ECB Taper on Table, Gold off it

A report that the ECB is considering taper bond purchases sparked a round of confusion in euro trading Tuesday. The US dollar was the top performer in a volatile session while the yen lagged. New 31-year lows in GBPUSD and gold breaking below 1300 were the other big stories of the day. Japan's services PMI from Nikkei is due up later along with Australian retail sales. Last night's Premium Insights pre-RBA trade has been filled as it nears the Aussie retail sales.

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The ECB is thinking about tapering bond purchases, according to a Bloomberg report. The question is: when?

The euro jumped nearly a cent on the initial headlines on the impression that the tapering could start in 10 million euro increments as soon as December. Later, the gains were halved on the idea that the ECB is more talking about theoretically tapering when the time is right.

The story itself seems to swing both ways. They highlight that the ECB is running out of assets to buy (true) and wants to put pressure on governments to reform (true) but don't explicitly say when the ECB might consider tapering.

Naturally, the ECB denied it but even the denial only went half-way. They said the ECB didn't discuss tapering at the Governing Council meeting. But the Bloomberg story stated that tapering was later discussed. The market remains skeptical, but tapering now (and maintaining the size of the balance sheet) would fit in with the more-optimistic tone from the ECB. Anyone who watched the last 2 ECB press conferences would notice that Draghi's message is "we've done enough & it's time for the national governments to fill the slack". Extending the duration of asset purchases beyond March 2017 is the most that the ECB could do. Expanding the size of the program was considered unsustainable due to the issue of scarcity. After today's taper story, QE expansion is pretty much out of the question. 

Aside from the ECB story, markets were volatile on Tuesday and the US dollar caught a strong bid against the yen and commodity currencies despite another rally in oil prices. Bonds and stocks sold off at the same time.

The dollar gains came in spite of the IMF lowering its US growth forecast this year to 1.6% from 2.2%. USD has shown time and again that it's tough to hold down. USD/JPY broke above the downtrend since May and is approaching the 100-day moving average at 103.76.The yen may react later to the Nikkei services PMI at 0030 GMT. The prior reading was 49.6.

The more-important release is Australian August retail sales at 0030 GMT. The RBA held yesterday but it didn't add much to AUD/USD. The consensus is +0.2% m/m.