Forex: Euro May Rise on Neutral ECB Outcome, Yen Gains on Nikkei Drop

Talking Points

Euro Unlikely to Find Lasting Volatility in Status-Quo ECB Announcement
Yen Soared, Aussie and NZ Dollars Fell as Japanese Stocks Fell Over 2%
Nikkei 225 Drop May Show Lack of Confidence in Stimulus / Tax Hike Math

An interest rate decision from the European Central Bank headlines the economic calendar in the hours ahead. Expectations call for no changes in the policy mix, with target rate due to remain at 0.50 percent along with the pledge to keep borrowing costs at the current setting or lower for an “extended period”. That shifts the spotlight to the post-announcement press conference from ECB President Mario Draghi. European economic data has been broadly stable relative to expectations since September’s ECB meeting, according to data compiled by Citigroup. Meanwhile, a Bloomberg gauge of regional financial conditions showed notable improvement over the same period. On balance, that hints the emergence of significant ECB policy innovations is unlikely for the time being.

The recent emergence of political instability in Italy is likely to figure prominently in reporters’ questions, but Mr Draghi is unlikely to feel pressured to counter with anything immediately actionable. Indeed, spikes in Italy’s 10-year bond yield and 5-year CDS spread triggered by former Prime Minister Silvio Berlusconi’s latest shenanigans have been relatively modest. That suggests the markets are broadly sanguine about the situation thus far, so the ECB chief probably won’t feel pressured to step outside his comfort zone to talk markets off the ledge. On balance, the absence of a further push into dovish territory may prove supportive for the Euro in the near term, but the lack of something materially game-changing is likely to limit follow-though.

The Japanese Yen outperformed while the sentiment-linked Australian, Canadian and New Zealand Dollars traded lower in overnight trade against a backdrop of aggressive selling on Japanese stock exchanges. The benchmark Nikkei 225 equity index fell over 2 percent in a move that looked like a reaction to yesterday’s after-market announcement of a ¥5 trillion stimulus package. The program is designed to offset the negative effects of a sales tax increase slated for April on economic growth. It appears investors didn’t judge the effort to be enough of a counter-balance, which brought on sharp risk aversion.

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