The GBP/USD is pushing below 1.50 this morning; even with the EUR/USD trying to make a stand above 1.30, will it be possible to contain the sterling rout?
Bank of Japan
As expected, the Bank of Japan meeting produced no surprise . One BoJ member, Sayuri Shirai, advocated moving straight to open-ended QE. The rest of the 9 voters voted against her proposal, which makes sense as it is up to the new BoJ leadership to establish policy, not the current lame duck board. But at least we now know that the new Kuroda trio will have at least one very sympathetic ear at the next BoJ meeting on
April 3 - 4. The JPY hardly responded to developments overnight.
BoE preview
There is plenty of opportunity for a kneejerk reaction to the BoE today as the market is rather split on whether the BoE moves with an expansion to the asset purchase programme and if so, by how much. As I have said recently, the GBP looks incredibly weak, and the best that the late comers to the GBP selling frenzy can hope for is a non-move by the BoE, and a kneejerk rally that will give them a fresh selling opportunity into the structural resistance at 1.5200/50. I’m afraid that such a throwback rally in GBP/USD may not be forthcoming, and the pair simply continues to melt lower to 1.4200. There is nothing to support the pound save for ebbs and flows in positioning.
ECB preview
I don’t think it is likely that the Draghi ECB moves rates today – it would be seen as too panicky a move in direct response to the Italian election. There is the potential that we see a downgrade in perceived inflation risks and that this serves as a set-up meeting for a cut at the next meeting, though in the end a 25-bp cut is far less interesting than the future of the ECB balance sheet.
What I will be more interested in, are signs that some solution is being discussed behind the scenes for a way to bring relief from still high sovereign spreads that is an adjustment - or addition to the OMT. As originally designed in an austerity-weary periphery, The OMT will not function. Without an eventual way for the ECB to expand the scope of its activities, the systemic risk/EMU exit potential comes more quickly back into view. Of course, we also have to watch for political news on this front as much as ECB developments, as the ECB’s mandate is more than a bit awkward.
As for near term Euro reaction, the most bullish scenario for the immediate term would be a pass on cutting now (likely), no downgrade of the inflation outlook (I think it more likely we get a downgrade of the language on growth and possibly inflation) and then no mention at all of anything related to balance sheet options (I don’t know for now…). This could set in motion a EUR/USD consolidation back higher to local resistance areas, but the overall down-trend is likely to remain intact beyond the shortest term as such an ECB performance would leave too many questions unanswered and do nothing for the general uncertainty level.
So, whether we get a 1.3150-1.3250 rally (1.3070/80 is short term key) here to consolidate the tremendous move from the 1.3710 top, I’m still focused on downside potential toward 1.2850 (the 200-day moving average) and then the 1.2662 November lows.
Looking ahead
French bond auction up at 9:50 GMT.
Later today we also have the US Trade Balance and Canadian Merchandise Trade numbers, which may help remind us why the USD/CAD has been rallying recently. I’m particularly interested whether the trend of improvement in the US terms of trade is strengthening as a background boost to the strong USD trend.
The Fed will release the results of its bank stress tests. Their schedule has not been without controversy – there could be short term noise on this for various reasons, but I’m certainly not expecting anything accurate or revelatory as to the real risks from the banks’ balance sheets.
Don’t forget that we have the US employment report up tomorrow – there's no reason to expect a payrolls number on the weak side, and it will be interesting to see if the unemployment rate drops a notch or two. Canada’s employment report is up tomorrow as well – the payroll number there appears to be far less statistically smoothed than the US number. Last month’s data point was extremely weak, meaning the base expectation should be for mean reversion to the plus side, with a very weak number for two months in a row a real shocker.
In Asia tonight, we also have Japan’s and China’s latest trade data – for January in Japan and February in China. Expect a trade deficit for China due to the New Year holiday, as we saw in 2011 and 2012.
Economic Data Highlights
- Australia Jan. Trade Balance out at -1057M vs. -500M expected and -688M in Dec.
- Switzerland Feb. Unemployment rate unchanged at 3.1% as expected
- France Trade Balance out at -5862M vs. -4700M expected and -5418M in Dec.
- Switzerland Feb. Foreign Currency Reserves out at 427.7B vs. 427.0B expected and 429.5B in Jan.
- Italy Jan. PPI out at -0.5% MoM and +0.8% YoY vs. +2.4% YoY in Dec.
- Norway Jan. Industrial Product Manufacturing out at +0.3% MoM and +2.4% YoY vs. +2.9% YoY in Dec.
- UK BoE Announces Rates and Asset Purchase Target (1200)
- Euro Zone ECB Announces Rates (1245)
- US Jan. Trade Balance (1330)
- Canada Jan. International Merchandise Trade (1330)
- US Weekly Initial Jobless Claims (1330)
- Canada Jan. Builiding Permits (1330)
- US Weekly Bloomberg Consumer Comfort Survey (1445)
- US Jan. Consumer Credit (2000)
- US Fed Releases results of Bank Stress Tests (2130)
- New Zealand Q4 Manufacturing Activity (2145)
- New Zealand Feb. QV House Prices (2300)
- Sweden Riksbank’s Svensson to speak (2300)
- Japan Q4 Final GDP estimates (2350)
- Japan Jan. Current Account Total (2350)
- China Feb. Trade Balance (0200)