However Drama From Bond Sales, Greek Debt Swap Deal Would Dominate
Part 2: Coming Week Market Movers
The following is a weekly strategy guide for traders and investors, covering coming week’s market movers and trade ramifications for traders of all major asset classes via both traditional instruments and binary options. Perfect for those seeking a summary look at likely coming week market movers. See here for Part 1on the prior week and it’s lessons for the coming week.
If EU Calm, Central Bank Rate Statements & Comments Key
The big events this week are interest rate and policy commentary from the RBA, BOE and ECB, as well as a speech from Fed Chairman Bernanke on Friday.
Tuesday we have the first such event from Australia’s RBA. Markets expect a 25 bp rate cut from 4.25% to 4.00%. There is some minor risk of a 50 bp cut, as the RBA does not expect banks to pass on to customers the full 25 bps if it only cuts by that amount. There is also some risk that the RBA keeps rates steady in light of recently more upbeat global data and calming in the EZ. Regardless, AUD is not moving on interest rate expectations for now, but rather on overall risk appetite, so we look to the broader risk gauges like the S&P 500 for guidance on the AUD.
Thursday features the other two central bank events:
First comes the BoE, expected to keep the benchmark rate at 0.50%, but also to begin a third round of UK bond purchases. Markets are mostly expecting a smaller round of GBP 50 bln, with a minority expecting another round of GBP 75 bln. Given the strength in recent UK data, we believe the BOE holds rates steady, which could help the GBP strengthen briefly. However, the GBPUSD is struggling to rise above the 1.5900 zone, and regard a daily close below 1.5750 as a potential start of the next move lower.
Then comes ECB comes later Thursday, and is not expected to announce any policy changes. ECB Pres. Draghi is likely to note that last week’s better PMI’s are a further sign that Q4 was potentially the worst for now for the EZ, , but will likely qualify any optimism by noting that downside risks remain. In sum, this is likely to be a non event, and the EUR will continue moving with news on Greece, as well as other GIIPS bond sales.
But New EU Drama Would Steal The Show
Of course, anything that rocks the current relative calm on the EU would become the dominant market driver. Possibilities include:
- Discouraging news regarding the Greek debt swap negotiations – a distinct possibility as the brinksmanship game continues
- News that last week’s declines in GIIPS bond yields were mostly from official ECB or EU sources.
- Disappointing GIIPS bond sales or other news that drives up CDS prices
- News that undermines confidence in the CDS market as a legitimate hedge. For example, if the 50% plus haircuts currently contemplated are somehow actually deemed voluntary and not triggering CDS payments, then there is effectively no insurance for GIIPS bonds. These now become far riskier, and their yields would quickly rocket higher to reflect that added risk.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.