ECB to trigger next euro move

On Wednesday; most European market showed nervous swings ahead of the ECB. However, the inter-markets’ connection and the direct impact on currency trading was no always easy to assess. European long term bond yields rose substantially, without reacting on rumours on QE. Equities initially fell prey to profit taking but a late session WSJ article on a big ECB QE move reversed early losses. The European equity rebound, higher core bond yields and a decent performance of US equities (helped by Bank of Canada rate cut) late in the session helped USD/JPY back above the 118 barrier. EUR/USD showed some wild intraday swings and close the session higher on a daily basis (1.1610 versus 1.1550). Still, it was a continuation of the recent consolidation pattern.

Overnight, the PBOC of China used technical measures to add liquidity to the system. Chinese/Asian equities show moderate gains, but not really spectacular. Japanese equities slightly underperform even as USD/JPY is well supported. Even in Asia, investors are awaiting the ECB QE decision on. The commodity currencies are again under pressure after the unexpected rate in Canada yesterday. AUD/USD is drifting lower in the 0.80 big figure, nearing the cycle low as markets see a rising chance of the RBA joining the BoC. The New-Zealand dollar is already setting now cycle lows in the low 0.75 area. The Norwegian Krone shows more resilience compared to other commodity currency. EUR/NOK is still hovering in the 8.80 area.

Today, the key factor for global trading will be the ECB policy decision. For an in depth preview of the ECB decision see our KBC flash report. Recently, we had the impression that markets were positioned for quite a ‘perfect’ ECB QE (Substantial amount with no big technical limitations). This optimism was especially visible in the Europe equity market rally and the hope was reinforced by yesterday’s WSJ article that the ECB would start bond buying of €50 bln/month.

We see risk for some further profit taking on the bond market (yield rise) even in case of a big ECB QE. The European equities have already incorporated quite some good QE news anticipating, among other elements, on the positive effects of a lower euro. For the currency markets, the reaction is not easy to guess. Yesterday, the euro spiked temporary higher after the WSJ article on QE, but the gains were short-lived. The EUR/USD is still hovering in the 1.16 area. Even so, we see a chance of some further short-term profit taking in a market that is still positioned short euro/long dollar. Even in that scenario we assume that a correction will be temporary in nature. After the ECB meeting, the focus will soon turn to the Greek elections. So, markets might maintain some basic scepticism on the single currency. Investors who missed the recent dollar rebound/Euro decline can use a technical rebound to cover exposure.

Strategy. Of late, we maintained a euro negative bias, even as the single currency already recorded substantial losses and is in oversold territory. The 1.1877/1.1640 support has been broken in a sustainable way after the SNB decision. This makes the picture for EUR/USD even more negative in a longer term perspective. We don’t row against the tide, but some consolidation or limited correction after the recent euro sell-off is possible. Investors with a short-term horizon might consider partial stop-profit protection on EUR/USD shorts. For USD/JPY, we were cautious of late as we considered a fragile risk sentiment and low core bond yields a negative for USD/JPY and EUR/JPY. For now a test of the key support levels USD/JPY (115.57) and EUR/JPY (134.14) didn’t occur, as sentiment on risk improved since the end of last week. Even so, the battle hasn’t been won. So we stay cautions on yen shorts for now.

GBP sold on ‘soft’ BoE minutes

On Wednesday, fortunes changed again for sterling. The UK labour market data were OK, including decent wage growth, but markets reacted in the first place to the Minutes of the January BoE meeting. The content of the Minutes was quite balanced, but markets focused on comments on recent low inflation. The two members who voted for a rate hike at previous meetings also suspended their calls for an immediate rate hike. Those headlines triggered sterling selling, especially as the market was probably positioned for hawkish news after Tuesday’s rebound. EUR/GBP spiked temporary north of 0.77 (partly euro driven) but closed the session at 0.7667 (vs 0.7626 on Tuesday). Cable was little changed at 1.5142 area (vs 1.5145).

Today, the calendar in the UK contains monthly public finance data and the CBI industrial trends report. CBI orders are expected stable at a reasonably good level. However, a big deviation from consensus is probably needed to trigger a lasting reaction of sterling. Also for sterling trading, and in particular for EUR/GBP, the focus will be on the ECB decision. Time for a temporary short squeeze in EUR/GBP?