Nowotny Softens on QE

Late in 2014, influential ECB policymaker Ewald Nowotny said Q1 was too soon for sovereign QE but today he urged a quick decision, warned the ECB balance will effectively shrink without action and called sovereign QE a traditional monetary policy instrument. The comments got little attention as oil sparked a round of risk aversion that helped the yen outperform. Japanese machine tool orders are due later.  In our latest Premium Insights, 2 CADJPY & 2 AUDJPY trades are in progress after 4 CADJPY shorts hit their final targets all the way from the 103 level.

Until today, Nowotny was thought to be one of the soft hawks at the ECB but with Brent hitting $45 today and deflationary signs emerging, he's swinging to the dovish side. It's one of the best indications yet that sovereign QE is coming on Jan 22.

The euro touched 1.1753 on Tuesday, which is a pip below last week's cycle low, and it will be a key support level in the hours ahead. EUR/JPY also extended further below the 200-day moving average after breaking it on Monday.

The key euro risk in the day ahead is the preliminary German court decision on the OMT. It's a program that was never used from the 'whatever it takes' era but if the court sounds disapproving it may have implications for the sovereign QE. Markets find court decisions very difficult to price and interpret so it could spark heard reaction or a squeeze higher.

Other moves on Tuesday saw USD/CAD stall just ahead of 1.20 despite a continued oil decline and a warning from the BOC's Lane that low energy prices could stall rate hikes. It could simply be some consolidation before a break but the lack of a further push could also be an early warning.

In the near-term, the highlight on the Asia-Pacific calendar comes at 0600 GMT when Japanese prelim Dec machine orders will be released. These numbers have been extremely volatile recently with Nov data up 36.6% y/y.