FX News Today
Euro weakness and commodity currency strength has been the central theme in forex markets in the wake of the ECB’s dovish guidance yesterday. The biggest mover has been the Russian rouble, which is up 3% against the dollar, and by more than this versus the euro as a 4%-plus rebound in oil prices sparked a rebound from record lows. EURAUD, EURNZD and EURCAD are also down notably today. AUDUSD climbed back above 0.7000 for the first time in eight days. EURUSD has remained above yesterday’s post-ECB low at 1.0777, but has remained heavy, giving back most of the rebound gains to 1.0900 in unraveling to the low 1.08s. The yen has mostly traded lower, except in the case against the euro, as its safe haven premium unwound. Japanese stock markets led Asian markets higher, closing 5.88% for the better — its second biggest one-day gain in the last five years, according to Bloomberg.
Draghi gave markets what they wanted, a clear hint that the ECB may extend easing measures further in March when the QE program will be reviewed again and Draghi highlighted that this move towards an easing bias, was adopted unanimously, which means it is also backed by Bundesbank President Weidmann. Draghi said in the introductory statement that the downside risks that emerged since the start of the year mean that there is the “need to review and possibly reconsider” the policy stance in March, when the next set of forecasts are available. In the Q&A session he was keen to highlight this part of the statement, which confirms that Draghi’s message to markets is that the ECB can and will do more if necessary. The question is what the ECB can still do – and Draghi didn’t go into detail when quizzed about that, just reiterated again that the ECB is willing to use all “instruments available”. So we could see a further QE extension and in particular an extension to other papers, as the pool of eligible assets is limited under the current structure of QE.
BoC Outlook: Rate cut bets that were unfulfilled have been moved ahead to March and April, according to Bloomberg, which cities futures pricing in roughly 50% odds for a cut by April. The spotlights the contrast between the Bank’s optimism and the increasingly weaker domestic growth outlook. To review, the BoC’s lack of cut day before yesterday was accompanied by a still constructive growth outlook. Granted, 2016 GDP was slashed to 1.4% from 2.0%, but the return to full capacity growth was only delayed to the end of 2017 from 2017. We see a 1.3% growth rate in 2016, but downside risks abound.
Main Macro Events Today
- EMU PMI:We are looking for broadly stable PMI readings in January, with the Eurozone manufacturing reading seen steady at 53.2 (med same) and the services reading to 54.1 (med 54.2). Even German ZEW investor confidence, which naturally is much more sensitive for market moves, came in somewhat better than expected and French national business sentiment yesterday also showed a slight improvement. With Draghi sending the ECB on course for further moves in March, even a better than expected PMI reading may have limited impact, although it would underpin the recovery in stock markets.
- Canada CPI Preview: We expect CPI to expand at a 1.8% y/y pace in December (median +1.7%), accelerating from the 1.4% rate in November. CPI is seen falling 0.3% month comparable basis in December after slipping 0.1% in November. Gas prices fell 5.0% in December compared to November, which is expected to weigh on month comparable CPI. The BoC’s core CPI index is seen falling 0.2% m/m in December after the 0.3% drop in November.
- US Existing Home Sales Preview: December existing home sales data is out Friday and should reveal a 11.3% headline increase to a 5.300 mln (median 5.120 mln) pace following the 10.5% drop to 4.760 mln in November.
Chief Market Analyst
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About Janne Muta, HotForex’s Chief Market Analyst
Janne Muta is a seasoned industry professional with over 16 years experience in the global markets. Originally from Finland, Janne has worked for institutions in both Helsinki and London as an institutional fund manager, global market analyst and FX educator.
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