Euro tests below 1.10, Aussie under pressure as US dollar gains

Quick Recap

The ECB confirmed last night that it will commence its monster QE program on Monday. That knocked the Euro under 1.10 for a time last night and while it has recovered somewhat over the past 6 hours (to 9am Sydney time) the outlook continues to look grim.

What’s important about the ECB confirmation last night is that it accompanied the latest round of updates from the ECB on growth and inflation for the next two years. For this year and next the ECB upgrded its forecasts to 1.5% and 1.9% from 1% and 1.5% previously. That’s good news even though it’s still weak growth overall. Equally so, given the ECB downgraded its inflation forecast to flat this year and just 1.5% in 2016 nominal growth is going to be weak as well. What this means, and what stock traders will be focused on, is this combination suggests that ECB QE will need to continue past the cut-off date in 2016.

That is extremely bearish for the Euro in a world where the Fed looks set to continue toward its path of interest rate hikes.

As it stand today the non-farm payrolls tonight are now the key catalyst to a big fall to end the week for the Euro or, perhaps if the data disappoints, a little rally. The market is looking for 240,000 new jobs to have been created in the US last month.

Elsewhere the US dollars strength dragged most other currencies and gold lower overnight while the proximity of the beginning of QE in Europe drove continental bourses higher. US markets and local SPI200 traders were less ebullient however overnight.

In Asia one thing I picked up was that even though I assume that a rate of 7% as a target means an implied promise of more easing Cao Yang, a Shanghai-based senior analyst at Shanghai Pudong Development Bank told Bloomberg that “The lower target may indicate less broad-based, aggressive easing measures than what the market expected previously.”

That means Shanghai and Hong Kong may face renewed pressure in the months ahead.

On the day

On the data front today, we get the AiGroup’s performance of construction index at 9.30am in Australia while Japan will release its coincident and leading indices. Tonight we see German IP, Italian PPI and the second read of EU Q4 GDP. But it is the US non-farm payrolls and unemployment rate which is the big data point.

And here’s the overnight Scoreboard (8.45 am AEDT):

• Dow Jones up 0.22% to 18,136
• Nasdaq up 0.32% to 4,983
• S&P up 0.12% to 2,101
• London(FTSE 100) up 0.6% to 6,961
• Frankfurt (DAX) up 1% to 11.504
• Paris (CAC) up 0.95% to 4,964
• Tokyo(Nikkei) up 0.26% to 17,752
• Shanghai (Composite) down 0.96%, 32 points to 3,248
• Hong Kong (Hang Seng) down 1.11%, 272 points to 24,193
• ASX Futures (SPI June) up 2 points to 5,884
• AUDUSD: 0.7778
• EURUSD: 1.1029
• Crude: $50.92
• Gold: $1,197.79

CHART OF THE DAY:

AUDUSD – IS something about to break: 

Chinese growth down graded. Australian growth weak. The RBA saying that monetary policy isn’t working. And the US dollar stronger.

These things seem to have conspired to take the wind from the Aussie dollars sails and make prices sustainably above 78 cents difficult to hold.

Likewise the technical picture suggests that the Aussie has, once again, rejected the top of the downtrend channel that it is in for the moment.

That means that the 0.7725/35 region is vitally important short term with 0.7625 the key below here should the Aussie break down.