Draghi’s loose lips yesterday plunged the 17-member single currency through a three-cent handle before a bottom was found. The uttering of negative deposit euro rates attempted to temporarily cripple the single currency ahead of this morning's highly anticipated U.S. employment report. The ECB did not need to take on any additional, more aggressive stimulus – instead they had Draghi mouthing deposit rates, which in effect delivered the same impact as an aggressive cut. Investors were hoping for yesterday’s rate cut to be the first on a list of measures to support a eurozone recovery. In the end all they got was an ECB that is able to move the market and not the economy.
24-hours later and Europe has two ECB members, Nowotny and Liikanen, trying to talk down the possibility of "negative" deposit rates. Why try and undo what Draghi called “technically ready”? Surely a weaker EUR is a plus for exporters and a supporter of growth in the region. The mere fact that Draghi uttered both deposit rates and negative in the same sentence helped cap the single currency gains against most currencies. Their chatter certainly will not stop the investor’s hunt for yield. From a policy maker’s perspective, investors yesterday were teased with a balanced view of inflation risk, a non-unanimous rate cut (more rumors) and a declaration that the ECB is not “in the business of monetization.” The ECB’s inability to provide any effective stimulus should limit the EUR’s capacity to rally. However, all Draghi’s good may come undone after this morning’s NFP report, which could provide a market surprise that does not favor the U.S. economy.
After the FOMC meeting this week the market will be putting more emphasis on the granddaddy of fundamental reports this morning – non-farm payrolls. The headline release will be the last event of a major event week and could have the most impact in determining the direction of all USD-pairs next week. The Fed has tied its policy outlook to labor market conditions. Earlier this week policy makers indicated that they could “not only reduce” their monthly bond purchases, but in fact they “could increase” the program if economic conditions warrant it. In translation, just more dialogue for a potential increase in accommodative policy. It was only six weeks ago that this market was beginning to look at a Fed exit strategy due date, now we have become more data sensitive dependent with softer global data. Even if growth continues along at the current moderate pace, U.S. longer-term yields must be in danger of falling further as current market perception has seemed to reduce any early expectations of an exit from QE.
The disappointing mid-week U.S. ADP report has sullied some of the originally strong expectations for today's headline release (+135K), while yesterday’s five-year record low U.S. weekly claims report has restored some lost confidence to a few lost souls, despite the reporting slant (+150k – the original shout). If we add in the softer tone of U.S. regional manufacturing survey data and their employment sub-components, it would suggest that a reading in line with consensus (+145K and a steady +7.6% unemployment rate) or slightly below is unlikely to provoke a strong response from the forex asset class. On the other hand, a surprise to the upside would be at odds with the weak narrative emerging from the more recent data points.
So far, it seems that the post ECB punt is to "buy" the single currency against the currencies where euro-policy makers are being currently outpaced in terms of monetary easing, and sell it as a funding play against anything that has yield. Currencies with a decent carry are few and far between, but they do exist and are familiar in commodity, Latin America or Nordic plays. This type of trade will obviously be supported by the “risk-on” effect of further global easing. However, what can both the rational and irrational investors do this morning?
If this market happens to witness a big disappointment from the NFP headline print, then the EUR is likely to head for the high country – an area that was visited earlier this week (1.3250). Under this scenario the BoJ’s Kuroda would be disappointed, as yen will want to test the stiff 97.00 USD/JPY support level again. The market should expect the commodity currencies (NZD, AUD and CAD) not to fare so well on a larger miss, especially if a weaker report happens to send both stocks and commodity prices lower on global growth fears. Any upside surprises should favor the "mighty dollar" sending it higher, temporarily at least, against both the EUR and JPY as the market remembers that the Fed can also "decrease" its bond buying. The EUR could end up testing sovereign appetite near the 1.3000 handle, while USD/JPY has the potential to gather further momentum if allowed to trigger stop-losses above 98.50 – again focusing its sights on the psychological 100.00 benchmark. Under this scenario, the commodity trio of the AUD, CAD and NZD could probably benefit the most as growth fears abate. All this tension could come to naught if we print as expected!