Mario Draghi has now firmly cemented the June ECB as one where we should see easing from the central bank. In what capacity that easing is announced is still not 100% clear, but one suspects the ECB could look to cut any number of its various interest rates; however I suspect it may look to leave its previous Securities Market Program (SMP) unsterilsed. This should see the ECB’s balance sheet expand by around 6% by the end of the year. EUR/USD printed a bearish daily reversal, which after missing out on a test of 1.40, looks very interesting indeed. Rallies now look like selling opportunities; however traders are keen to see if the July uptrend can hold at 1.3787.
Long-term BTP (Italian bonds)
Being long Italian debt seems to be one of the few consensus trades which actually continues to work well. The spread against German bunds continues to narrow and the market seems to buy any dips that come their way. Being long Italian BTPs seems to be shaping up as one of the trades of the year; with Mario Draghi signalling that further easing will materialise in June, the path of least resistance seems higher for price.
After yesterday’s April employment data, the AUD seems to have caught another bid in the market. China’s trade data also improved, however it will be interesting to see China inflation data out at 12:30 AEST today. Consumer inflation is expected to increase 2.1% on the year, which is a thirty basis points fall from the prior month’s print, while producer prices should fall 1.9%, which would continue the trend of falling producer prices seen since 2012. We also get RBA minutes at 11:30, with traders continuing to focus on the bank’s view on the AUD. Recall the RBA statement was modestly hawkish, so its seems logical that the minutes should follow suit.
Iron ore fell 1.3% yesterday to $103.70, which is now the lowest level since October 2012. In AUD terms iron ore is also at the lowest level since 2012 and with inventory levels at record highs in Chinese ports, it’s hard to make a case that bulk commodities will rally anytime soon. Stay cautious on the iron ore space, although valuations on a number of these stocks are very low.