- ECB meeting - Nothing major expected - rate and QE will remain unchanged
- We believe that Draghi's press conference will focus on adding downside pressures to the EUR
- We rule out any extraordinary FX intervention in the short term
- There is some concern concerning further potential upside pressures on the EURUSD
The US dollar rose sharply in Wall Street yesterday amid strong housing numbers in March. Existing home sales increased by 5.33 million in March or 5.1%m/m, beating a median forecast increase of 5.28m or 3.9%m/m. February’s figure was downwardly revised to 5.07m from 5.08m initially. The low interest rate environment added incentive for buyers to return to the housing market after the weak figures of January and February. As a result, EUR/USD fell from 1.1385 to 1.1290 and stabilised around the latter ahead of today’s ECB meeting. The market and we expect no change in the ECB monetary policy. However, investors will pay particular attention to the central bank’s reaction with respect to the recent strength of the single currency. He will also most likely express his concerns regarding Brexit. As usual on ECB day, traders will remain sidelined ahead of the meeting and will resume trading during the press conference that follows the rate decision.
Yann Quelenn, market analyst: “Brexit will give the ECB some room: Nothing major is expected from today’s ECB meeting, with rates very likely to remain unchanged (main refinancing at 0%, Depo rate at -0.4% and Marginal lending at 0.25%). We also do not expect the pace of the current QE to be increased. Since the beginning of the year, the EUR has strengthened gaining a few figures over the end of the monetary policy divergence with the US.
However, we think that Mario Draghi still has some room to devalue the single currency and he may mention this at the following press conference. We also expect Draghi to highlight his concerns over a potential Brexit and Europe’s delicate growth environment. We feel that Draghi’s intervention will focus on adding downside pressures to the EUR. Currency wars continue. Ironically, European uncertainties are buying the ECB more time and despite the fact the institution is already all-in, we should not see any helicopter money or FX intervention in the short-term. Yet, we also remain concerned about further potential upside pressures on the EURUSD as we firmly believe that financial markets are becoming increasingly disappointed with US monetary policy. Next week will take place the April FOMC meeting.”---
Crude oil jumped to a 5-month high in late US session yesterday after US inventories came in below market’s expectations. Data showed that US stockpiles increased by only 2080k barrels over the previous, missing estimates of 3000k. The international gauge, the Brent crude, rose to $46.13 a barrel, the highest level since late November last year. Similarly, the West Texas Intermediate hit $44.48 a barrel in Asia up $5.5 from its lowest level of the day.
Commodities got another strong trading session in Asia. Gold resumed the rally and rose 1.15% in Tokyo, reaching $1,258 an ounce. The yellow metal is moving towards the $1,262.79 resistance (high from April 12th). On the downside, a support can be found at $1,223.95 (low from April 14th). Gold is currently trading at key levels as it still needs to validate an escape from its multi-year downtrend channel but it still holding ground above its 50dma and 200dma. Silver was also buoyed in Tokyo as it surged 2.88%, rising from $12.96 to $17.46.
In the FX market, the US dollar was trading broadly lower overnight after surging massively in London and New York on Wednesday. The Australian dollar almost completely erased yesterday’s losses and returned to above the $0.78 threshold.
The Swiss franc got hammered in the late European session yesterday as investors dampened safe haven assets for riskier ones as Brexit fears eased. EUR/CHF rose 0.65% to 1.0989, the highest level since March 17th, while USD/CHF broke the 0.9688 resistance (high from April 14th) before consolidating above the 0.97 level. The next resistance can be found at 0.9788 (high from March 25th), while on the downside, the low from April 19th will act as support.
Peter Rosenstreich, head of market strategy: Swiss Watch Exports Collapse: "Providing further evidence of the lack of Swiss franc competitiveness and general growth economic sluggishness, Switzerland watch exports have collapsed to their lowest levels since 2011. Data from the Federation of the Swiss Watch Industry stated that watch exports deteriorated -16.1% y/y to chf1.5bn. The sharp fall, prompted the industry watchdog to indicate that the size the downturn was “unusual”. Hong Kong, the largest Swiss watch export destination declined a massive -37.7%, followed by steep drops in the USA and China. Today’s watch export data follows a disturbing downward trend since 2007 shadowing the aggressive appreciation of the CHF. While there is some idiosyncratic market behavior, such as Beijing's anti-corruption clampdown on “gift giving”, which justifies today’s worrying read. Yet the long term extent and correlation of CHF indicates that CHF strength is playing a substantial part in the sector’s unswerving erosion. With current overvaluation remaining a drag on the Swiss economy and risk to further CHF appreciation on the horizon and evidence that the SNB is potentially confronted with some difficult choices. We have consistently highlighted the risk of Brexit on CHF and probability for the SNB to proactively react to excess CHF strength. We suspect that the SNB threshold for pain is around EURCHF 103-105. At these levels we should see SNB policy action including but not limited to significant direct fx intervention, tightening of negative rate exemptions and deeper negative rates.
Today traders will be watching Riksbank interest rate decision; retail sales from the UK; ECB interest rate decision from the euro zone; Chicago Fed National activity index, initial jobless claims, leading index and Philadelphia Fed business index from the US; gold and forex reserve from Russia.