Good morning,
December in March
Markets are becoming increasingly focused on Thursday’s European Central Bank meeting as the next big policy hurdle for Mario Draghi and the ECB’s Executive Council to negotiate. Following that negative inflation print in February alongside pressures on growth and falling inflation expectations the stage is set for the central bank to once again attempt to stimulate the ailing Eurozone economy.
This is all very similar to the thoughts that surrounded the European Central Bank as we got closer and closer to their December meeting. Communications from policymakers had been dovish – as they have been of late – data had been poor and expectations were for action. They disappointed hugely and EURUSD, EURGBP and any cross with the single currency as part of it went ballistic.
Chances of disappointment are high
Markets and traders have once again allowed each other to get ahead of themselves with some measures pricing in an additional 30bps of cuts by the end of the year. It therefore stands to reason that even if Mario Draghi and the Executive Council meet market expectations of what is due from them at this meeting, if the press conference suggests that they believe this response to be adequate then a strengthening of the euro is all but guaranteed.
Look at the market reaction in the Japanese yen these past few weeks. Despite a cut into negative deposit rates and a tiered interest rate system to protect banks, the market viewed it as not enough and USDJPY is now 7% lower. A similar strengthening of the euro would put EURUSD at 1.18 and GBPEUR at 1.20.
Draghi delivers his press conference at 13.30 on Thursday with policy announced 45 minutes earlier.
Carney in a lose-lose game
Today it is all about another central banker however with Bank of England Governor Mark Carney as well as Deputy Governor for Financial Stability Jon Cunliffe testifying to lawmakers in the UK on the EU referendum. The Bank of England is not a political organisation and it is going to be an almighty test of communication skills for the Governor to come out of the grilling without being thought to have taken sides on the issue, probably by both sides.
There is also a lot of speculation that we may see Carney quizzed on policy should the UK leave the EU referendum and while this may not preclude a chat about negative interest rates, we still believe that the chance of this happening is minimal.
Carney takes his seat at 09.15 this morning.
There have no new opinion polls on the referendum in the past 24hrs.
You can’t spell malaise without Asia
Overnight news from China and Japan has reinforced the challenges facing the two largest economies in the region. Japanese GDP contracted in 0.3% on the quarter which was slightly better than the 0.4% decline that had been expected. The real bad news came from Chinese trade figures.
The trade balance fell to a 10 month low propelled by a 20.6% decline in exports and a 16.7% fall in imports. Obviously these figures have been made worse by the Chinese New Year holiday and the subsequent shuttering of the country for a week or so but there are very few people out there who foresee a timely rebound. Plus we have to remember that Chinese New Year is every February; the year on year figures are still ghastly.
Have a great day.