Draghi Hints At Further Policy Action

Forex News and Events:

EUR to head lower

ECB president Daghi sounded exceedingly dovish (stealing the spotlight from Yellen) as he signaled that action would come as inflation continued to slide. He acknowledges that an expectation for inflation in the Eurozone has decreased. He stated that “the Governing Council will acknowledge these developments and within its mandate will use all of the available instruments needed to ensure price stability over the medium term.” Developments this week have only strengthened our opinion that in the medium-term EUR will continue to depreciate. The pace of deflation in the euro-area has only increased despite the ECBs radical feat of negative interest rates. July headline inflation in the euro area fell to 0.4% from 0.5%, which extends the downwards trend since October 2011. On the growth side, GDP failed to expand in Q2 coming in at 0.0%. Economies of Italy and Germany contracted while France came in at 0.0%. In a twist of fate the engine of growth in Europe was saved by performance in periphery (yet numbers were distorted by a ultra-weak Q1). Forward looking indicators are not more encouraging as Euro-area composite PMI declined to 52.8 from 55.7 in July.

While still above the 50 threshold, drops in national PMI reads indicated that the further weakness should be expected. In a negative loop the weaker growth will only increase the pace of disinflation. ECB President Draghi made clear at the August press conference that the ECB stood ready to fight disinflation with “whatever it takes.” In our view, Europe data has crossed the threshold. Since policy measures were announced at its June meeting, headwinds to a recovery have only amplified. Yet so have the inflation raising rhetoric. The ECB would clearly like more time to assess measures already deployed; further delay is more likely to intensify the complexity of the solution. Draghi has a strong track record of delivering timely, market moving, solutions and we don’t expect him to let us down now. The exact nature of the action is still being debated yet undoubtedly ECB’s accommodative stance will expand and extended. In our view impending ECB action will keep EUR weak especially against the USD and GBP.

Thai Baht

The Thai baht fell as the USD rally has started to spread to high-yielding EM currencies. In addition, the baht was not helped by domestic news that the national legislative assembly voted unanimously to select junta leader Prayuth Chan-Ocha as PM. Despite this setback for democracy, with the military government providing much needed stability, domestic demand saw a strong rebound of 10.8% q/q. Thailand reported that Q2 GDP expanded by 0.4% y/y above the market expectations for 0.0%, partially reversing the -0.5% contraction witnessed in Q1. Encouragingly, exports also made a positive contribution to growth (helped by import compression). In addition, investments recovered and consumer confidence returned. While demand is significantly off its 2012 peak, suppressing anti-government protest has allowed commerce to return. We suspect that manufacturing production will remain weak but gains in the service sector should allow further growth recovery.

In the coming months we suspect that business and consumer sentiment will improve and lucrative tourism will accelerate (especially as the curfew gets lifted). The Bank of Thailand (BoT) projections for 2014 growth is a soft 1.5%, which given yesterday’s read, is under 2.0% which we suspect is possible. Finally, the BoT MPC has most likely finished their easing cycle, keeping repurchase market rates at 2.00% from 3.50%. The overall tone of the monetary policy statement was neutral: "current accommodative monetary policy remains appropriate in supporting the economic recovery" yet will keep policy accommodating in support of the government to "complement government's reform efforts to lift the economy's potential growth." As growth outpaces regional rivals and confidence in a stronger national balance sheet lures investors, we suspect THB to continue to recover.

The Risk Today:

EURUSD EUR/USD continues to move lower. The recent new lows confirm persistent selling pressures. The short-term technical structure is negative as long as prices remain below the hourly resistance at 1.3297 (22/08/2014 high). Another resistance stands at 1.3336 (12/08/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The downside risk given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700) has been met. Monitor the key support at 1.3105 (06/09/2013 low) given the general oversold conditions. A key resistance lies at 1.3444 (28/07/2014 high).

GBPUSD GBP/USD is in a declining trend as long as prices remain below the resistance at 1.6739. However, the proximity of the key support at 1.6460 and today's potential bullish intraday reversal increase the odds of a short-term rebound. Hourly resistances can be found at 1.6601 (21/08/2014 high) and 1.6679. In the longer term, the break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) invalidates the positive outlook caused by the previous 4-year highs. However, the lack of medium-term bearish reversal pattern and the short-term oversold conditions do not call for an outright bearish view. A key support stands at 1.6460 (24/03/2014 low).

USDJPY USD/JPY continues to move higher, breaching the key resistance at 104.13. Hourly supports can now be found at 103.50 (22/08/2014 low) and 102.91 (intraday low, see also the rising trendline). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high).

USDCHF USD/CHF has moved above the strong resistance at 0.9156 (see also the 38.2% retracement). Supports can now be found at 0.9104 (22/08/2014 low) and 0.9059 (19/08/2014 low). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. Monitor the test of the strong resistance at 0.9156 (21/01/2014 high). Another resistance stands at 0.9250 (07/11/2013 high).