- ECB may cause a sell-off in equities and an adjustment of the EUR complex if Draghi does not deliver what both equity and forex markets have already priced in
- EUR/USD may move further lower even though the negative momentum is losing steam ahead of the decision with key level at 1.0458
- With the RBA willing to stay on the sidelines for now and with the Aussie economy stabilising, we believe that there is room for further AUD appreciation, especially given the fact that the upcoming lift-off by the Federal Reserves is almost completely priced in
- NZD/USD is confirming the trend reversal initiated a couple of weeks ago. A first resistance can be found at 0.6567, while on the downside, a support can be found at 0.6430
- Japan data seems mixed and the current positive monthly trend may be strictly temporary as business investment remains at a low level certainly caused by the declining Japan population and by the fact that investors are more attracted by overseas investment opportunities
- We remain bullish on the USDJPY as we expect more supportive data, although Japan the structural issue of its ageing population to solve
Here we are, on Thursday the ECB is expected to take action by increasing its support to the economy. Mario Draghi has plenty of tools to do this but we anticipate that the ECB will cut the deposit rate as well as introduce an increase in the size of the bond purchase programme and an extension of the QE. The decision is due on Wednesday. Meanwhile, we believe that the increase/extension of the stimulus has already be priced in, both in the equity and FX markets, which means that if Draghi does not deliver it will most likely cause a sell-off in equities and an adjustment of the EUR complex. EUR/USD continues to move lower even though the negative momentum is losing steam ahead of the decision. The key level at 1.0458 (March 16th low), will continue to support the pair, while on the upside the strongest resistance area lies at around 1.11. The single currency is currently treading water between 1.0570 and 1.06.
***Peter Rosenstreich, Head of Market Strategy: “As we anticipated the stimulus effect of weaker CHF has faded with a strengthening CHF. With the stronger CHF has come a slower outlook for economic activity. The November KOF Economic Barometer dropped to 97.9 (100.2 expected read) from a revised higher 100.4, meaningfully below its “long-term average.” The deceleration of the barometer was driven predominately by negative data from Swiss manufacturing activity and export related indicators. Clearly the Swiss economic is struggling with the CHF appreciation shock. Earlier, Swiss sight deposits came in basically unchanged at chf468.6bn from chf468.3bn. The lack of expansion suggests that speculation over SNB intervention was erroneous. With heightened expectations for the ECB to over deliver easing at their policy meeting Thursday, the CHF has been appreciating against its primary trading partner. In addition, Friday Swiss CPI is expected to remain in deflationary territory at -1.3% from -1.4% in October. The SNB is now caught between a rock and a hard place. With the CHF strengthening and inflation and growth indicators pointing to further deterioration, the central bank will be forced to act. We anticipate that the SNB will respond to the ECB with their own deeper interest rates cuts accompanied with a tightening of exemptions thresholds, verbal intervention and direct FX intervention. Given the SNB aggressive history of inflicting the most damage with actions, traders will remain nervous and quick on the trigger over any CHF moves, as we saw last Friday. We remain bearish on the CHF over expectations for the SNB to act.”***
In Australia, inflation data released earlier this morning showed that prices level remained stable in October as the economy adjusts to the low commodity price environment. TD securities inflation printed flat 1.8%y/y in November, while on a month-over-month basis the gauge rose 0.1% compared to a flat reading in October. On another note, company operating profit climbed 1.3%q/q in the September quarter, beating market expectations of 1% and upwardly revised contraction of -0.5% in the previous quarter. As a result the Aussie got a little boost following the release of the data with AUD/USD rising above the 0.72 threshold. With the RBA willing to stay on the sidelines for now and with the Aussie economy stabilising, we believe that there is room for further AUD appreciation, especially given the fact that the upcoming lift-off by the Federal Reserves is almost completely priced in.
In South Korea, both the equity market and the won got hammered amid disappointing data from the industrial sector. Industrial output contracted 1.4%m/m (s.a.), well below median forecast of -0.9% and previous month’s upward revision of 2.2%. On a year-over-year basis, industrial production expanded 1.5% versus 2.2% consensus. Consequently the Kospi was sold-off in the Asian session and dropped 1.82%, while the local currency retreated -0.45% against the greenback.
NZD/USD is among the biggest winner for now as the Kiwi surged 0.35% against the US dollar on better-than-expected as business confidence climbed to 14.6 versus 10.5 in the previous, the highest reading since May this year, as companies regain confidence and start looking positively toward the future. NZD/USD rose as much as 0.75% in the Asian session and is back above 0.6550, confirming the trend reversal initiated a couple of weeks ago. A first resistance can be found at 0.6567 (Fib. 50% on September-October rally) while on the downside a support can be found at 0.6430 (low from November 18th).
***Yann Quelenn, Market Analyst, Swissquote: Japanese industrial production has been released at 1.8% month-on-month, meaning a 4 month consecutive rise even considering that the data was released below expectations. However, the annualized level of industrial production is still negative and has worsened from September to -1.4% y/y vs -0.8% y/y on September. This data seems mixed and the current positive monthly trend may be strictly temporary as business investment remains at a low level certainly caused by the declining Japanese population and by the fact that investors are more attracted by overseas investment opportunities.
Another key data for assessing the current monetary policy in Japan are the retail sales, which printed well above expectations at 1.1% m/m and 1.8% y/y led by the sales of clothes, food and drink. For years retails sales were a weak point of the Japanese economy. At some point, with the massive easing, we are awaiting inflation to pick up to confirm that the recovery is actually happening. We remain bullish on the USDJPY as we expect more supportive data. Japan has a structural issue to solve with an aging population. Shinzo Abe is trying to push more people to keep on working longer. This will be necessary to save the Japanese economy.” ***
Today traders will be watching GDP from Sweden; mortgage approval from the UK; inflation data from Italy; trade balance from South Africa; budget balance from Brazil; CPI from Germany; Chicago purchasing manager index, pending home sales and Dallas Fed manufacturing activity index from the US.