Intraday Market Thoughts Archives

One day after the ECB delivers the biggest “easing” policy move since the Eurozone crisis, the US economy shows it has recovered all non-farm jobs lost after the 2008 recession, while posting the first 4-consecutive monthly NFP increase of +200K in more than 14 years. These could well be the key factors fuelling the next run-up in global equities into Q3. Full charts & analysis

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The euro rose as high as 1.3670 as shorts were squeezed following the ECB decision. The New Zealand and Australian dollars were the top performers while USD lagged. Markets will have a chance to digest the moves in a quiet Asia-Pacific session.

Sometimes what happened today in central banking matters less than what will happen next. The ECB delivered more than the vast majority of analysts were expecting on the Thursday as deposit rates went negative, TLTROs were introduced for 4 years and, in the biggest surprise, SMP purchases will no longer be sterilized.

The initial euro reaction was lower and EUR/USD came within 3 pips of 1.3500 but from there it was a dash higher up to 1.3670.

Aside from a squeeze on shorts, the market chose to focus on what will happen next. Draghi talked about further action but he said it's coming only if necessary. He sounded reluctant on outright QE but what was most telling was the cut in the 2014 inflation forecast to 0.7% from 1.0% and the 2015 forecast to 1.1% from 1.3%.

The ECB will not act further unless those forecasts are clearly and substantially threatened and because the downgrades were so significant, that's a high hurdle to overcome.

Still, the impact of today's action are only the beginning of the trade. This is experimental monetary policy and the bond market will cast the deciding vote. Expect a dose of jawboning in the day ahead as ECB officials fight the higher euro.

The hours ahead will be light on data but not completely quiet. Up first at 0000 GMT is New Zealand data on house prices for May. Prices are expected to continue to show improvement after an 8.4% rise in April. Carry trades are boosting NZD as other developed market yields fall and higher home prices will only encourage the market to price in more cuts.

At 0500 GMT, the focus shifts to Japan's April prelim leading index. It's rarely a market mover but it's a chance to sum up the effects of the tax hike. The consensus is a slide to 106.1 from 107.1.

Other than that, the market will be strapping in for non-farm payrolls.

As EURUSD breaks below its 200 DMA ahead of today's ECB decision, traders ask whether the pair show the same action as in April 3-4 and Nov 7-8 -- Rapid declines followed by a gradual rebound-- Or, is this the start of a new downtrend? It is argued that the today's rate cut is well priced in the market and the ground for further declines is limited. But the oppposite camp argues for broadening downturn in euro sentiment, as highlighted in momentum measures and futures net shorts. With the USD index and USDJPY above their 200 DMA and EURUSD below its 200 DMA, the case for USD recovery appears to be in place. Draghi's planned announcement of rate cuts and extending the fixed rate lending window into 2016 may be anticipated, but there is the possibility of opening the door for further measures (LTRO & unsterilized purchases), which may intensify euro's losses. There is also the potential of an upside surprise from US jobs.

It's getting tougher to find signs the US economy is accelerating toward a 3% growth pace. The Australian dollar was the top performer while the loonie lagged after the BOC brushed off higher inflation numbers. Up next is Aussie trade balance, China's services PMI and BOJ comments. A new set of EURUSD Premium Insights wil be issued tonight ahead of Thursday's ECB press conference.

A busy US data calendar had something for everyone but it was more likely to leave the skeptics feeling more skeptical and the optimists feeling uncomfortable.

ADP employment grew just 179K in May compared to 210K expected. GDP estimates were also trimmed after the April trade deficit rose to $47.2B versus $40.8B expected along with a $4B downward revision to the March figure.

Those numbers put a sour tone into US dollar trading and USD/JPY sunk to 102.43 from 102.63 but hope was renewed by the next release and the dollar climbed all the way back. The ISM non-manufacturing index rose to 56.3 versus 55.5 expected. It's seen as a better leading indicator than the other data points and the market was also apprehensive to pick sides ahead of the ECB and NFP.

The other main event on the day was the BOC decision. Some traders were looking for a slightly more hawkish slant after inflation rose to 2.0% from 1.5% in April but Poloz brushed it off as a product of temporary factors and retained a slightly dovish bias. USD/CAD moved up 30 pips but gave most of it back to finish at 1.0938.

Looking ahead the focus shifts to Australian April trade data at 0030 GMT. The disappointment in US data weighed on USD Wed and a miss of the $510M surplus expected will do the same to AUD. At the same time BOJ member Sato delivers a speech. Look for comments on the inflation outlook.

At 0045 GMT the May HSBC China services PMI is due. There is no consensus estimate because it's a less-followed indicator but it's slowly gaining clout and a small improvement on the 51.4 reading from April would affirm positive sentiment about China.

Rising Treasury yields helped boost the US dollar ahead of a busy data slate. The euro also began to prove that negative headlines are less of a threat. On the heels of the RBA decision, Australian releases Q1 GDP data in the hours ahead.  In the Premium Insights, our AUDNZD deepens in the green with over +200 pips, while USDCAD longs have stabilized after surviving the 1.0820 long. We will issue a new set of Premium Insights in addition to the 10 existing trades on Wednesday morning.

The persistent fall in Treasury yields has reversed into a persistent rise and what's notable is that only the later move has had an effect on USD/JPY. The pair stubbornly held onto a bid above 101.00 even as 10-year Treasury yields fell to the lowest since June last week. Yields are now 20 basis points off the lows at 2.60% and USD/JPY has climbed 100 pips to 102.50. The asymmetrical relationship is a bullish sign for the pair and the better performance from the Nikkei is also contributing.

The market shrugged off economic news throughout the day because larger events are looming. US factory orders rose 0.7% compared to 0.5% but the details of the report were mixed. Defense orders drove the entire gain and revisions to the durable goods orders data were neutral. The main upbeat sign was in US vehicle sales data as sales rose to a 16.77m pace compared to 16.1m expected.

Perhaps the most interesting move was the lack of a market reaction when Bloomberg, citing 2 sources, said Draghi is likely to signal that any interest cut won't necessarily be the final one. The euro hardly reacted in a sign that ECB bets are already placed or a dovish message is already priced in.

The data highlight in Asia-Pacific trading is Q1 GDP at 0130 GMT. The q/q median is a healthy +0.9% but the risks might be higher. The RBA was a bit more optimistic in yesterday's decision and that could be because officials had a sneak peak at the data.

China's May PMI rose to 50.8 from April's 50.4 in, confirming further stabilisation in the Chinese economy, dampening chances of any stimulus programs from Beijing. The big story in May was the ECB hint at easing but overall moves were unusually small. The Canadian dollar was the top performer while the euro lagged but we look at some of the technical moves. Last week ended with an unwind of some of the moves on the month as the euro and pound drifted higher while the loonie slipped. The lack of major moves in the market is like a tightening coil that will eventually spring.

What happens next will largely depend on fundamentals like the ECB meeting and the bevy of tier 1 US indicators in the week ahead but technicals will also offer hints.

GBP/USD stalled out at 1.70 and slipped in May but the decline wasn't so severe that it could easily be called a reversal. That the pound was able to limit losses to 250 pips after a long uptrend shows that buyers may still be in control.

A closely watched chart was AUD/NZD, which looks to be breaking out but another notable chart is NZD/USD as it flashes signs of topping, including an outside reversal on the monthly chart. Falling milk prices and aggressive talk from the RBNZ could add a fundamental reason to sell.

Another spot to watch is seasonal patterns. June FX seasonals are almost nil but precious metals are extremely weak. June is the worst month on the calendar for gold but silver is exceptionally weak, averaging a 2.95% decline over the past 30 years – 100 basis points worse than any other month The trend is even more pronounced in the past decade.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -17K vs -9K prior JPY -59K vs -54K prior GBP +35K vs +33K prior AUD +16K vs +19K prior CAD -22K vs -26.5K prior CHF -4K vs +5K prior NZD +18K vs +18K prior

The euro bears continue to add. Late on Friday the FT cited sources talking about negative rates and unlimited LTROs with a funding-for-lending kind of scheme attached. That's a fresh reason to sell.