A quiet week has continued through the Asian session today.
Waiting on Thursday
The euro is starting to wobble already in the lead-in to Thursday’s European Central Bank with traders believing that Draghi and the rest of the Executive Council will need to push back on the single currency amid calls for increased stimulus, lower interest rates and the need for higher inflation.
The hawks who want no change to policy will argue that the data from the European economy and its constituent countries is no cause for euphoria at the moment, but neither is it awful and improvements in wages and unemployment are starting to show through. And of course, yes, the inflation picture is poor at the moment but the majority of that is as a result of the oil price falls and therefore may have little impact as we enter 2016.
The doves are still pinned by market expectations of what the Federal Reserve does by the end of the year; if Yellen et al hike then some of the pressure will come off the ECB as interest rate differentials take EURUSD lower in the short term, although in the last Federal Reserve hiking cycle USD actually ended up weaker.
Weaker euro to continue
I personally think that the Draghi will have to come out and hurt the euro. Draghi has spent most of this year talking down the euro; fears over the tightened monetary conditions that a stronger currency would bring should ensure that Draghi does not deviate from that message anytime soon. This may come from chat around increased or prolonged asset purchases but there is the real chance that a cut in interest rates may be floated for some time in the future as well.
I doubt there will be any action from the ECB’s Executive Council this Thursday but that doesn’t mean we won’t see a wobbly euro.
Canada swings to the left
Overnight, the Liberal Party seems to have taken the Canadian election with a strong majority. Justin Trudeau is set to be confirmed as Prime Minister later today having won on a campaign based around higher government spending in a bid to rescue the Canadian economy from its commodity driven slump.
This is nothing new, of course, and the sell-off in the Canadian dollar since the polls closed is a natural reaction to fears that higher spending will damage deficit and debt/GDP ratios as well as concerns over the make-up of a possible government coalition that has not been in power for over 10 years.