- Traders are expecting another to the deposit rate cut, currently standing at -0.30%, but are still wondering what will come with it as Mario Draghi will most likely deliver
- EUR/USD should trade trendless ahead of the ECB meeting as traders fine-tune their positions.
- EUR/CHF will also be under the spotlight today as traders will monitor closely SNB’s reaction after the ECB decision
- The SNB will adopt a wait-and-see attitude to adjust the response to the market reaction instead of Mario Draghi's announcement
- We believe that the Japanese Government is very reluctant to increase sales tax to 10% as it would prevent inflation from reaching the inflation target of 2%
- Yen is appreciating on a safe haven status which is very ironic considering that is the currency of one of the most indebted country in the world
- NZD/USD may further lose ground returning at around $0.65 after RBNZ took the market by surprise and cut its official cash rate by 25bps to 2.25%
The Reserve Bank of New Zealand took the market by surprise and cut its official cash rate by 25bps to 2.25%. Governor Wheeler argued that the deteriorating outlook for global growth, and more specifically the uncertainty surrounding China’s economic prospect, justifies this surprise easing move from the central bank. Obviously, the New Zealand dollar was heavily sold-off during the night as traders priced in the rate cut. The Kiwi was trading broadly lower across the board, down .65% against the Canadian dollar, 2% versus the Aussie, 1.64% versus the greenback and 1.23% versus the EUR. NZD/USD fell from 0.6785 to 0.6630 amid the decision. We believe it won’t take long for the Kiwi to return to around $0.65, which corresponds to the bottom of the currency pair monthly range.
Finally, it’s Thursday and traders are bracing for wild swings in EUR crosses as Mario Draghi will most likely deliver. Traders are expecting another rate cut of the deposit rate, which currently stands at -0.30%, but are still wondering what will come with it. The ECB has a broad set of tools at hand, such as increasing the size of the QE, its duration or extending the list of bonds eligible. It is also difficult to know what is priced in but one thing is sure, the market wants to see commitment from the ECB and Mario Draghi would be better off not disappointing the market like he did on December 3rd. After being rejected by its 200dma, EUR/USD moved lower during the Asian session. The pair should trade trendless ahead of the ECB meeting as traders fine-tune their positions.
EUR/CHF will also be under the spotlight today as traders closely monitor the SNB's reaction after the ECB decision. Unlike in January last year, we expect the Swiss central bank to adopt a wait-and-see attitude as it would rather adjust the response to the market reaction instead of Mario Draghi announcement. For now, EUR/CHF is trading between 1.09 and 1.10.
On the equity market, returns were mixed in Asia with Japanese shares gaining more than 1%. The Nikkei rose 1.26%, while the broader Topix was up 1.49%. In mainland China, the Shanghai and Shenzhen Composite continued to slide lower as investors remained concerned about the government’s ability to successfully implement the required reforms. Elsewhere, in New Zealand shares were up 0.79%, while in Australia the ASX fell 0.14%. In Europe, equity futures are trading lower as traders are reluctant to load their portfolio ahead of the ECB.
***Peter Rosenstreich, head of market strategy, Swissquote: Can Draghi “overdeliver”?…Unlikely: "The surprise rate cut by the RBNZ highlights three key issues: weakness in the global economy, mounting disinflationary pressure and the important role central bank policy plays in asset pricing. If there was not an overwhelming expectation for today’s ECB rate decisions, then the RBNZ move just raises the stakes. It will be difficult for the ECB to “over-deliver” given the misgivings of the actual effectiveness of the current policy mix. It’s widely expected that the ECB will lower its inflations forecast and ease policy further. Aside from some micro-tuning we expect Draghi to cut the deposit rate 10bp (a 20bp cut is possible but less likely as Europe faces Brexit, possible new Spanish elections, Greek debt issues, as well as immigration discourse where additional stimulus might be required) and adjust the size and make-up of the current QE program. We suspect that launching a tiered system for negative rates is more likely in the future then today as Draghi still needs to keep some cards up his sleeve. Other potential surprises could be hidden in cuts in refi, credit purchase and within the LTRO program. Despite ECB members suggesting that rates are far from their lower bound we suspect that we are in fact very close. This thinking is based on the limited effectiveness negative rates have had thus far and the risk that unexpected consensus going deeper into negative territory might bring. Germany has been vocal about their displeasure over utilizing negative rates. In our view it’s unlikely Draghi will unveil a policy “bazooka”, so after some empty threats of more aggressive stimulus we should see EUR rally. Please understand this is not an indictment of Draghi and ECB but a general statement over global central bank’s policy incapability. EU-JP rate differentials are unlikely to widen significantly (yet European yields curves are steeper than Japan’s) and general easing of risk environment EURJPY should head back to 127.29 (50% fibo lvl) then key resistance at 130.80 (declining trend line).”***
***Yann Quelenn, market analyst: “Japan’s PPI declines again: Deflation continues in Japan and is not ready to stop. Despite massive efforts over the last decade, the producer price index has declined 3.4% y/y in February, down for the 11th straight month. Strong easing has not yet provided the necessary impulse to pull the country out of deflation and we doubt it ever will. Abenomics can be considered everything but a success. Shinzo Abe has failed to stimulate the economy. Consumer spending, which accounts for 60% of the Japanese economy, has failed to be stimulated. Indeed, the fiscal arrow of the Abenomics had a larger impact than expected in 2014 when the sales tax rate increased to 8% from 5%. We believe that the Japanese Government is very reluctant to increase the sales tax to 10% as it would certainly prevent inflation from reaching the inflation target of 2%. The central bank of Japan is already all in. The world is witnessing Japan’s debt increasing to stratospheric amounts without inflation ever picking up. Governor Kuroda ends his term in March 2018 and it is very unlikely that the vicious circle will end by this time. For the time being, the yen is only appreciating on safe haven status which is very ironic being a shelter to one of the most indebted countries in the world.”***
Today traders will be watching industrial and manufacturing production from France; CPI from Denmark, retail sales from Spain; CPI from Norway; manufacturing production from South Africa; retail sales from Brazil, ECB rate decision from the euro zone; initial jobless claims and monthly budget statement from the US; manufacturing PMI and food prices from New Zealand.