ECB Speculation Rising, Canadian Dollar Surges

An ECB sources story sent EUR/USD nearly a half-cent higher in a sign of the increasing focus on the central bank in the week ahead. The loonie was the top performer for the second day while the US dollar lagged. Australian capex and house prices are due later.  

There's no doubt that the short-euro trade is crowded but with Eurozone economic data continuing to disappoint, inflation falling and the potential for QE, there's plenty of justification for the sellers. The intrigue began early in the day when Deutche Bank moved up its forecast for ABS purchases, something they call private QE, to next week's meeting from early January.

The next move came when a report revealed that Blackrock has been hired by the ECB as a consultant for ABS purchases. It's well-known that the ECB is working on preparatory work for purchases but the move indicates increased momentum.

The euro had begun to sag down to 1.3168 in US trading when Reuters headlines crossed saying ECB auction is unlikely next week unless inflation slumps. They cited unnamed sources at the central bank. EUR/USD quickly rallied to 1.3210.

Ultimately, the timing of when the ECB announces QE is less important than if it occurs or not. The market is quickly coming to the conclusion that purchases are inevitable. The Swiss franc has been caught in the crossfire and EUR/CHF sagged to 1.2060 before rebounding 10 pips. The SNB may need to prepare measures of its own to counteract inflows if the ECB begins to print.

The big mover in US trading, however, was the Canadian dollar. Ashraf highlighted the upside for the loonie in some trades last week and yesterday and they quickly bore fruit. USD/CAD toppled down to 1.0836 as the 200-dma, 100-dma and August low gave way in a single push.

We've liked CAD on the crosses because Canadian fundamentals will piggyback on the improvement in the US but there is no clear catalyst at the moment. The BK/Tim Horton's deal by no means signals Canada will be an Ireland-like inversion base. Oil flows often settle near month end and that likely pushed the move on Wednesday.

Looking to the hours ahead, the focus is on the Australian dollar with HIA homes sales due at 2100 GMT and Q2 capex numbers at 0130 GMT. Signs of an investment pickup in Australia would underscore the recent outperformance of AUD on the crosses.