Draghi fails to inspire

You don’t need to be a Nobel Prize winning economist to work out that the European Central Bank disappointed markets overnight – well at least in the short-term.  Judging by the ensuing reaction from the Euro, their efforts to spur on confidence by extending their stimulus program(s), was a flop. I guess the tough talk has finally worn thin.

Those expecting the Euro to continue towards parity against the dollar have reactively changed or are reconsidering their views. Goldman Sachs are tweaking their forecasts as a result of the ECB with news wires yesterday noting their expectation that Euro could take a 300pip hit. As I write Bloomberg is quoting Goldman Sachs saying ‘Euro Weakness May be Compromised’.

Take a look at the Wall Street Journal top 5 takeaways for a quick update on the ECB announcement and press conference.

Still it’s worth getting back to the fundamentals sometimes. GO Markets guest Analyst, Ramin Rouzabadi still sees the downside risks to the Euro despites its shock reversal overnight.

The below is an extract from his latest report talking about Euro downside risks.

The common consensus from many analysts is that a probable December rake hike by FED is already priced in to the EURUSD pair, and the current interest differentials (stated in 5 years swaps or the likes) is not justifying further appreciation of Dollar. Therefore their view is to take your profit and run.

Whilst this makes sense from a few angles, but the chart below may suggest otherwise. This chart shows the ECB’s Euro area ‘s AAA-rated central government bonds yield  curve as at Dec 2015 (green line), November 2015 (redline) and December 2014 (blue line). The yield curve shows the interest rates on government bonds at different maturities. It basically shows how much you’d get if you deposit your money at the AAA central banks in Europe.

If you look closely, you will see that in December 2014, you would have earned a negative interest if you kept your money in a 2.5 year term deposit. While this is induced by the ECB’s efforts to cut overnight rates to encourage investment, it took one year till Nov 2015 where even a 4.5 year deposits yielded negative returns. What’s interesting is that in a space of only one month (from November to Dec 2015 ), the situation  got much worse to extent that even now a 6.5 years bonds has got a negative yield. The negative yield means that you actually have to pay money to the banks for them to keep your money! Negative yield means that investors are not interested in market opportunities and are instead flying over to risk free government bonds. This is obviously not good and it means that all the efforts that ECB has been putting into fixing the economy are not yet perceived as a long-term fix by the market.

Chart – ECB’s Euro area AAA-rated central government bonds yield curve

A broad look at the post-ECB volatility on the Swiss pairs looks like the drawing of a polygraph needle before finally settling weaker against its major counterparts – but probably not enough to keep the Swiss National Bank happy.

In case you missed it, here’s a quick snap shot of the post ECB action on EURUSD.

EURUSD in a stunning recovery

In other slightly less exciting news Australian retails data came in a touch better than expected increasing 0.5% in October, but the news only had a momentary positive effect on the Aussie which has settled 73.3 around US cents.

The market moving themes continue this evening with US jobs data, and once again it has the capacity to really shape values across the board. Given the extraordinary residual impact on the dollar courtesy of the ECB, it may also be worth considering how that may exacerbate or moderate the market reaction for tonight’s non-farm payrolls. Tonight’s jobs data is considered to be the final argument in favour or against the Fed lifting interest rates on December 16.