Forex: Euro at Risk if ECB Hints at Expanded Stimulus in the Works

2014-04-03 04:52:00

Ilya Spivak, Head Strategist, APAC

Talking Points:

Euro at Risk if ECB’s Draghi Hints Stimulus Expansion Plans in the Works
US Dollar May Rise on Upbeat ISM Data But Follow-Through to be Limited
Aussie and NZ Dollars Declined in Asia, Soft Chinese Data a Likely Catalyst

The monetary policy announcement from the European Central Bank headlines the economic calendar in the hour ahead. Economists’ consensus forecasts point to no changes this time around and the traders are pricing in a meager 3.8 percent probability of an interest rate cut. For our part, we continue to think the ECB is waiting for its Asset Quality Review (AQR) to reveal the gap in policy transmission that prevents ultra-low borrowing costs in the interbank market from being passed through into the broader economy. Deepening disinflation may prompt a rhetorical effort however, with the Euro vulnerable if ECB President Mario Draghi overtly suggests that policymakers are drawing up plans for stimulus expansion at the press conference following the announcement.

Later in the day, the spotlight turns to the ISM Non-Manufacturing Composite gauge. Expectations point to a rebound in March after the index hit four-year low in the prior month. An upbeat outcome may fuel hopes for a reacceleration of the US recovery after the allegedly weather-induced soft patch witnessed in the first quarter of 2014. This would likely erode doubts about the continuity of the Fed’s efforts to “taper” QE asset purchases and may boost the US Dollar. Follow-through may be limited however as traders await Friday’s much-anticipated Employment report.

The Australian and New Zealand Dollars underperformed in overnight trade, with the selloff seemingly linked to disappointing economic data from China. Official Non-Manufacturing PMI data pointed to a slowdown in activity growth while a Composite PMI reading from HSBC that combines factory- and service-sector performance pointed to the steepest pace of contraction since November 2011. The East Asian giant is Australia and New Zealand’s top export market and a slowdown there carries significant spillover risk, which traders may have interpreted as limiting future RBA and RBNZ policy tightening prospects.

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Asia Session

GMT	CCY	EVENT	ACT	EXP	PREV
22:30	AUD	AiG Performance of Service Index (MAR)	48.9	-	55.2
23:15	JPY	Markit/JMMA Composite PMI (MAR)	52.8	-	52.0
23:15	JPY	Markit Services PMI (MAR)	52.2	-	49.3
0:30	AUD	Retail Sales s.a. (MoM) (FEB)	0.2%	0.3%	1.20%
0:30	AUD	Trade Balance (A$) (FEB)	1200M	800M	1392M
1:00	CNY	Non-manufacturing PMI (MAR)	54.5	-	55.0
1:45	CNY	HSBC China Composite PMI (MAR)	49.3	-	49.8
1:45	CNY	HSBC/Markit Services PMI (MAR)	51.9	-	51.0

European Session

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:45	EUR	Italian Markit/ADACI Composite PMI (MAR)	53.4	53.4	Low
7:45	EUR	Italian Markit/ADACI Services PMI (MAR)	51.9	52.9	Low
7:50	EUR	French Markit Composite PMI (MAR F)	51.4	51.6	Low
7:50	EUR	French Markit Services PMI (MAR F)		51.4	Low
7:55	EUR	German Markit/BME Composite PMI (MAR F)	55.0	55.0	Medium
7:55	EUR	German Markit Services PMI (MAR F)	54.0	54.0	Medium
8:00	EUR	Markit Eurozone Services PMI (MAR F)	52.4	52.4	Medium
8:00	EUR	Markit Eurozone Composite PMI (MAR F)	53.2	53.2	Medium
8:30	GBP	Official Reserves (Changes)	-	$1096M	Low
8:30	EUR	Markit EU Composite PMI (MAR)	-	54.5	Medium
8:30	GBP	Markit/CIPS UK Services PMI (MAR)	58.1	58.2	Medium
8:30	EUR	Markit EU Services PMI (MAR)	-	53.9	Medium
8:30	GBP	Markit/CIPS UK Composite PMI (MAR)	58.1	58.2	Medium
9:00	EUR	Euro-Zone Retail Sales (MoM) (FEB)	-0.6%	1.6%	Medium
9:00	EUR	Euro-Zone Retail Sales (YoY) (FEB)	0.8%	1.3%	Medium
11:45	EUR	European Central Bank Rate Decision	0.25%	0.25%	High
11:45	EUR	ECB Marginal Lending Facility	0.75%	0.75%	High
11:45	EUR	ECB Deposit Facility Rate	0.00%	0.00%	High
12:30	EUR	ECB’s Draghi Holds Press Conference	-	-	High