The Forgotten Central Bank
Since the beginning of the week, today’s European Central Bank meeting has been earmarked as the most important data point and there is much reason to believe that it will be actually be the most important meeting of the month.
This month’s press conference takes place in Malta this afternoon and when I stop to think about it, I cannot remember analysts being so unanimous around an expectation of further easing at some point in the near future. Some may think that is a sure fire sign that we are all wrong, but the data and recent comments do back up a more stimulatory policy change later down the line.
Timing is the dealbreaker
That is not to say that it happens today, however, and I am of the belief that the initial announcement of no change in policy will lead to a brief spike in the single currency. We will have to wait until Mario Draghi starts speaking at 13.30 BST before his dovish patter increases pressure on the euro.
I think that the overall message that the European Central Bank will try to communicate to the markets today is that all policy options are open at the December 3rd meeting that will see the Bank also release its latest economic forecasts.
What can they do?
Of course, the options open to the European Central Bank are fairly vanilla; an expansion/enhancement of its QE program beyond September 2016 i.e. buying more assets for longer or a further cut in the Bank’s already negative deposit rate. The latter would have a more pernicious effect on the euro in the short term.
Indeed it is the euro that is the main barometer of these financial conditions for most central bank watchers and its run higher on haven flows will have tightened financial conditions – albeit slightly – in the past few months. EUR/USD at or around 1.15 remains a market ‘line in the sand’ and I would be very surprised if the European Central Bank did anything to put that level in danger.
That being said, given the overwhelming level of belief that the ECB will be dovish and the euro will fall, the value bet is to the high side.
The ECB will announce policy at 12.45 BST with the press conference taking place 45 minutes later.
Markets turn to RBA
Overnight moves in the Australian mortgage market have seen the AUD rock and roll through the Asian session. Commonwealth Bank (AX:CBA) is Australia’s largest mortgage lender and overnight announced a 15bps increase in its effective rate on mortgages. This is a tightening of monetary conditions – making money more expensive – and follows a similar announcement from Westpac (AX:WBC) a few weeks ago.
AUD has slipped on the belief that the Reserve Bank of Australia will have to lower interest rates in the coming months as a result. Markets are pricing in one additional rate cut in the coming six months this morning.
The Day Ahead
Elsewhere we have UK retail sales at 09.30 which should continue their expansionary track given the low inflation/rising wage dynamics that very much favour the UK consumer.