By Dean Popplewell
Overall, it's the correct position but horrible timing on entry price averages - that's what the weak EUR "bear" position holders are probably feeling at this moment as the 18-member "single" unit trades up through the psychological €1.3200 handle and feel that it wants to gather more upside momentum. Certainly clouding some of this morning's price action will be month-end demand. For most of this week, the EUR has mostly resided just ahead of its yearly lows (€1.3155) and somewhat handcuffed to a plethora of option barriers and month-end requests. However, it now seems that the market may have gotten too far ahead of the ECB outlook.
So far this Thursday, trading has been mostly centered on current ECB expectations. Bunds and US Treasury prices are beginning to give up some of their recent gains, allowing yields to back up, while the EUR advances outright on speculation of "no" new ECB policy action actually happening next week (September 4th). Despite softer euro data of late, sources indicate that Draghi and company are unlikely to act unless tomorrow's euro inflation numbers (HCIP) show the eurozone sliding towards deflation. Nevertheless, the chance of new stimulus being introduced without first taking into consideration the impact and take-up of the TLTRO program starting in a matter of weeks would not have been policy-prudent.
ECB will not act hastily
Speculation of a proactive ECB has grown since President Mario Draghi struck a dovish tone at the Jackson Hole central bankers' meeting last week, indicating that euro policy makers could be moving closer to quantitative easing (QE). Departing from his original speech text, Draghi noted last Friday that "financial markets have indicated that inflation expectations exhibited significant declines at all horizons" in August. To-date, euro policy makers have been transparent in their communications. The chance of an imminent stimulus is low, even after Draghi expressed his concerns about market expectations of inflation. Time and time again, he has repeated that the ECB is ready to respond with "all available tools, should the need arise." However, under the TLTRO program, the ECB expects +€1 trillion to be taken up, and they will want to gauge the effectiveness in channeling money back into the "real economy" before becoming too trigger happy. The ECB is definitely looking at a program to buy ABS (Asset-Backed Securities), and further details could be announced next week on structure and execution. The euro bear seems to have got caught in the Jackson Hole euro stimulus vortex euphoria.
It's not just policy expectations or month-end demand supporting the EUR this morning, there are also several yards of EUR/USD strikes nearby for Friday's cut. On the topside, €1.3235-40 (€677m) and €1.3250 (€2 billion) being the most significant. On the downside, support is found cluttered near €1.32 for about €1.5 billion. All levels will act like a magnet at some stage. Not helping is the contrarian Asian Central Bank (ACB) interest. They are making the EUR bear's life that bit more difficult in the final stretch of August. ACBs have been seen buying both EUR and GBP overnight to most likely pare back some of their "net" shorts (dollar longs). For the most part, reserve flows have been guiding the EUR/USD recently, and the ACBs' supposed drawdowns are most probably being used to smooth currency strength and could add to the EUR's current squeeze.
Weaker EUR data can wait
A steeper-than-expected rise for eurozone M3 this morning has helped to lift the EUR from its overnight lows. The broadest measure of money supply increased +1.8% y/y, exceeding expectations (+1.4%). It's a start, but well below the ECB's reference value of +4.5% that euro policy makers consider consistent to maintain an inflation rate just below +2% over the medium term. In Germany, Hesse (+0.0% m/m, +0.7% y/y) and Bavaria (+0.1% m/m, +0.8% y/y) CPI was reported largely unchanged on the month, providing no surprises or support for the EUR. However, softer German jobless numbers (+1k m/m) and eurozone loan data will continue to work to curb the EUR's bullish reaction. Nevertheless, the market seems singularly focused on tomorrow's euro CPI, so a further short squeeze is highly likely. A modest market correction rather than one-directional flow is healthy for price action.
Russia is not immune
The MICEX is plummeting amid the increasing focus on the involvement of Russian soldiers in Ukraine. This is not new news, however, the sudden uptick in focus suggests that Europe needs to show some sort of reaction. Risk aversion price action will continue to see a pre-weekend uptick - only natural because of event risk exposure. Gold, so far, has risen for a third consecutive day as tensions between Ukraine and Russia support the metal's safe haven appeal. Thus far, it has added $1.46 an ounce to $1,283.91, slowly moving away from its two-month low of $1,273.06 hit last week.