Looming ECB Rate Decision To Keep Investors At Bay

by: Dean Popplewell

It's currently not easy for the FX investor to find something of substance to get excited about. Caution over a plethora of Q4 earnings over the coming weeks is expected to naturally limit risk. The fiscal cliff euphoria is long gone and markets again are beginning to brace themselves for the onslaught of long-drawn-out negotiations to raise the US debt ceiling and avert huge spending cuts. Breaking the current monotony will be the big boys coming out to play tomorrow. The BoE and ECB policy makers finally get to 'show their hand.' Thus far, markets reaction is somewhat muted, holding a 'bluff' does not win over many new friends!

Raising capital is all the rage for the periphery EU economies this week. Ireland had a successful syndication yesterday, reopening an older issue of 5-year debt. Strong demand push yields to +3.31%, sharply lower than the initial issue yields print of +5.59% last July. Even Portuguese bonds are falling this morning. Yields are backing up amid speculation that the country could be entertaining the idea of selling new debt. With the Irish deal enjoying strong demand, returning to the bond market must look enticing for Portugal. Investors switching product could also explain the backup in yields, switching out of Portugal into Irish product. However, new Portuguese debt requires a nice premium and their current yields look unappealing given the risk the country carries.

Is the market to get its temporary pick-up from this morning's German industrial production numbers? Analyst consensus was leaning towards a +0.8% print for December, and this after three consecutive weaker releases. A print like this does not show anyone the correct direction 'out of the woods.' However, it will continue to keep the markets focused on the inadequate growth landscape that the EU's supposed backbone has. The weak pace of growth will not stop just in Germany; it will continue to perforate throughout the core.

The final print did beat consensus (+0.2%), growing slightly m/m, but again has fallen short of expectations. This result is expected to further weigh on Germany's Q4 growth prospects. We should not be that surprised; data so far this week has not benefited Germany. Exports dropped in November at the fastest pace in 12 months and manufacturing orders were also down. All is not lost however, despite forecasters expecting an 'iffy' Q$ report for Germany; forward-looking indicators, like the Ifo index and the ZEW point to a quick recovery.


The German production release should not harm the EUR bears. The final print highlights the inadequate pace of growth in core Europe. This will benefit short EUR positions. Negative EUR investors are looking for a retest of the 1.30 big figure support. With EUR 'spot' being off yesterday's relative highs, it only gives further comfort to the naysayers' positions starting off this morning. All eyes will now be focusing on the ECB announcement tomorrow. The meeting could support the EUR even though many expect no change to policy. Initial reaction to an unchanged decision tends to support the EUR boosting its rate advantage against lower yielding currencies. Now it's wait and see!

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