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Forex Analysis: Euro at Risk on Growing Case for ECB Stimulus

Forex Analysis: Euro at Risk on Growing Case for ECB Stimulus

2013-01-10 10:04:00
Ilya Spivak, Head Strategist, APAC
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The Euro appears vulnerable ahead of the ECB policy announcement as the case for stimulus begins to look increasingly compelling.

Talking Points

  • Euro Likely to Fall if ECB President Draghi Hints at Stimulus Ahead
  • BOE Rate Decision Probably Another Non-Event as Inflation Spikes
  • Japanese Yen Sinks, Aussie Soars as Chinese Exports Top Expectations

A monetary policy decision from the European Central Bank headlines the economic calendar in the hours ahead. Investors’ priced-in expectations and economists’ forecasts both suggest the central bank will keep the benchmark lending rate unchanged at 0.75 percent. This puts the focus on any guidance revealed by ECB President Mario Draghi in the press conference following the announcement.

The currency bloc’s economy shrank in three of the past four quarters, with the flat reading for the three months through March 2012 being the only exception. Composite PMI figures suggest another negative reading is likely to emerge for the fourth quarter of last year. Meanwhile, the inflation rate has trended downward since November 2011. Taken together, this seems to create an environment that both calls for and is able to support monetary easing.

The ECB had previously cited broken monetary policy transmission as the reason for holding off on stimulus, saying a rate cuts would be ineffective as swelling sovereign risk premiums pushed out borrowing costs. The announcement of the OMT program mid-year has clearly improved the situation, with key yields (most notably on benchmark Spanish and Italian 10-year bonds) now dramatically lower. This likely reflects the unwinding of tail risk and suggests the ECB now has room act.

Near-term correlation studies suggest the Euro is rather sensitive to front-end yields, meaning nod toward forthcoming accommodation emerging in Draghi’s press conference are likely to weigh on the single currency. Currencies sensitive to Eurozone growth like the Swedish Krona and the Norwegian Krone may rise however, and we remain short EURSEK. Such a scenario may also prove supportive for broader risk appetite considering the Euro-area recession remains a critical headwind for global recovery at large.

The Bank of England is likewise due to deliver its rate decision. Another non-event seems likely, with the MPC holding the key rate and the asset-purchase target unchanged. Inflation spiked worrying higher in the fourth quarter and leading economic data has performed mostly well relatively to expectations (according to data from Citigroup), suggesting a lack of urgency for the time being.

The Japanese Yen sank anew in overnight trade, down as much as 0.5 percent on average against its top counterparts as Asian stocks soared, sapping demand for the haven currency. The MSCI Asia Pacific benchmark equity index added 0.7 percent after China’s Trade Balance report showed exports soared 14.1 percent year-on-year in December, nearly tripling economists’ forecast for a 5 percent increase and buoying regional growth expectations. The Australian Dollar outperformed, adding as much as 0.6 percent against the majors.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Trade Balance (NOV)

-700M

-698M

-666M (R+)

21:45

NZD

Trade Balance 12 Mth YTD (NOV)

-1457M

-1450M

-1334M (R+)

21:45

NZD

Exports (NZ$) (NOV)

3.81B

3.53B

3.51B (R+)

21:45

NZD

Imports (NZ$) (NOV)

4.51B

4.23B

4.18B

23:00

NZD

QV House Prices YoY% (DEC)

5.7%

-

5.7%

23:50

JPY

Official Reserve Assets ($) (DEC)

1268.1B

-

1270.9B

0:00

NZD

ANZ Commodity Price (DEC)

1.0%

-

0.9% (R-)

0:30

AUD

Building Approvals (MoM) (NOV)

2.9%

3.0%

-5.1% 9 (R+)

0:30

AUD

Building Approvals (YoY) (NOV)

13.2%

11.6%

19.2% (R+)

0:32

CNY

Foreign Exchange Reserves ($) (DEC)

3310.0B

3317.0B

3285.1B (R-)

0:32

CNY

Money Supply - M0 (YoY) (DEC)

7.7%

11.2%

10.7%

0:32

CNY

Money Supply - M1 (YoY) (DEC)

6.5%

6.0%

5.5%

0:32

CNY

Money Supply - M2 (YoY) (DEC)

13.8%

14.0%

13.9%

0:32

CNY

New Yuan Loans (DEC)

454.3B

550.0B

522.9B

2:00

CNY

Imports (YoY) (DEC)

6.0%

3.5%

0.0%

2:00

CNY

Exports (YoY) (DEC)

14.1%

5.0%

2.9%

2:00

CNY

Trade Balance ($) (DEC)

31.60B

20.00B

19.63B

2:00

JPY

Tokyo Avg Office Vacancies (DEC)

8.67%

-

8.76%

5:00

JPY

Leading Index CI (NOV P)

91.9

-

92.8

5:00

JPY

Coincident Index CI (NOV P)

90.1

-

90.7

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

12:00

GBP

Bank of England Rate Decision (JAN 10)

0.50%

0.50%

High

12:00

GBP

BOE Asset Purchase Target (JAN)

375B

375B

High

12:45

EUR

European Central Bank Rate Decision (JAN 10)

0.75%

0.75%

High

13:30

EUR

ECB President Draghi Holds Press Conference

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3036

1.3184

GBPUSD

1.5985

1.6112

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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