What Euro Traders Should Expect from ECB

  • What Euro Traders Should Expect from ECB
  • USD: Risk Appetite Supported by Better U.S. Data
  • GBP: Resilient Despite Higher Debt and Weaker Growth Forecasts
  • NZD: RBNZ Comfortably On Hold, Eyeing the Upside
  • AUD: Sharp Rise in PMI Services, Mild Pullback in GDP
  • CAD: IVEY PMI on Tap
  • JPY Sinks as BoJ Reiterates Commitment to Doing More


What Euro Traders Should Expect from ECB

On the eve of the European Central Bank's final monetary policy meeting of the year, the euro is trading slightly lower against the U.S. dollar. While the decline is modest, this is the first time in 6 trading days that the euro fell against the dollar. The sell-off would have probably been more significant if not for the strong rally in U.S. equities. Stronger service sector activity was offset by a sharp slide in retail sales. Since the last ECB meeting, there has been as much improvement as deterioration in the Eurozone economy. Taking a look at Germany specifically, because we know that it's the only meaningful Eurozone country with any growth, we have seen both good and bad news. On the positive front, business confidence improved thanks to smaller contractions in the service and manufacturing sectors and a larger trade surplus. This has led to a slowdown in job losses in the month of November. However inflationary pressures are muted and retail sales fell sharply. Therefore in terms of growth, the ECB has very little reason to adjust their negative outlook particularly since austerity measures will limit recoveries in the New Year.

When the ECB last met in November, Mario Draghi said he does not expect any major improvements in growth over the next year but more stimulus was not necessary because the availability of OMT has been enough to stabilize the financial markets and reduce bond yields. We don't expect his views to have changed especially since Spanish 10 year bonds are now yielding 5.382% down from 5.836% the last time the ECB met. The central bank has made it abundantly clear that they are satisfied with the market's reaction to OMT and the current level of monetary policy and we believe they will remain committed to providing unlimited liquidity. Since we don't expect Draghi to say anything new, this month's monetary policy announcement and accompanying press conference may have a limited impact on the EUR/USD.


USD: Risk Appetite Supported by Better U.S. Data

Better than expected U.S. economic data and a strong rally in equities led to a divergent performance in the U.S. dollar. The greenback traded higher against the euro, Japanese Yen and Australian dollar but weakened against the New Zealand dollar and ended the day unchanged against other major currencies. According to the ISM report, service activity accelerated in the month of November as the ISM index increased to 54.7 from 54.2. Although the employment component of the report fell sharply, signaling slower job growth in November, the increase in service sector activity suggests that Hurricane Sandy did not hit the economy as hard as some may have feared. Business activity surged thanks to stronger demand for autos and record Black Friday / Cyber Monday sales. Manufacturing activity also beat expectations with factory orders rising 0.8% against a forecast for flat growth. According to payroll provider ADP, U.S. companies added 118k workers to their payrolls last month. While this increase was less than expected, above 100k payroll growth is not bad considering the factors that could have curtailed hiring including Hurricane Sandy effects, President Obama's policies and Fiscal Cliff concerns. Overall today's reports will ease some concerns about an abysmally weak non-farm payrolls report on Friday and the continuation of weak job growth thereafter. There are 2 U.S. labor market reports scheduled for release on Thursday - Challenger Job Cuts and Jobless Claims. While the Challenger report is a monthly release and jobless claims is weekly, claims have had a greater impact on the dollar and FX flows than the layoff report. Over the past few weeks, Hurricane Sandy has abnormally distorted jobless claims and only now are we finally beginning to see the true state of the labor market. Jobless claims have fallen below 400k but a further decline is necessary to avoid a big reaction to Friday's non-farm payrolls report. If payrolls surprise to the downside and claims also decline, economists will point to claims and say that we should have a nice snapback in December. 


GBP: Resilient Despite Higher Debt and Weaker Growth Forecasts

The British pound proved to be surprisingly resilient in the face of weaker service sector activity and cautionary comments from Chancellor Osborne. According to the PMI report, U.K. service sector activity grew at its weakest pace since December 2010. While a reading above 50 still represents an expansion, the pace of expansion has slowed materially. Chancellor Osborne's twice a year speech on the economy and fiscal policy is one of the most anticipated event risks of the year and surprisingly enough, today's Autumn statement proved to be a complete dud even though Osborne announced major cuts to the government's GDP growth forecasts. They now expect the economy to contract by 0.1% in 2012, versus a forecast for 0.8% growth back in March. For 2013, they expect 1.2% growth in 2013 versus a prior forecast for 2% growth. The government is also expected to borrow more this year with public debt expected to peak at 79.9% vs. a prior forecast of 76.3% with the peak coming a year later in the 2015-2016 fiscal year. While the Chancellor stated that, "it is taking time but the economy is healing," it is clear that they believe the outlook is grim. A number of other changes were also announced including higher taxes on the wealthy, lower taxes for corporations, benefit caps and the removal of the 50-year maturity cap on Gilts. Trade numbers are due tomorrow along with the Bank of England's monetary policy announcement. The BoE is not expected to alter interest rates and therefore the meeting should be a nonevent for the GBP. Instead, all eyes will be on the U.K. debt rating. Fitch has put the country's rating on review, saying that missing their initial debt targets weaken credibility.


NZD: RBNZ Comfortably On Hold, Eyeing the Upside

The New Zealand, Australian and Canadian dollars ended the day lower against the greenback. As expected, the Reserve Bank of New Zealand left interest rates unchanged at 2.5% but the New Zealand dollar soared after the meeting because they did not sound overly eager to cut interest rates. While the new central bank Governor expressed concerns about the strong currency, rising joblessness and slower growth, he also expects domestic demand to strengthen, sees stronger housing market activity and less risk next year. His comment that they are monitoring for faster inflation buildup in the construction sector and note that house prices look expensive suggests that they have absolutely no plans to ease monetary policy. Wheeler also told the market not to expect the central bank to stop the NZD from rising because "intervention criteria" has not been met." While there was no Canadian data on the calendar today, the loonie extended higher following the central bank's decision to maintain a hawkish bias. The IVEY PMI report is due for release on Thursday and based on the sharp slide in wholesale sales, manufacturing activity could have weakened slightly. The Australian dollar did not benefit from better than expected service sector data but also did not slide on softer GDP growth. Overall, the AUD/USD is holding on strong and this Teflon like resilience should not be ignored. Service sector activity grew at its fastest pace in June while economic growth slowed to 0.5% from 0.6% in the third quarter. Given the drop in retail sales and trade, the data could have been much worse. Labor market numbers are due for release this evening and economists are not looking for job growth in the month of November.


JPY Sinks as BoJ Reiterates Commitment to Doing More

Broad based Yen weakness drove USD/JPY back above 82. No major economic reports were released from Japan last night and nothing is expected this evening which means that it should be could be another quiet night in Japan. Nonetheless the Yen lost ground on comments from Bank of Japan Board member Nishimura who said the central bank is ready for bold action if the risks to their outlook deteriorate significantly. While the BoJ's commitment to doing more is nothing new, Nishimura's comments are a reminder that BoJ Governor Shirakawa's assertion of independence has nothing to do with his willingness to ease. LDP leader Shinzo Abe has called for more aggressive stimulus by the BoJ and there's no question that if the economy were to deteriorate further, the BoJ stands ready to act. However, having just increased asset purchases this quarter, they aren't itching to spring back into action. The general election will be held in less than 2 weeks and the uncertainty that it brings has limited gains in the Yen.

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