Intraday Market Thoughts

BoE Holds, ECB Cuts, Yen Outperforms, Draghi Next

by Patrik Urban
Dec 8, 2011 12:57

The ECB cut its main refinancing rate to 1.00% from 1.25%, dragging down EURIBOR-OIS spreads (positive for liquidity), while the BoE held unchanged without increasing asset purchases. The ECB announcement on LTROs and liquidity follows next at the 8:30 am EST press conference. NY session will bring jobless claims, wholesale inventories and Canadian housing starts.

Markets have been trading within relatively tight ranges throughout the Asian and London sessions as traders positioned themselves for the BOE and especially the ECB rate announcements. Main European equities are in red but only marginally.

Ashraf is telling followers to keep an eye on the EURIBOR-OIS spread, which is falling to 0.97% from 1.00% earlier today and from 1.04% last week attained prior to the coordinated central bank interventions to inject liquidity. The ECB announcement could well keep the spread down to the benefit of gold. But EURJPY is continuing to lose along with all YEN crosses.

Separately, French banks are estimated to need 7 bln in fresh capital according to Le Monde newspaper.

Despite worsening fundamentals, the BoE chose the wait and see approach and kept rates steady at 0.5% as expected and did not increase the Asset Purchase Facility that stands at GBP 275 bln. Two weeks ago, the OECD noted that further QE by the BOE is warranted and projects that the APF will be increased to GBP 400 bln. The next MPC meeting is on January 12th. The BoE is widely expected to resume fresh round of purchases in February or March.

On 11/30 MNI reported that sources within the ECB had claimed that the central bank is ready to be more flexible with respect to possible rate cuts, collateral framework and bond purchases. Reports also suggest that the ECB could offer 2 or even 3 year loans.

The big event of the day is the ECB press conference due at 8:30 EST, 13:30 GMT. Keep in mind that the EU summit ALSO STARTS TODAY and any remarks about the likelihood of an approval of reforms leading to a fiscal union might underpin the common currency.

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The NY session data will include Canadian housing starts due at 8:15 am EST that are anticipated lower in November at 200K from 208K, US jobless claims are due at 8:30 am and are seen lower at 397K from previous 402K and wholesales inventories that are expected to rise 0.4% in October from previous -0.1%.

CAD traders should also note that the BOC will release its Financial System Review at 10:30 am so the volatility is likely to increase.


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