Intraday Market Thoughts Archives

In the midst of the ECB rate-cutting storm and the latest Q3 GDP figures from the US, an important development occurred yesterday with regards to the Bank of England. It is in fact the reason why GBP is this week's best performing currency behind the USD. The central bank has called in select economists from the City to share its latest forecast on unemployment, citing that it would reach the 7.0% threshold -- suggested for raising rates -- earlier than the 2016 currently estimated. This may be of no great revelation to some private economists who had been expecting unemployment to reach 7.0% from the current 7.7% in 2015 (some even expect it in H2 2014). The implication for such development is that BoE will most likely make public its forecast at the inflation report, due for release on November 13.

Today's surprise ECB rate cut is seen less negative for the euro than had the ECB waited until December, in which case the currency would have been more likely to descend into a slow drag until December. Although the refi rate spread with the deposit rate is at its lowest since the euro began trading, stabilisation is seen ahead. Charts & analysis

Click To Enlarge

MNI published a sources story saying the ECB won't cut ahead of Thursday's announcement. That's not a big surprise but the lack of sustained upside in EUR/USD is worrying. The Canadian dollar was the top performer while the yen lagged. Up next is the Australian employment report. Today's Premium Insights added 2 new EURUSD trades and 1 USDCAD short ahead of Thursday's ECB meeting, US and Canada jobs reports.

MNI is best known for its 'ECB sources' stories because they have a long track record of accuracy (although they aren't 100%). They cited a senior eurosystem source saying the ECB doesn't want to overreact to a single data point and that price expectations are firmly anchored.

EUR/USD jumped to 1.3549 from 1.3515 on the headlines but what's interesting is the lack of follow through and eventually the gains faded away. A number of analysts have backed away from rate cut calls after last week's rush to predict them. We have maintained the ECB won't cut rates.

The inability to hold euro gains on the MNI story suggests the market has already priced in no rate cut. That could mean some quick selling on a kneejerk higher in EUR/USD announcement.

That leaves Draghi's communication as the main factor. We struggle to believe Draghi will strongly hint at a cut in December but given the market's unwillingness to bid up the euro today, even with the positive German manufacturing data, we're skeptical.

Coming up at 0030 GMT, Australia releases the October jobs report. The Aussie has been flying high on upbeat data this week and expectations are modest with a 10K consensus on jobs and unemployment forecast to tick to 5.7% from 5.6%. As always, watch the breakdown of full-time/part-time jobs.

New Zealand reported stronger-than-expected employment numbers leading to another rally in the kiwi. On the day, the pound rode the services PMI to the best performance while CHF lagged. Australian trade data highlights a quiet Asia-Pacific session.

Early in Asia-Pacific trading, New Zealand reported a 1.2% q/q rise in employment compared to 0.5% expected. The unemployment rate also fell to 6.2% from 6.4% leading to a NZD/USD rise to 0.8376 from 0.8325. Earlier in the day, finance minster English said momentum is building in the economy.

It's awfully difficult to build a case against the New Zealand dollar. Foreign investment, especially in property is pouring in. The government is attempting to use regulation to cool housing but as long as Chinese money continues to look for an offshore haven, NZ will benefit.

There's a housing bubble? Well there's a housing bubble everywhere and if it cracks at least the central bank there has 250 basis points of ammunition if it wish to cut. In the meantime, Wheeler forecasts 200 bps of rate hikes in the next two years.

There will be periodic episodes of NZD selling on risk aversion and overbought conditions but any extended weakness will ultimately be countered by the flow of funds into the country.

Earlier in the day, the October ISM non-manufacturing survey hit 56.2 compared to 52.7 previously and the employment component was particularly strong. There was no sign of a shutdown slowdown and comments from Lacker that the impact of the 17-day govt closure was `purely transitional`, a statement that may ring true.

Up later, Australia releases trade balance data at 0030 GMT and is expected to show a $A500m deficit for September. Otherwise, the calendar is quiet.  

The US dollar edged lower Monday on mixed messages from Fed speakers. The Australian dollar cruised on retail sales to the best performance of the day while USD lagged. In the hours ahead, the Japanese market reopens after a holiday and Kuroda speaks but we focus on the RBA decision. 

The dollar decline on Monday probably said more about the depth of rally late last week than anything fundamental. Market watchers could use Fed speak to justify which ever way they were leaning. Bullard emphasized data dependency. Rosengren, who is probably the most dovish Fed member, said a taper in December compared to April is not too significant. Williams said QE has been a close call. Powell said monetary policy will remain accommodative for some time.

None of the headlines inspired any direct moves in the FX market as the US dollar drifted gently higher. The turnaround in EUR/USD may have been significant and the chart indicates a potential false break below the Oct lows and the 55-day moving average. Ultimately, we believe the ECB won't cut rates and that will deliver the final verdict.

One underreported reason the Fed may delay the taper is Treasury bond issuance. The quarterly refunding announcement revealed $266 billion in Q4 borrowing compared to the $235 billion estimated in July. An additional $31 billion in issuance along with $10-15 billion less Fed buying would be a double-dose of pressure on the bond market.

The RBA decision at 0330 GMT is the highlight of trading in the day ahead. The realization that rates have bottomed has underpinned the latest AUD/USD rally but there is scant talk of rate hikes. For sure the RBA will be on hold today but only 10 bps of hikes are priced in for the coming 12 months. If that holds, the RBA will have held at the cycle bottom for 15 months compared to 5 months and 4 months in the previous cycle troughs.

A slow move toward optimism would be a queue to price in rate hikes and buy the Aussie.

Can the afford to wait until December to cut rates? Inflation may be excessively low, but the stability of Eurozone market and macro metrics (periphery spreads, business surveys and credit outlooks), mean the ECB could afford to hold fire until December, when it releases its quarterly forecasts. Full analysis & charts

Click To Enlarge

All eyes are on the ECB and the slumping euro heading into a new week. The Canadian dollar was the best performer last week while pound sterling lagged. The week starts off with Australian dollar retail sales due next.

The euro headed into the weekend in freefall on a six consecutive days of declines including a 260 pip swandive on Thursday and Friday. An ominous sign was the near-total lack of a bounce heading into the weekend and a close at 1.3487. There is some support from the October low at 1.3473 and the 55-day moving average at 1.3476.

Given the uncertainty about what the ECB will do this week, we assume some kind or relief rally will take place before the Nov 7 decision. The magnitude and timing is certainly up for debate and it's possible the ECB will leak some type of hint at what it intends to do so the headline risk is considerable.

Speaking of the 55-day moving average, the US dollar is approaching or has surpassed the technical marker on a number of crosses including cable, USD/JPY, NZD/USD and the Dollar Index. We're also reminded that the dollar is the second-best performing currency this year despite a disappointing economy, dysfunction in the government and the lack of a taper.

The technical signs are beginning to align for the dollar and November is a solid seasonal month for USD. Better economic data or a stronger hint at a taper could lead to an extended dollar rally.

At 00:30 GMT/London, Aussie September retail sales are on the docket for Australia. The consensus is for a 0.4% rise. At the same time, the high-flying house price index is expected to rise 7.6% year-over-year.

Later, with the market still confused about exactly where the Fed stands we will here from outspoken Dallas Fed President Fisher at 0000 GMT. He's on a visit to Sydney.