By Dean Popplewell
- Draghi throws his tool kit at deflation and growth concerns
- EUR Specs were short into NFP
- US Jobs headline a coin toss ending at the low end
Both forex volume and volatility have taken a massive hit since the onslaught of low interest rate policies by G7 central banks. What the FX market needs, and has been looking for, is a divergence in monetary policy. Are capital markets finally on the route to getting their wishes granted?
In translation the ECB's policy action this week means that over the next 12-18 months there will be some divergent monetary policy between the Euro-zone, the US and the UK. However, this knock on effect from the ECB's perspective will take time.
Yesterday, the ECB were more dovish than expected, pledging to throw their whole tool kit to ward off both deflation and tepid regional growth. The EUR's initial negative response towards January's low (€1.3473) looked promising, which suggested that the market was buying into the surprisingly more dovish comments from Draghi. Nevertheless, what transpired by day's end, with the EUR ending the day trading at a weekly high at the time (€1.3670), caught many EUR bears and speculators off guard. In reality, cuts to the refinancing and deposit rates were already priced in – the Euribor and the Eonia curve were unchanged.
So why is the EUR not suffering? The ECB measures taken on Thursday are very supportive for European financial assets like equities and peripheral bonds, so yesterday's ECB action is stimulating further portfolio investments in to the Euro region, and it's this that would obviously bid up the EUR itself. Friday morning’s non-farm payroll number was always going to be a coin toss outcome. Any negative surprises (sub +200k print) and the EUR would have garnered immediate support. A strong headline print (along the line of last months +288k – actual +217k) would keep the Fed on track and aid the ECB's best intentions. However, anything in the middle (and that what has occurred) and the market will find it difficult justifying full engagement.
The market specs went into NFP long USD, short EUR's on the crosses and against EM currencies. No surprises either way will have pre-weekend short-EUR covering becoming the order of the day. The bullish reversal in the EUR suggests the path of least resistance is likely higher toward €1.3775-1.38.
Keeping with the rate theme, next week’s UK labor report could cause some worries and possibly push back expectations for the timing of the first BoE rate hike. In particular, average earnings could fall to +1% y/y, or lower. With CPI inflation still around 1¾% - this undermines the recent theme that real living standards have started to recover. Any indication of a lower than expected UK wage inflation would reassure the MPC that there is sufficient slack to hold back from hiking bank rate at least until early 2015, and maybe even longer. This will have the fixed income dealers again pricing their curves and rate differentials will again narrow somewhat.
* JPY Gross Domestic Product
* GBP Jobless Claims Change
* GBP Employment Change
* CNY Consumer Price Index
* NZD Reserve Bank of New Zealand Rate Decision
* AUD Unemployment Rate
* JPY Interest Rate Decision