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The key global theme this year remains pinned around central banks and what sort of action and stance they will be adopting. As a result, playing the divergence will be key to getting the strategy right this year. The Bank of Canada was the latest to surprise after cutting rates by 25 basis points as the country faces a benign inflation outlook and the sharp falls in oil and gas prices negatively impact growth expectations.
USD/CAD experienced the biggest move as a result, squeezing to a high of $1.2394 and trading at its highest level since April 2009. Oil managed to rebound, though not enough to mitigate any medium-term risks as the supply/demand dynamics remain a concern.
The bid tone in equities was mainly sustained by hopes the ECB will announce a substantial quantitative easing programme when it meets later today. The headline will be the size of the programme on a nominal basis, with broad expectations of a €550 billion plan.
A report also emerged overnight suggesting the ECB proposed spending €50 billion a month through to December 2016. With expectations running high, the risk will be for the ECB to disappoint.
Central banks feeling pressure
With the BoC having surprised, local attention will continue to be on other commodity-reliant economies such as Australia. Investors will be wondering if the RBA will look to take similar action as global pressure mounts. Westpac has been the most aggressive in its calls and is expecting a February rate cut by the RBA.
Essentially, if the RBA doesn’t cut, it’ll be hoping other central banks do the job for it in stimulating growth. At this stage, nothing can really be ruled out, particularly when the swaps market is already pricing in 40 basis points’ worth of rate cuts over the next 12 months.
Investors would want to see the RBA preempt conditions as opposed to simply react to a situation. Commodity prices seem like they will be lower for longer and, should China choose to continue focusing on reforms this year as opposed to stimulus, then this could hurt us further.
Focus shifts to the 2015 growth target which will be announced in March. This will essentially give us an idea of how aggressive Chinese policymakers will be when they act this year, or whether they will make reforms dependant on what sort of bar the target sets for them.
AUD/USD remains stuck in a range between $0.8000 and $0.8300, and has been declining after testing the top end of this range last week. I get the sense a significant catalyst would be needed to prompt the pair out of this range. On the calendar today we have MI inflation expectations and new home sales data due out.
Firmer open for the ASX 200
Ahead of the open we are calling the ASX 200 up 0.8% at 5434. I suspect investors will want exposure to equities in case the ECB goes above and beyond and drives further gains for global markets. As a result, I feel we could be in for further gains through the session as we head into the ECB meeting.
Commodities were mostly firmer and this should be supportive of most of the materials and energy plays. Gold and iron ore were both weaker but I doubt this will hamper gains for related stocks as optimism around the ECB underpins sentiment.
BHP looks like it’ll extend its run after doing well yesterday on the back of its quarterly report. The financials are likely to do well heading into the ECB meeting, particularly MQG which has the most exposure to Europe. Funds with a lot of European exposure would also benefit from ECB action.
While sentiment is probably going to be overly positive ahead of the ECB, there will also be a cautious camp as some feel the ECB is now fully and aggressively priced in and may possibly disappoint. Either way, we’re in for an interesting finish to the week.