ECB's real-economy emphasis sustains EUR, US jobs in focus

Forex News and Events:

The ECB announced a set of complex policy action tools in addition to lower policy rates in June 5th meeting. In his press conference in Frankfurt, the ECB President Draghi explained the extended stimulus package in four distinct parts. Although the knee-jerk reaction triggered a short-lived aggressive EUR-unwind, the heavy orientation towards real economic activity gave decent support to EUR-complex. The limited EUR sell-off across the board dissipated expectations on a potential SNB reaction on June 19th policy meeting. The Swiss interest rate futures converged to levels corresponding to SNB’s policy targets. Traders focus shift to US labor data in New York, supportive data should give a lift to USD and US yields pre-weekend.

ECB’s real economy orientation triggered enthusiasm

The ECB played big in June 5th meeting by announcing a complex stimulus package to sustain the Euro-zone economy. The ECB President Draghi detailed the package in four distinct parts. We first examine the content of the package then shortly discuss market implications moving forward.

First, the ECB eased the monetary policy stance by lowering the main refi rate to 0.15%, the marginal lending rate to 0.40% and the deposit facility rate to -0.10% - the negative rates being also applied on excess reserve holdings.

Second, to enhance the transmission of liquidity to real economy, the ECB decided to launch the TLTRO - targeted LTRO. This measure aims to make sure that the cheap credit flows into household pockets (except for house purchases) and into non-financial sector. We talk about roughly EUR 400bn in this context through two TLTROs in September and in December 2014. Practically, additional checks will be required on initial lending, then on quarterly basis to insure that the liquidity goes to the right place. Quite similar to BoE’s practice, the counterparties will be able to borrow up to three times the amount of their net lending (new loans minus redemptions) to non-financial companies. The TLTRO will be subject to fixed interest rates through the life of the loans (with September 2018 maturity for all TLTROs), with option of early repayment two years after the loan starts. The counterparties which have not lent enough amounts will be obliged to pay back by September 2016.

Third, the preparatory work for ABS will be intensified. There Mr. Draghi reaffirms that the new structure will be real-economy-oriented and will be far from the concept of CDOs, CDO-squares and CDO-cubes which brought the world economy to the latest subprime crisis! The ideal ABS would be simple, real (based on real loans) and transparent.

And finally, Draghi insisted on ECB’s dissatisfaction with uneven progress of structural reforms across the Euro-zone countries. Governments should aim for growth-friendly budget consolidation including lower taxes, lower expenditures, yet higher capex and higher public spending - a classical economic theory that has been left aside for quite longtime now by EZ ruling parties (!)

All in all, the package has been put together unanimously and we see significant shift towards “real economy”, which should finally generate “consumer” inflation, rather than boosting the financial markets. The impact on the money markets has been quite immediate: the euribor interest rate futures rallied to highest since November 2013, the front end of the Eonia curve flattened. While the implications on the real economy is difficult to estimate at this stage, we think that the ECB has pointed out the “real” problems, which actually prevent the policy measures to show efficiency. Although the policy is now shaped to counter the existing problems (we think of heavy budget consolidation in EZ, higher taxes, limited consumption), the EZ governments’ support is essential for Draghi’s dreams to become true.

Finally on the FX markets, the euro volatility has been two-sided as suspected. The rate cut and additional stimulus package triggered a knee-jerk sell-off in EUR-complex. EUR/USD spiked down to the four-month low of 1.3503, yet ECB’s commitment to sustain Euro-zone growth generated great opportunity for dip-buyers. We expect a short-term bullish reversal pattern now that the heavy clouds on EZ have dissipated (at least for a while). A weekly close above the 200-dma will confirm the bullish trend.

Walking into the week close, we will be closely monitoring the US nonfarm payrolls and jobs data. The US May nonfarm payrolls are anticipated at 215K with slight improvement in average earnings. Supportive data should broadly give support to USD and the US yields, thus thus building some selling pressures on EUR/USD pre-weekend. We look to chase dip-buying opportunities based on our short-term nullish reversal expectations. The key supports are placed at 1.3580 (MACD pivot), 1.3503 (June 5th reaction low), then 1.3477 (2014 low).

No more demand for SNB reaction

The limited EUR weakness post-ECB has dissipated concerns of a potential SNB reaction on the Swiss markets, immediately sending the interest rate futures for June delivery below par – to trading zone corresponding to SNB’s current 0.00-0.25% libor target. Although the EUR/CHF continues extending losses, bringing the cross down to month lows, the tensions on a potential SNB reaction by June 19th are clearly dissolving. Released in the morning, slightly faster-than-expected CPI figures did not gather significant market reaction.

Today's Key Issues (time in GMT):

2014-06-06T12:30:00 USD May Change in Nonfarm Payrolls, exp 215K, last 288K
2014-06-06T12:30:00 CAD May Unemployment Rate, exp 6.90%, last 6.90%
2014-06-06T12:30:00 CAD May Net Change in Employment, exp 25.0K, last -28.9K
2014-06-06T12:30:00 USD May Two-Month Payroll Net Revision
2014-06-06T12:30:00 USD May Change in Private Payrolls, exp 210K, last 273K
2014-06-06T12:30:00 CAD May Full Time Employment Change, last -30.9
2014-06-06T12:30:00 USD May Change in Manufact. Payrolls, exp 10K, last 12K
2014-06-06T12:30:00 CAD May Part Time Employment Change, last 2
2014-06-06T12:30:00 USD May Unemployment Rate, exp 6.40%, last 6.30%
2014-06-06T12:30:00 CAD May Participation Rate, exp 66.2, last 66.1
2014-06-06T12:30:00 USD May Average Hourly Earnings MoM, exp 0.20%, last 0.00%
2014-06-06T12:30:00 CAD 1Q Labor Productivity QoQ, exp 0.00%, last 1.00%
2014-06-06T12:30:00 USD May Average Hourly Earnings YoY, exp 2.00%, last 1.90%
2014-06-06T12:30:00 USD May Average Weekly Hours All Employees, exp 34.5, last 34.5
2014-06-06T12:30:00 USD May Change in Household Employment, last -73
2014-06-06T12:30:00 USD May Underemployment Rate, last 12.30%
2014-06-06T12:30:00 USD May Labor Force Participation Rate, last 62.80%
2014-06-06T19:00:00 USD Apr Consumer Credit, exp $15.000B, last $17.529B

The Risk Today:

EURUSD EUR/USD made an intraday bullish reversal on Thursday, indicating exhaustion in the short-term selling pressures. Resistances can now be found at 1.3688 (22/05/2014 high) and 1.3734 (19/05/2014 high). Hourly supports lie at 1.3586 (29/05/2014 low) and 1.3503 (05/06/2014 low). In the longer term, the break of the long-term rising wedge (see also the support at 1.3673) indicates a clear deterioration of the technical structure. The long-term downside risk implied by the double-top formation is 1.3379. Key supports can be found at 1.3477 (03/02/2014 low) and 1.3296 (07/11/2013 low).

GBPUSD GBP/USD has broken the resistance at 1.6783, validating a short-term base formation. Monitor the test of the resistance implied by the declining channel (around 1.6844). Another resistance stands at 1.6882. An hourly support lies at 1.6775 (intraday low). In the longer term, despite the break of the long-term rising channel, the lack of significant bearish reversal pattern suggests a limited downside risk. As a result, a medium-term bullish bias remains favoured as long as the support at 1.6661 (15/04/2014 low) holds. A major resistance stands at 1.7043 (05/08/2009 high).

USDJPY USD/JPY has weakened near the top of its short-term rising channel. Hourly supports for a short-term correction can be found at 102.27 (03/06/2014 low) and 101.76 (02/06/2014 low, see also the rising channel). Hourly resistances stand at 102.80 (04/06/2014 high) and 103.02. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.39) and 100.76 (04/02/2014 low). A major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF declined sharply on Thursday, opening the way for a short-term correction. Supports can be found at 0.8883 (15/05/2014 low) and 0.8841. An initial resistance lies at 0.8952 (intraday low). Another resistance stands at 0.9037. From a longer term perspective, the bullish breakout of the key resistance at 0.8953 suggests 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. A key resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: