aussie was also under pressure from AUD/NZD selling.
LDP ally cautions Abe
Bloomberg ran an article discussing a warning by the LDP party’s main ally (New Komeito Party) on Abe’s offensive on BoJ policy. The spokesman indicated concern that the BoJ would lose independence. As well, the NKP is against the aggressive line on defensive spending and likely the confrontational attitude on the islands dispute with China as well.
Looking ahead
We’ve got the BoE (no expectations) and ECB (rate cut or not?) on tap later today. A very small minority is looking for a rate cut from the ECB, so it will be a considerable surprise if they do move on rates – though we could also see a “set-up” for a cut rather than an actual cut as a still-dovish alternative scenario.
The rhetoric on inflation has eased to the dovish side recently. In any case, it appears that the 1.3000 psychological magnet could continue to attract the EUR/USD on any hint of a rate cut in the pipeline after yesterday’s re-widening in peripheral bond spreads. We’ve got a French auction for 6-,7- and 15-year bonds up at 1000 GMT today.
As for the BoE, one wonders if there is a bit of policy change vacuum until Carney takes over in about six months time, which could be passively GBP positive. EUR/GBP is looking toppish now as long as 0.8150 remains intact as resistance.
The euro is looking a bit weak heading into the meeting due to yesterday’s weak Spanish bond auction that saw peripheral spreads perking up again – as the “tail risk” remains the focus for now. Meanwhile, straightforward yield differentials suggest that EUR/USD should be trading much lower, so there is an interesting tension in the fundamentals.
Tomorrow we have the US employment report, which hasn’t been a big mover of the USD in the past, but could have a bit more potential to move the USD crosses as the USD is on the ropes lately at range extremes in many cases. But the main event will be next Wednesday’s FOMC meeting.
Economic Data Highlights
- New Zealand RBNZ left Official Cash Target unchanged at 2.50% as expected
- Australia November Employment Change out at +13.9k vs. 0.0k expected and +10.2k in October
- Australia November Unemployment Rate out at 5.2% vs. 5.5% expected and 5.4% in October
- Switzerland November Unemployment Rate out unchanged at 3.0% as expected
- UK November Halifax House Prices out at -1.3% 3-months/YoY vs. -1.9% expected and -1.7% in October
- Switzerland November CPI (0815)
- UK October Visible Trade Balance (0930)
- Eurozone Q3 GDP (1000)
- Germany October Factory Orders (1100)
- UK BoE Announces Rates/Asset Purchase Targets (1200)
- US November Challenger Job Cuts (1230)
- Eurozone ECB Announces Interest Rate (1245)
- Eurozone ECB President Draghi Press Conference (1330)
- Canada October Building Permits (1330)
- US Weekly Initial Jobless Claims (1330)
- US Weekly Continuing Claims (1330)
- US Weekly Bloomberg Consumer Comfort Index (1445)
- Canada November Ivey PMI (1500)