Despite next week being a shortened trading week in North America, investors will end up feeling like participating in a sprint to August’s NFP report. But before the employment announcement, global investors will have to endure both the copy and rhetoric from a plethora of central bankers, and the European Central Bank is one of them.
The ECB’s 23 Governing Council members will meet against a backdrop of improving eurozone economic data to discuss their monetary policy. Their own regions' gradual recovery remains very much uneven, and continues to be led by Germany, whose business sentiment hit its highest level in 16-months this month. ECB council member Nowotny said yesterday that it is appropriate for central banks to give “financial markets some certainty at a highly uncertain time.” The Austrian National Bank head indicated that although the recession in Europe is technically over following the positive 2Q GDP results, a high degree of uncertainty continues.
ECB’s Nowotny comments from an Austrian symposium attended yesterday are again being rehashed this morning with a focus on translation of forward guidance language. He said, “For the foreseeable future, interest rate hikes are excluded.” That differs little from the ECB’s forward guidance, where rates are likely to remain at “present or lower levels for an extended period o f time.” What was different was that Nowotny dismisses the idea of tying the ECB’s hands on forward guidance based on a specific level of employment similar to the policies of Bernanke or Governor Carney at the BoE.
The ECB’s forward guidance is based on a need to maintain its primary mandate of "price stability" and to a certain extent "financial market stability." Nowotny said that the turmoil in emerging markets was not having an impact so far on the eurozone's economy – it maybe a tad too early to feel any real impact. So far, the developing markets have borne the brunt of investor unease over a possible U.S. led military strike on Syria as well as expectations that U.S. will soon begin to apply some pressure to their monthly $85b bond buying program.
Notwithstanding the severity of the political and economic moment, some of the major currencies this morning remain caught in the “month-end” demand headlights and seem to appear somewhat unresponsive to political and macro-fundamental stimulus. The 17-member single currency is not immune; Asian Central Bank action earlier this morning seemed to send the EUR ‘shorts’ scuttling for cover as they lifted the currency away from 1.3220.
Frustrated by the tight ranges thus far, the spec trader seems to have also moved to pare some of their EUR short positions. Some further EUR light stops are reported straddling the higher 1.3260s, just ahead of a few good reported offers (1.3270-90), an area that is expected to cap the first rebound after the initial break of 1.3300 yesterday.
Some month end EUR/GBP demand seems to have underpinned the main pair as the market heads stateside. There are reports of month-end dollar demand, which one would have to assume that a percentage of dealers have completed some of those transactions ahead of time due to holiday trading time constraints. Expect the North American FX session to be short and probably price erratic due to the geopolitical and event risks premium that gets to be priced in, especially on a “long” weekend.
Investors thus far seem to expect the USD to remain supported against emerging market currencies and are hoping that it will post small gains against GBP and EUR. The lack of commitment to further stimulus from BoJ officials suggests that any USD gains against the JPY are likely to be limited for the time being.