Central banks dictate plays

Rising expectations that the ECB will expand the QE following yesterday’s unchanged rate decision drove EUR/USD down by 1%. Prices dropped from low-1.12 to low-1.11.

Mario Draghi
Source: Bloomberg

ECB President Mario Draghi warned that slowing growth in emerging economies, particularly China is dragging on the eurozone’s growth prospects. He said ‘asset purchases are intended to run until the end of September 2016, or beyond, if necessary.’

Market participants and analysts noted the ‘beyond, if necessary’ as a signal for more easing. In addition, the ECB increased the proportion of an individual bond issue that it can buy to 33% from 25%. This clearly raised market hopes that the central bank could extend its over EUR 1 trillion bond-purchase programme.

European stocks and bonds rallied. The DAX and CAC 40 jumped over 2%. The yields of German 10-year bunds fell 6 basis points. In the currency markets, EUR/USD slide helped to strengthen the US dollar, which was also bolstered by strong non-manufacturing PMI readings. USD/JPY was partially capped by cross-play bids in EUR/JPY. Meanwhile, commodity FX pairs were heavy. AUD struggled to hold above 0.70 while NZD was under 0.64.

Certainly, the focus now will be on the nonfarm payroll due tonight. The Fed has alluded to the importance of sustained labour gains, and investors will sit on the edge ahead of the print. Economists are looking for another above 200,000 addition at 217,000 for August, from the July’s 215,000.

A strong print will no doubt fuel speculation that a September rate increase would materialise. The market however is still pricing in a 30% probability of that happening. I figured a tepid inflation outlook and sluggish global growth would give the FOMC reasons to wait a little while longer.

Equity markets in Asia should consolidate as we head towards the weekend, especially given the flat close on the Wall Street. Already, we are seeing selling in the Nikkei, ASX 200 and KOSPI.

Investors may also clear positions, uncertain about how will China perform next Monday. The G20 finance ministers and central bank governors will meet in Ankara, there could be some interest.

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