Yesterday's European Central Bank (ECB) meeting was not as dovish as I expected as Mario Draghi and company entirely failed to roll out actual new easing measures, such as the much bandied about cessation of SMP sterilisation or even a funding-for-lending scheme. All of the rhetoric on inflation pointed to a strong belief that no deflationary dynamic threatens, even if the Eurozone faces a long period of low inflation and that inflation will eventually pick up next year and thereafter. Still, the EUR bears could hang their hats on two things: that Draghi suggested growth risks were to the downside and, most of all, that the ECB was “unanimous” in its agreement that unconventional tools could be used if and when needed. Draghi even rounded this out in the Q&A by specifically mentioning quantitative easing. This eliminates the idea that the German Bundesbank sticklers will obstruct more aggressive ECB policymaking if the Eurozone numbers begin to weaken from here.
EURUSD pushed below the 1.3707 support, which was unable to contain the selling pressure and could be on the express train to 1.3500 or slightly lower. Note the EURCHF upside despite ECB dovishness; this was a theme I suggested was likely because a more accommodative ECB unwound the pressure on the CHF to strengthen it as a safe haven from EU tail risks. Interesting as well that EURCHF and EURUSD have been negatively correlated for some time now, suggesting that further EURUSD downside makes USDCHF the high beta way to look for further USD strength from here.
Chart: EURUSD
The main area of congestion lower in EURUSD would appear to come in between 1.3500 and 1.3400 and the rising trend line will hit that area about mid-May. We may need to either see clearly weaker Eurozone data and/or even clearer guidance from the ECB that it is mobilising actual new policy initiatives (rather than merely discussing its intention to use them if needed) to push EURUSD lower than that area. On the flip side, if we don’t follow through lower very soon and see weaker US data, a move back above 1.3800 would neutralise the downside bias.
Looking ahead
For those living under a rock, it is US employment report day (and Canada employment and Ivey PMI day as well). The market is looking for some bounce back in the non-farm payrolls number after the winter disruptions have clearly plagued the US numbers to a degree in recent months. I suspect the risk is skewed to a stronger than expected reading well above 200k (Bloomberg expectations are just under 200k). The most interesting scenario would be a very strong number of more than 250k and the unemployment rate actually hitting the abandoned 6.5 percent US Federal Reserve threshold. Certainly, the stronger the number, the more it is likely to threaten the “pro-risk” currencies that are vulnerable to prospects for tighter liquidity. This is on the idea that the Fed would need to step up the tapering rhetoric and bring forward the timing of the first hike to as soon as the end of this year — certainly something the market is not prepared for at present. 250K might not be enough to bring that scenario into full gear, but 300k would certainly throw a grenade on the dance floor of the market’s assumptions about Fed policy (because Fed policy is reactive, anyway, and "firmly anchored" in the rear-view mirror).
Stay careful out there.
Chart: GBPCAD
Some of the CAD crosses are interesting as most have a positive correlation with USD crosses and a stronger USD could also pull CAD stronger. CAD crosses are also in focus with the Canadian employment report for March and latest PMI out later today. GBPCAD is an interesting case study as it has been one of the most spectacular trenders over the past 12 months and is pushing at key support here locally as major Europe/USD crosses are in breakout alignments as well.
Economic Data Highlights
- Germany Feb. Factory Orders out at +0.6% MoM vs. +0.2% expected (Jan. revised down to +0.1% from +1.2%)
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Feb. Service/Industrial Production and Industrial Orders (07:30)
- Germany/France/Italy Mar. Retail PMI (08:10)
- Euro Zone Mar. Retail PMI (08:10)
- US Mar. Change in Non-farm Payrolls (12:30)
- US Mar. Unemployment Rate (12:30)
- US Mar. Average Hourly Earnings and Average Weekly Hours (12:30)
- Canada Mar. Unemployment Rate and Net Change in Employment (12:30)
- Canada Mar. Ivey PMI (14:00)
- Australia Mar. AiG Performance of Construction Index (23:30)