Euro Rebounded On Receding Expectations Of ECB Rate Cut

The euro rebounded broadly overnight on building expectations that ECB would keep the policy rate unchanged at 0.75% this week. According to a Reuters poll, 67 out of 73 surveyed economists are expecting ECB to stand pat. Though, forward rate contracts are still pricing in a 25bos cut by then end of June. It's perceived that while ECB has indicated the openness to a rate cut, the decision will largely depend on the willingness of core Eurozone countries. Germany CPI rose more than expected to 2.1% yoy back in December while Eurozone CPI also continued to stay above ECB's target and was at 2.2% yoy. The stubborn inflation reading would probably tie up ECB's hands for cutting rates in Q1.

There was also additional support for the common currency from news that former Italian prime minister Berlusconi won't run for the post again, for the fourth time, in February's election even if his alliance wins. Markets are cautious on the election results as the reform programs brought in by prime minister Monti's technocratic government are temporary and need to be replaced by formal laws. Currently, central left alliance leader Pier Luigi Bersani is running ahead in polls but relatively little was heard from him.

In the US, the Bipartisan Policy Center said in a statement that the US government will be unable to pay all of its bills as early as February 15. And it warned that "we have less time to solve this problem than many realize" as the Treasury will "exhaust its borrowing authority and no longer have sufficient funds to meet its obligations in full and on time at some point between February 15 and March 1."

It emphasized that it will be difficult to get beyond March 1. Also, the policy group predicts that a debt limit increase of $1.1T is needed to fund the government through the end of 2013. And, another $1T is needed for 2014. While the tax portion of the fiscal cliff issue was solved earlier this year, there is still much negotiation to be done between Democrats and Republicans on spending cuts and the debt ceiling. Meanwhile, it's reported that US president Obama is close to choosing White House Chief of Staff Jack Lew to replace Timothy Geithner as Secretary of the Treasury and there would be an announcement as soon as this week.

Trading volume in the FX markets dropped much back in December due to low volatility and a sluggish global economy. Average daily volume on Thomson Reuters dealing platform dropped -10.5T yoy to $102b in December. ICAP also reported that average daily volume on ECB dropped -1.4% yoy to $91.8b in December. While December is traditionally a low month, the numbers would catch some attention when comparing to the figure of $274.2b recorded back in September 2008.

Data from Australia saw trade deficit widened to AUD 2.637b in November, bigger than expectation of AUD 2.30b. Prior month's deficit was also revised higher to AUD 2.433b. The 1% growth in exports were more than offset by the 2% jump in imports. UK BRC sales monitor rose 0.3% yoy in December. Swiss unemployment, German trade balance, eurozone retail sales, unemployment and confidence indicators will be released later today.