By Dean Popplewell
It's confirmed, the ECB can "walk the walk and talk the talk" after yesterday's promises. Euro policy makers have stopped at nothing, and have finally decided to throw everything, including the kitchen sink, at the region's twin potent risks of deflation and tepid growth. What the market heard from Draghi was certainly more dovish than anticipated; however, the squeeze on the EUR higher has been an even bigger surprise and the most painful so far. The EUR bear will be looking to this morning's US non-farm payroll report as a lifeline. A strong jobs report will give credence to the Fed's tapering endgame and naturally weigh on the EUR through interest rate differentials.
In reality, both investors and dealers are still coming to grips on the "when and the how" the ECB will have to dive into its toolkit to produce some of the promises. In his post announcement press conference, Draghi announced the suspension of the "sterilization" of bond holdings, the preparation for the purchases of Asset Backed Securities (ABS) and longer term loans of €400 billion. This followed their expected cut to both its benchmark rate (0.15%) and deposit rate (-10% - pushing it into negative territory for the first time in their history).
The market's initial reaction pushed the EUR to new four-month lows (€1.3504), yet by day's end the EUR managed to hold well above the January lows (€1.3473) and atop of the stateside open (€1.3623). A higher EUR was expressing the market's disappointment with the scope of refi and deposit rate cuts along with no QE announcement. Yesterday's intraday EUR bid price action was also aided by short covering of EUR positions after the fact. That rebound has weighed on the greenback with sterling back above £1.6800; USD/CHF falling from four-month highs ($0.9025) to one-week lows ($0.8911). USD/JPY (¥102.36) has been held up mostly by EUR/JPY (€139.45), but falling US yields and a small negative close in the Nikkei were JPY negative overnight.
The post ECB price action in a number of pairs will perhaps convince many to adjust their immediate positive outlook for the USD. The techies believe a close for the EUR above the 200-DMA will turn the market neutral from bearish short term, but expect dealers to want to sell EUR rallies ahead of €1.3800. The small bearish pattern in JPY could see the market wanting a pull back towards ¥102 and ¥101.50. Sterling for the moment has investors wishing to sell GBP strength up to £1.6900.
Yesterday's event price action was not for the faint of heart, but volatility provides opportunity and that is something the forex market has been craving. Today's main economic releases, North American payrolls report hopefully will provide investors with the same breaks. All eyes will be on US NFP, which is a volatile and oft-revised set of data, but the bulls will be praying for another strong print. This essentially means +200k new jobs or better to keep their charge going. Last month's +288k blockbuster headline will be tough to beat. The unemployment rate is expected to tick up to +6.4% from +6.3%.
The market price action would suggest that EUR/USD traders remain short EUR heading into this morning's number. Many are hoping for a strong headline print – technically stronger data should boost US rates and save them. However, the odds would favor data produced closer to the median (+210k, +6.4%), and if this is the case, then pre-weekend short EUR covering should become the order of the day. The bullish reversal in the EUR suggests the path of least resistance is likely higher towards €1.3775-1.38, unless there is a significant surprise in the NFP headline rate and/or a sharp drop in the unemployment rate.
Heading stateside, the EUR is dipping towards €1.3625-30 mostly on the back of cross-related sellers. The EUR is basically being sold for yield – EUR/AUD down 60 ticks (€1.4565), -100 vs. NZD (€1.5980) and more against EM. This morning's number is really a coin toss outcome, but with the specs short EUR across the board, a prudent investor would want to trade the US jobs release with the above positions in mind. Basically, any negative surprises and the EUR will have more support. A strong headline will keep the Fed on track and aid the ECB's best of intentions. Anything in the middle and the market will find it difficult justifying full engagement.