Draghi’s delicate dance
By Arnaud Masset
The single currency has been trading in a volatile range as investors await Thursday’s meeting of the European Central Bank.
There is no doubt the ECB will trim its bond purchasing, currently at €60 billion per month, but the question remains: when? Bank President Mario Draghi probably will answer this on Thursday. Waiting longer would unsettle investors and suggest the ECB’s dissatisfaction with the Eurozone economy. Still, Draghi will likely be cautious and reiterate his willingness to ramp up buying if required. The thing Draghi fears most is to trigger further EUR appreciation, which would damage the economic outlook and dampen already anaemic inflation.
Market data this morning reflect investor worries. 1-week implied volatility has spiked to 9.36%, compared to 6% a week ago. The 1-week 25 delta risk-reversal measure rose to 0.53% indicating that investors are buying protection against an upside move in EUR/USD. The 6-month 25 delta risk reversal measure has returned in negative territory, sliding to -0.17%. This indicates a reversal of EUR/USD within the next 6 months.
Abe win give USD/JPY a boost
By Peter Rosenstreich
Japan’s Prime Minister Shinzo Abe won a resounding victory in the Lower House elections, pushing USD/JPY to 114.10, as investors now can see where policy is headed. This, although Abenomics is not likely to debase the yen. The fate of USD/JPY now depends less on the BoJ policy and more on the US Federal Reserve. Expectations for a positive turn in US monetary data has boosted US interest rates. Developments in tax reform and naming the next Fed chairperson should keep USD firm against the JPY.
Upstart opposition Party of Hope failed to convert its general popularity into votes, and it actually helped Abe win a 2-3rds majority by splitting the opposition vote. Abe will run again for his party’s leadership next year, while the Bank of Japan will be dominated by doves. Japanese’s institutional investors know low interest rates and yield-curve-control are unlikely to change, so they will search overseas for yield. FX Asia is looking increasingly balanced with higher US yields on one side and solid global growth (expected around 3.0% 2017) and trade data on the other: risk is skewed towards USD upside