ECB marching into April with easing

The dovishness, or pseudo-dovishness, of the ECB will be on display this week as a plethora of data is paraded in front of Mario Draghi for examination over the next week.

Tonight the bank will get insights from German retail sales, French GDP, Italian CPI and Eurozone CPI, which will be followed up by manufacturing Tuesday.

Every major manufacturing country across the globe is releasing some form of PMI data tomorrow, but the ones of note will be Japan, China, Germany, France and the US.

The interesting read for Draghi will be inflation and unemployment. The questions will be, is deflation taking hold? And is unemployment demanding more to be scoped for action in order to keep the debt-crisis at bay and out of a triple-dip recession after suffering a double dip in the past two years?

The ECB is in an interesting bind at the moment it is certainly one of two central banks which is moving to the dovish end of the spectrum – the other being the Bank of Canada (BoC). Draghi reminded the market that rates will remain at the record lows even on signs of zone recovery.   

“I expect monetary policy to regain influence over the economic cycle, and our accommodative stance to support a gradual closing of the output gap in the coming years.”

The next question that comes from that quote is what will the response be from Thursday’s ECB meeting if tomorrow’s PMI day shows the output gap isn’t narrowing?

However, I believe Thursday’s meeting will be a non-event as far as rates are concerned. On current numbers it’s hard to see the ECB moving to negative real rates.

What I think is interesting is the language from Jens Weidmann. The head of Bundesbank and governing council member on the ECB has sparked moves in the EUR by suggesting QE ‘was not out of the question’. He was seen as a EUR hawk, and this change in language is a huge change in stance for the hawkish member – therefore there is a suggestion that the ECB is moving to a more dovish stance. 

However I see these statements as something central bankers are now doing as part of their arsenal to high currencies - this appears to be jawboning. Glenn Stevens did it masterfully, to a point where he almost turned it into an art form. Since the RBA removed its easing basis and dropped its language surrounding the ‘historically high AUD’, the Aussie dollar has appreciated 4.75% since this change and looks like it could be under more upside pressure after the RBA statement is released tomorrow, which is unlikely to take a backward step from its current path of a neutral bias with a concern around housing. 

The statements from Weidmann and Draghi have seen the EUR at a monthly low, and it has moved away from the $1.38 handle; however it still remains firmly fixed in headache territory for deflationary fears.

A EUR above $1.37 makes the zone uncompetitive and increases the political pressure on domestic economies. Spain, France and Italy have all publicly complained about the EUR at this level in the past three years. Although Spain, Italy and Portugal are seeing bond yield at pre-crisis levels they are all still struggling under the pressure of high unemployment.  

It is understandable why stimulus expectations are growing and why Mario Draghi is likely to continue with his mantra of ‘whatever it takes’. But this is unlikely to eventuate in April as PMI data and private lenders are no longer taking up the ECB’s LTROs, meaning ECB QE may have to be redefined to see its uptake. What is clear is that the EUR is in for some finessing.

As today is the end of Q1 CY14, Asian trade has completely thrown the book out and moved higher on little news. The current outlook from the European futures market suggests European trade is in for a similar event. Traders will be watching the miners on the FTSE, having seen a run in BHP on the ASX, and how financials finish considering the activity in the markets over the past month.

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