- It is now clear that the ECB will move in December, however it is still not too late to start building short EUR positioning. We expect the single currency to adjust further to the downside with 1.0850 as a reasonable target on the medium-term
- EUR may further weaken against the GBP too, especially after the strong retail sales figures from September
- USD may appreciate against most of the G10 currencies as investors drop the single currency in favour of the greenback and emerging currencies
- EURCHF, has been pushed downside and we believe that the SNB will be forced to react.
Just like the market, we were expecting a dovish stance from the ECB’s president. We certainly didn’t expect Mario Draghi to bring out the big guns. He declared that the European Central Bank has discussed the possibility of cutting the deposit rate and could possibly adjust “the size, composition and duration” of its bond purchase programme. Looking at the EUR's significant downward moves and rally in the equity markets, it appeared that the market has not yet priced in this dovish message. EUR/USD fell two and half figures from 2.25% to $1.11, printing a fresh 2-month low. European equities rose sharply across the board on the perspective of lower interest rates and/or further stimulus. According to the tone of the press conference, it is now clear that the ECB will move in December. In our view, it is not too late however to start building short EUR positioning as we expect the single currency to adjust further to the downside. EUR/USD is currently trading at around 1.1120 and we believe that 1.0850 is a reasonable target on the medium-term. There is also further room for additional weakness of the EUR against the GBP, especially after the strong retail sales figures from September. Retail sales surprised to the upside, up 1.07%m/m, from a downwardly revised contraction of -0.7%, versus market expectations of 0.4%.
***Yann Quelenn, Market Analyst: “The European Central Bank has decided to keep its main refinancing rate unchanged at 0.05%. No major surprises there. However, the announcement by ECB President Mario Draghi that he is prepared to cut interest rates in the euro zone has sent the EURUSD back to 1.1100. In addition, and as we expected, Draghi is willing to step up the pace of the Eurozone as well as increasing the duration of the easing program, which was initially supposed to end in September 2016.
Draghi is concerned about the slowdown in emerging markets, in particular China, and during yesterday’s meeting added that downside risks for the Eurozone’s inflation and growth are rising. Fresh economic data will be closely scrutinised and an official announcement will be made at the next meeting in December. For the moment the QE programme will be reassessed and very likely expanded. So far €60bn has been injected into the market. This could reach €80bn.
We remain bearish on the EURUSD with QE needing to be increased and expanded. EURCHF, has been pushed downside and we believe that the SNB will be forced to react. Switzerland is in the process of reclaiming its safe haven status because of the mounting uncertainties in the Eurozone. Only equity markets are rising. The era of cheap money is just beginning and money will just keep on flowing into stocks markets.”***
Yesterday, data from the US were broadly mixed with September existing home sales increasing 4.7%m/m versus 1.5% median versus, up from a revised contraction of -5%m/m. Meanwhile, the leading index fell -0.2%m/m versus -0.1% expected. Fed national activity index came in on the soft side, printing at -0.37 from -0.39 in the previous month, below market expectations of -0.20. The USD appreciated against most of the G10 currencies as investors dropped the single currency in favour of the greenback and emerging currencies. However, commodity currencies hold ground against the US dollar with the AUD bouncing back to $0.7275 from $0.72 and NZD/USD heading toward the strong resistance standing at $0.69.
On the equity front, Asian regional markets are blinking green on the screen without exception in reaction to the ECB meeting. The Japanese Nikkei soared 2.11% while the broader Topix index climbed 1.95%. In mainland China, stocks are about to close in positive territory for the second straight day with the Shanghai and Shenzhen Composite up 1.16% and 2.81%, respectively. In Hong Kong, the Hang Seng was up 1.34% while in South Korea the Kospi index edged up 0.86% amid better-than-expected growth figure. Third quarter’s preliminary GDP estimate printed at 2.6%y/y versus 2.4% median forecast and 2.2% in the previous quarter.
Today traders will be watching Markit PMIs from France, Germany, euro zone; industrial production and retail sales from Italy; tax collection, current account balance and foreign direct investment from Brazil; inflation figures from Canada.