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If all along, the Fed was hoping for the ECB and BoJ to fill the void left by an end to the QE3 program, then they’d be fairly pleased with developments. Many feel that a full-blown government bond buying QE program from the ECB is now a step closer.
This seems to have stemmed from the fact that ECB staff have been asked to prepare for further measures, although many remain of the view that there are additional unconventional instruments within its mandate that can be used. From here, it really depends on one’s inflation outlook for the Eurozone and whether you feel there’ll be a strong take up in December’s Targeted Long-Term Refinance Operation (TLTRO); while inflation has troughed then you could argue that the ECB will merely use the threat of QE as a policy tool only.
Still, you can’t deny that Mario Draghi has done a first class job in quashing talk of a strong internal war behind the scenes. It leaves the market feeling that the diverging views are nothing more than par for the course in any sophisticated organisation when significant policy change is announced. This divergence is similar to what we’ve seen from the BoJ, BoE and Federal Reserve when there has been policy change. The other key point is that the balance sheet will also be taken to similar levels seen in March 2012. So, while Mr Draghi didn’t specify that the ECB are going to buy €1 trillion of assets, he may as well have and this should keep the euro on its weakening trend.
EUR/CHF a tactical buy?
Keep an eye on EUR/CHF which has pulled back below 1.2050 and the level to which funds have been happy to buy at, for moves back to 1.2100. Clearly those looking to be long need to leave stops above 1.2000 otherwise if the Swiss Central loses its battle with the market (which it won’t) and the 1.2000 floor gives way you will most probably see a 300 point run in a split second due to $30 billion or so of stop orders below the figure.
Still the lack of moves in German bunds and European banks suggest that many feel - and I share this view - that the barriers to a US styled QE program are very high. If the Outright Monetary Transaction (OMT) program is still being debated in the European Constitutional Court, it will be tough to get a program passed given many see this as effectively debt forgiveness.
The US payrolls report doesn’t seem to be affecting sentiment in Asian trade, with US futures printing a new all-time high, with Asian equities also modestly higher. The ASX 200 has found buyers despite 20 points coming out of the index due to NAB and ANZ going ex-dividend, with the small cap miners seeing a solid rebound. Iron ore futures are flat, so the big moves in iron ore miners can only be attributed to short covering and some aggressive trading capital with many of these companies significantly oversold.
The RBA Statement on Monetary Policy was a non-event as far as provoking a reaction in the AUD, with the central bank leaving its forecasts unchanged. Tuesday’s RBA rates statement echoed much of the rhetoric we heard today so we shouldn’t see too much in the way of economic forecast adjustments from economists. Technically the trade seems to stay short AUD/USD for a move to the bottom of the channel at 0.8350.
Watch out for China data over the weekend
Watch out for gapping risk though if holding commodity related assets, given China release its trade balance figures on Saturday. Exports are expected to increase 10.7% and imports 5%. The net trade balance should widen to $42 billion.
The love for the USD continues to increase day-by-day and it’s hard to see that changing anytime soon. It’s worth highlighting that the US dollar index (the USD vs a weighted basket of currencies) has broken above the downtrend drawn from the 1984 high, so therefore needs to close above 87.16 (spot now at 88.09) and that should be seen as a significant move. Still, it does concern me that everyone is now positioned for a strong payrolls print tonight, although this seems fair given all the usual leading indicators (weekly jobless claims, the employment sub-component of the manufacturing and services ISM and ADP) have been strong. The market is positioned for a big number.
The consensus suggests we’ll see 235,000 (the economist range is 314,000 to 140,000) jobs created, which is in-line with the six month average. The unemployment rate should remain at 5.9%, while average hourly earnings should increase 2.1% on the year. There is also a raft of Fed speakers with Charles Evans (a dove) speaking on the economy at 01.15am AEDT and Janet Yellen speaking on ‘Policy since the Crisis at 02.15am (AEDT) in Paris. Prior to that though we get what has to be one of the strongest line ups of any conference with Yellen, Carney, Kuroda and Coeure speaking at the Bank of France Conference.