EUR rises vs. USD and JPY, but falls sharply elsewhere as Trichet unable to spot deflation risks. Negative headline US CPI on tap?
MAJOR HEADLINES – PREVIOUS SESSION
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US Jan. Philadelphia Fed out at -24.3 vs. -35.0 expected
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New Zealand Non-resident Bond Holdings out at 73.4% vs. 74.2% in Nov.
THEMES TO WATCH – UPCOMING SESSION
Events Today:
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Switzerland Dec. Producer and Import Prices (0815)
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UK BoE Deputy Governor Gieve to Speak (0830)
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EuroZone Nov. Trade Balance (1000)
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US Dec. Consumer Price Index (1330)
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US Nov. TIC Flows (1400)
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US Dec. Industrial Production and Capacity Utilization (1415)
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US Jan. preliminary University of Michigan Confidence (1500)
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Switzerland SNB's Hildebrand to Speak (1630)
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US Fed's Lacker to Speak (1715)
Market Comment:
The ECB cut 50 basis points as widely expected, but also indicated that it would not cut at the ECB meeting in a mere three weeks time as Trichet said at the press conference that the meeting "is not a relevant one to make a monetary policy decision". This means that the next cut will have to wait until the following meeting. In general, and no major surprise, Trichet reiterated the reluctance by the ECB to get too close to a zero-interest-rate-policy (ZIRP), as he stated that "It is not the intention of the Governing Council to find itself in a liquidity trap". At what level the ECB considers this trap a risk is an open question they have not touched on, but one might imagine that 1.00% would be a psychological barrier if they are able to maintain this stance down the road.
Despite mounting evidence of very strong deflationary trends around the world, Mr. Trichet somehow found reason to believe that inflation risks are "broadly balanced". That is a tough one to swallow indeed and makes us wonder which global economy Mr. Trichet is looking at. A contributor to ftalphaville poked fun at the decision-by-committee ECB and points out why the ECB's bumbling on interest rates might actually help the EuroZone by weakening its currency....saying that "As for the falling Euro, every struggling EuroZone economy will welcome it. As European policymakers are not up to scratch, markets are doing their jobs instead" Touche.
Also see the front page article in Bloomberg this morning for more on the divergence in yields on EuroZone debt and is implications - we've touched on this a few times in the recent past.
Aside from EURUSD and EURJPY, most currencies gained versus the Euro yesterday, particularly commodity currencies, GBP and SEK, which saw a spectacular bearish reversal (see charts below). The moves in general were not exaggerated, however, and were largely in line with what one would expect with the sharp recovery in risk appetite yesterday, so it seems the market has shrugged its shoulders at Trichet and company as they failed to deliver any surprises. Helping to drive the GBP a bit stronger may have been the announcement of a new plan to further bail out banks to kickstart lending again. Rumor has it that a package could be announced as early as Monday.
Today is the last trading day in the US ahead of next Tuesday's inauguration as this coming Monday is a US banking holiday (Martin Luther King Day). The inauguration comes after Citigroup reports earnings for Q4 today and as Bank of America reports earnings on inauguration day Tuesday. Apparently, the situation at B of A has deteriorated as the bank has discovered what financial horrors it took on when it bought Merrill Lynch, which had a Lehmanesque balance sheet that was clearly not investigated sufficiently at the time of the deal. In any case, Bank of America threatened to end the deal unless the government came riding to the rescue, which it did yesterday to the tune of $138 billion, part of which is to come from the now-released second half of the TARP funds. So, while rumors of troubles at these banks initially caused a bout of risk aversion yesterday, by later in the day, the market was rallying on the B of A rescue, the release of the TARP money, and possibly also on rumors that US authorities are looking at new ways to fix the banking system, possibly with some kind of bad bank plan.
As we are headed into a three-day weekend, some of the action may be driven by market participants wanting to take some risk off the table, and the market may be a bit long on risk aversion here it seems, judging from the action overnight. This could mean a short term squeeze on EURUSD, for example, today before it has a go at lower levels further out. 1.3400 looks like an interesting level from here to see if the bears can make a stand again.
The US CPI is on tap today, and the headline number is expected to show the first negative year-on-year reading since 1955. Any risk of deflation worth noting, Mr. Trichet?
Charts: EURSEK and EURNOK
The Scandies made a comeback versus the Euro on Trichet's ho-hum performance and on a resurgence in risk appetite yesterday.
EURSEK
Yesterday saw a spectacular bearish reversal on the daily chart, suggesting that the recent attempt back toward the December above 11.30 is over and that the pair could focus back lower on the 10.50 area to start.
EURNOK
Likewise, EURNOK saw a reversal in yesterday's action and current levels around 9.3200 look very important, as this was a recent support area and it was also a key old major high. A break that holds could set up a test toward 9.00, especially if risk appetite continues to improve next week.
