Euro rebounds on short covering ahead of ECB meeting: Jan 22, 2015

Market Review - 21/01/2015   22:48GMT 
 
Euro rebounds on short covering ahead of ECB meeting

The single currency went through a 'roller-coaster' session in New York on Wednesday after Bloomberg news reported that the ECB President Mario Draghi and his Executive Board recommended asset purchase of 50 billion euros a month until December 2016 to revive inflation in the euro area, according to two-euro area central bank officials.

During the day, although euro rebounded from 1.1542 versus the U.S. dollar at Asian open and then rose to 1.1588 ahead of European open, price retreated to 1.1547 in European morning before ratcheting higher to 1.1641 in New York morning. Later, the single currency briefly dropped to 1.1565 after the news of ECB's bond purchase plan and then rallied to a fresh session high of 1.1680 before retreating to 1.1562 in New York afternoon.

Versus the Japanese yen, U.S. dollar weakened on Wednesday after faltering below Tuesday's New York high of 118.87, price ratcheted lower from Australia's high of 118.84 to 117.67 in Asia after BoJ announced to keep monetary policy unchanged. Later, price fell further to 117.30 due to comments from BoJ's Governor Kuroda and then 117.18 in New York morning before recovering to 118.17 due to renewed cross-selling in yen.

On Wednesday, the BOJ maintained the size of its stimulus program and reiterated its pledge to increase base money at an annual pace of 80 trillion yen through buying government bonds and risk assets. Later, BoJ's Governor Kuroda said in a press conference, 'positive economic cycle remains intact; Japan economy continues to recover moderately as a trend; inflation expectations appear to be rising on the whole from long-term perspective; outlook for underlying CPI trend intact; annual gain likely to be lower towards FY2015; consumer inflation is likely to slow for time being; reflecting decline in energy prices; BoJ's QQE has been exerting its intended effects; some BoJ board members have more cautious outlook for CPI; BoJ will continue with QQE for as long as necessary to achieve 2% inflation stably; BoJ will examine both upside, downside risks to economy n prices, n adjust policy as appropriate; inflation expectations remain intact on the whole; change in people's deflationary mindset has been steadily taking place; meeting 2% inflation may come earlier or later depending on oil prices; no change to view that there is high chance of meeting 2% inflation around fiscal 2015; not considering cutting interest rates paid to excess reserves parked at BoJ; lowering of yields are due to BoJ's massive JGB buying n lower interest rates in other countries; hopes gov't continues efforts to achieve sustainable public finances; must achieve 2% inflation target regardless of rises or falls in commodity prices; will adjust policy without hesitation if prices deviate from price target; don't see the trend of returning to deflationary mindset now; ECB easing to prevent risk of lower inflation will be positive for Europe n the rest of world.'

Cable retreated after edging higher from Asian low at 1.5136 to 1.5180 ahead of European open and then nose-dived to 1.5076 after 'dovish' MPC minutes. However, weakness in greenback versus other major currencies contained intra-day losses there and price later rebounded to 1.5147 in New York morning before retreating to 1.5083 in New York afternoon.

BoE minutes stated 'external MPC members Weale and McCafferty's decision to stop voting for rate rise was finely balanced; Weale and McCafferty thought rate rise now would increase risk of prolonged low inflation; roughly even chance that CPI will fall below zero at some point in h1 2015; MPC alert to risk of low CPI becoming entrenched, though medium-term risks to inflation may have shifted to upside; downward effect on CPI likely to be temporary if oil prices stabilise or increase; medium-term upward pressure on CPI from faster increase in incomes, early signs of wage pick-up, lower mortgage rates; growth remains solid in UK and U.S., subdued in euro zone and slowing modestly in emerging economies; monetary policy could and would be adjusted at appropriate time to hit 2% CPI target; when bank rate does rise, likely to be more gradual than in previous cycles.'

In other news, Bank of Canada surprised the market and cut overnight interest rate to 0.75% from 1% on Wednesday due to sharp drop in oil prices and dramatically slashes inflation and growth forecasts.

Thursday will see the release of New Zealand's Manufacturing PMI, Australia's HIA New Home Sales, China's MNI Business Sentiment, Italy's Industrial Orders, Industrial sales, Retail Sales, U.K.'s PSNB, PSNCR, CBI Trends (Orders), ECB's rate decision, U.S. Jobless Claims, Monthly Home Price, Markit Manufacturing PMI, euro zone's Consumer Confidence.