The market wasn’t positioned for a huge amount from the ECB meeting, but given EUR/USD is through the $1.2400 level and EUR/GBP is testing £0.7800, it seems the market got more than it expected.
The main take-out from Mario Draghi’s press conference was around the ECB’s balance sheet – whether his remarks in the September meeting about targeting a balance sheet that mirrored that of 2012 were realistic. Mr Draghi’s comments that the balance sheet was ‘expected to move towards the dimensions it had at the beginning of 2012’ were definitive. This is key and really does imply the central bank is totally focused on expanding its balance sheet by around €1 trillion. This is EUR bearish in a big way, hence the move lower in the euro.
The meeting was also designed to show solidarity within the ECB’s ranks, especially after a Reuters article yesterday quoted sources close to the situation as saying some of the board were angry at Mr Draghi over a number of the recent initiatives. It seems this isn’t so; at the end of the day, we need to remember the ECB is a democracy. As we have seen in the BoJ, BoE and Federal Reserve over the years, there will be disagreement when big economic policy changes are implemented.
In terms of targets for EUR/USD, I would be looking closely now at the 200-month moving average at $1.2220, which has been huge support since 2003. A monthly close below here (assuming it gets there) would target $1.2090 (1.618 times the move we saw in wave one of the move from $1.3995).
All eyes are on today’s RBA Statement on Monetary Policy at 11:30am AEDT. As it stands, the swaps market is pricing in seven basis points of cuts over the coming 12 months, but that could soon increase if the central bank alters its inflation forecasts.
Recall the RBA expects to see headline inflation in the June 2015 quarter at 2.25% (that being the mid-point of the 1.75% to 2.75% range they provided), so if they lower this to 2%, it could imply they see headline inflation falling to 1.5% on a dovish case. If unemployment continues to track higher with the employment-to-population ratio also at lacklustre levels, the RBA would then have little reason to cut. Providing, that is, that the APRA impose macro-prudential measures to take the froth out of the housing market.
Given the lack of concern shown in the recent RBA statement, we could feasibly see an upgrade to GDP; however the inflation forecast seems the biggest issue for markets. I believe a move to 2% for its June inflation forecast could send the AUD lower.
At 00:30am AEDT we get the US non-farm payrolls report. Here are the consensus numbers, which you can use as a guide for market expectations:
- At a headline level, the market expects 235,000 jobs to be created. This is just above the year-to-date average of 212,000 and in line with the six-month average of 233,000 jobs
- The economists’ range is 314,000 to 140,000 jobs to be created
- The unemployment rate is expected to stay unchanged at 5.9%. Recall the Fed has a year-end target ranging from 5.7% to 6.1%, so 5.9% is still on track with forecasts
- The underemployment rate (or U6 rate) is currently at 11.8%, so a number below 11.8% would be positive for the USD
- Watch out for average hourly earnings, with the market expecting 2.1% growth. The market will have its biggest reaction on the headline jobs print but wages are key for the Fed, so a number above 2.1% could be very positive for the USD