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Market Digests ECB's move, Stronger USD ahead of US Jobs Report

- EUR/CHF is currently returning to its pre-ECB meeting levels as the market realises that the ECB’s disappointing move is unlikely to trigger a reaction from the SNB to defend the Swiss franc

- Over the medium term, the EURCHF will be pushed downside. Consequently, we await an action from the SNB to prevent the fatal strengthening of the Swiss Franc

- Today big event is the release of the NFPs report, the last one before the Fed December meeting

- The OPEC meeting will likely end with no consensus as despite the recent boost from the weak dollar and Saudi Arabia proposal for non-OPEC member to join output cut, the pressure remains on the downside

« Whatever it takes », those were the words used by Mario Draghi to describe the action he was ready to take to support the economy and to bring back inflation in positive territory. However, the changes to the ECB’s quantitative programme announced by Draghi fell short of market expectations. Indeed, investors had already priced in a more aggressive move than the shy extension proposed yesterday during the press conference, such that the EUR appreciated sharply against all its peers. Looking at the details, the deposit rate was reduced to -0.3% from -0.2% while the main refinancing rate and the marginal lending rate were left unchanged at 0.05% and 0.3%, respectively. About the QE, the duration of the programme was extended by six months, from September 2016 to March 2017. This change has a limited impact since the ECB already made clear that it was open ended. Besides other minor changes, Draghi did not deliver what was expected, meaning an increase of the amount of monthly purchases, currently standing at €60bn.

As a result, EUR/USD jumped from 1.0524 to 1.0970 before stabilising around 1.090. EUR/CHF jumped 140bps to 1.094 but was unable to hold ground. The pair is currently returning to its pre-ECB meeting levels as the market realises that the ECB’s disappointing move is unlikely to trigger a reaction from the SNB to defend the Swiss franc. Indeed, investors expected the SNB to react aggressively against further franc strength; this is actually what enabled the euro to hold ground against the CHF.

On the equity market, well, since traders were expecting a stronger boost, stocks got hammered across the globe. In Europe, regional indices were down more than 3% overall with the DAX down 3.58%, the Footsie -2.27%, the CAC 40 -3.58%, the SMI -1.82% while the broader Euro Stoxx 600 slid 3.14%. In Wall Street, the S&P 500 fell 1.44%, the Nasdaq -1.67% and the Dow Jones -1.42%. Obviously, Asian regional markets were also trading in negative territory. In Japan, the Nikkei and the Topix index fell 2.18% and 1.80%. In mainland China, the Shanghai and Shenzhen Composite were down 1.67% and 0.48% while in Hong Kong the Hang Seng dropped 1.02%. European futures are pointing to a lower open with the Footsie down 0.52%, the DAX -0.42%, the CAC -0.22% and the SMI -0.50%.

Today big event is the release of the NFPs report, the last one before the Fed December meeting. The OPEC meeting will likely end with no consensus. Despite the recent boost from the weak dollar and Saudi Arabia proposal (proposal for non-OPEC member to join output cut), the pressure remains on the downside. Besides, traders will be watching industrial production from Sweden; jobs report from the US and Canada; trade balance from the US. Several Fed members will also speak today (Harker, Kocherlakota and Bullard). Draghi will also speak in New York.

Yann Quelenn, Market Analyst

“Markets overpriced Draghi’s actions before the ECB meeting. President Mario Draghi has decided to lower the deposit facility rate to -0.3% from -0.2%, to extend the current quantitative easing to March 2017 (when the markets was pricing an extension of at least a year) and has finally decided to maintain unchanged, against all odds, the pace of the QE. Markets have largely been disappointed by Draghi and while the EURUSD has flown slightly below 1.1000, stocks markets ended up the session very negative with most indices below -3%. The Swiss National Bank looked closely at Draghi’s conference as the Swiss economy is largely dependent on the European economy. Despite the ECB actions was below expectations, the EURCHF has remained stable. We believe that there has been an offset between the too high QE expectations from Draghi that drove back EUR higher and the Swiss safe haven status which drove also the CHF higher as general uncertainties – both economic and political – persist.

It leaves some room to the SNB to act but we still consider that the QE won’t be the answer to the current European crisis. As a result, we believe that the current QE will not have the expected effect. European growth won’t be created out of this monetary policy. Only European countries’ debt will go much higher as what is currently happening in US and Japan. Over the medium term, the EURCHF will be pushed downside. Consequently, we await an action from the SNB to prevent the fatal strengthening of the Swiss Franc

Friday, 04 Dec, 2015 / 9:39

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Source : http://en.swissquote.com/fx/news-and-live-signals/daily-forex-analysis/2015/12/04

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