Mario Draghi Under The Spotlight

We stand ready for two-side volatility

The ECB gives policy verdict today and the President Mario Draghi’s press conference will be at the centre of attention. We will be concentrated on potential disclosure of further technical details on the Quantitative Easing program, the ECB’s forward guidance in the mid-term and an update of perception regarding the Greek situation. Also, we are curious to hear what Draghi has to say about the drastic impact of the QE program on Eurozone’s sovereign debt markets, the negative rates, whether the aggressive market reaction and the snowball effect that it has created may impact the future of the QE program. UBS has already started chattering about the possibility of an early exit; “ECB has repeatedly argued that its constructive staff macroeconomic forecast from March relies on the QE programme being implemented in full, i.e at least until September 2016. Yet the early impact of QE has been so pronounced that the ECB is already facing questions as to whether it might have to end it before September 2016”.

Yesterday’s EUR/USD rally has been solely due to the aggressive USD sell-off as the US retail sales missed the market estimates in March. The positive news from JPMorgan (NYSE:JPM) and Johnson & Johnson (NYSE:JNJ) remained under the shadow of soft retail sales, therefore giving little conviction to the market to stay on the buy side in USD. Investors are now concerned that the strong USD may hit corporate revenues moving forward, which in our view should only remain an ephemeral feeling. We see broad correction in USD verse the G10 currencies since early trading today. On the equity side, US Bancorp (NYSE:USB), Charles Schwab (NYSE:SCHW), Kinder Morgan and PNC Financial Services Group (NYSE:PNC) will release results. Even in case of weak earnings, we see little chance for the Fed stepping back from its plans to start normalizing sometime in the second half of the year; the high probability scenarios are still June or September start. Therefore, the potentially weak earnings announcements might revive short-run hope for a later Fed rate hike; however the conviction should stay firmly limited on a further dovish shift in Fed scenarios.

In the short-run, Draghi’s speech should define the short-term direction given the confusion in technical levels following yesterday’s spin. Technically speaking, any hawkishness could push EUR/USD higher. The upside should remain limited however as the opportunities to sell euros at good prices will certainly not last long given the solid divergence between the ECB and the Fed policies.

Loonie’s relief will certainly not last long

We expect the Bank of Canada to maintain the status quo at today’s meeting. We remain cautious on the recent recovery in Loonie, mostly seen as a short-term breather given the oil recovery. For the real damages on the Canadian economy to be restored however, the oil prices should climb back to $70/80 levels minimum. Therefore, we keep our bearish bias on CAD and do not rule out an additional rate cut over the coming months, especially if the Fed tightening gets delayed. The market is pricing over 50% chance for a September BoC easing according to implied probabilities extracted from the bond markets. We have good conviction that the USD/CAD should pause before a renewed boost toward fresh 6-year highs (above 1.2830), then 1.2920/1.3000. The key support is seen at 1.2350/90 (3-month support area).

Some colour out of Asia

The Chinese GDP growth slowed from 7.3% to 7%y/y in Q1 in line with expectations. The reluctance to invest continues despite lower PBoC rates as final demand has hard time picking up. Despite all efforts, China might fail to secure 7% growth target in 2015. This indicates that there is a scope for further PBoC action on rates and the reserve requirement rations in weeks ahead.

Concerns on China weigh on the Aussie. The AUD/USD consolidates weakness below the conversion line (0.7646) despite yesterday’s heavy USD unwinds. The market shifts to the sell side with decent vanilla puts placed between 0.75/0.76 for today’s expiry.