Forex: Euro – How Far have Markets Priced in Fresh ECB Stimulus?

Talking Points:

Dollar Builds Pressure as Jobs Data, Beige Book Bolster Taper
Euro: How Far have Markets Priced in Fresh ECB Stimulus?
Yen Crosses Weigh Risk, Stimulus, Capital Gains Tax Hike

Dollar Builds Pressure as Jobs Data, Beige Book Bolster Taper
The focus on (or perhaps hope for) Friday’s US jobs report must be strong. The USDollar continued to carve out a narrow range through the past session despite a round of data that significantly bolsters speculation for a January or December Taper timetable for the Fed. In a crush of scheduled event risk, the most prominent fundamental updates for the greenback Wednesday were the November ADP employment report and the Fed’s Beige Book. The former is a private payrolls report aimed at front-running the official Bureau of Labor Statistics numbers. The 215,000-net increase in jobs stood out prominently as the biggest increase for the series in 12 months. And, while this may not change FOMC members’ minds, it certainly feeds speculators’ expectations.

In a more ‘official’ vein, the Beige Book is the central bank’s play book for the forthcoming policy meeting. Aggregating the assessment of the country’s 12 districts, the report noted that growth was “modest to moderate” across the country as consumer spending received a similar grade. For employment, hiring trends reflected a “modest increase or was unchanged”. While this assessment is generally consistent to the past few updates, its impact is found in its context. Measuring the period directly after the partial US Federal Government shutdown, following positive trends in various economic data series, and noting a distinct effort by FOMC members to reinforce the separation between QE moderation and rate hikes; the scales of probability likely lean towards a Taper earlier than the unofficial March 19 meeting adopted two months ago.

If the Taper threat is so near, why isn’t the dollar on the move? We have recently seen a pullback in US equities, sliding gold prices and a two month high in 10-year Treasury yields – symbolically now the highest since September 18 when the FOMC surprised the market by deferring. Perhaps this is what the greenback looks like fully pricing in a near-term easing of the QE3 program? More likely, the presence of Friday’s NFPs is delaying repositioning. If the data is unexpectedly weak, it can douse hawkish speculation. Then again, if it impresses, it could unleash a speculative dam. Today, watch the Challenger Job Cuts report and the policy moves of the Fed’s major counterparts (ECB and BoE).

Euro: How Far have Markets Priced in Fresh ECB Stimulus?
Speculation surrounding the ECB’s (European Central Bank) policy regime caught traction on November 7 when the central bank surprised the majority by cutting the benchmark lending rate by 25 bps to 0.25 percent. The euro had tumbled heading into the last meeting, triggered by a reminder of ongoing economic hardship (record unemployment) that found the unfortunate compliment of a sudden drop in the region’s consumer inflation report. The currency has certainly wavered recently, but we haven’t seen the same deleveraging heading into this policy gathering. This could reflect a market that has fully priced in future ECB plans. Alternatively, the lack of clarity on what a next move could be may render the masses inert.

A cut to the benchmark rate carries limited return from a growth, lending and financial stability perspective – there are many zero-bound central banks that have reinforced that lesson. To move the needle on monetary policy and the euro, the group needs to either compete on the stimulus level that its counterparts have set or introduce something novel. Recent speculation has focused on the consequences of negative interest rates which President Draghi and company said was an option under reviews. A more traditional large scale asset purchase program (LSAP) like the previous LTRO efforts or even a targeted program like the BoE’s Funds for Lending Scheme, however, can be an effective euro weight.

Yen Crosses Weigh Risk, Stimulus, Capital Gains Tax Hike
The benchmark yen crosses (USDJPY, EURJPY, GBPJPY) continue to carve out ambiguous congestion patterns as traders await something to take center stage. There are risk trend implications in Friday’s NFPs release, a distant follow up to the BoJ’s QE program, imminent speculation surrounding other central banks’ policy bearings, and even a recent 3.6 percent Nikkei 225 tumble. Yen traders must balance the timing and importance of these different factors. Risk is imminent, but a January 1 capital gains tax hike (10 to 20 percent) may be grander in scope.

British Pound: The Biggest Monetary Black Swan?
There is material speculation for the ECB to reverse the contraction in its balance sheet, outright speculation of a BoJ QE2 and heavy debate as to the timing of the Fed’s Taper. Yet, for the Bank of England (BoE), the consensus is for status quo until the trigger is pulled on the first rate hike far in the future. That means there is far more room for the UK central bank to ‘surprise’. Should the MPC make any mention of concern over the level of the sterling, a sensitive pound could take an Aussie-like lurch. Meanwhile, watch the Exchequer’s updated fiscal and growth forecasts.

Canadian Dollar Has Plenty of Premium to Burn as BoC Backs Off Tightening Threat
The biggest trend developments come from changes from one extreme to the other of an elemental fundamental theme. Having the market’s perceptions of your policy bearings change from hawkish to dovish is about as extreme as they come –and that is what the BoC (Bank of Canada) seems to have established. The group noted that the risk of missing inflation targets now “appears to be greater”.

Emerging Market Currencies Taper Divining Rod?
Looking at pairs like EURUSD and GBPUSD, it may be difficult to assess the greenback’s appreciation of a solidifying Taper possibility. Yet, we can see that threat solidifying in the exotic currency set and emerging market. USDZAR for example is up 2.5 percent on the week. The chase for yield and dependency on quiet markets is most prominent in this group.

Gold Posts Biggest Rally in Six Weeks Despite Dollar Pickup
A 1.7 percent rally from gold this past week was the biggest since October 22 – following the delayed release of the September US employment statistics. This move is unexpected considering it comes ahead of major event risk – an ECB rate decision that can undermine the world second most liquid currency and Friday’s US NFPs – and the Beige Book seemed to support Taper speculation. Yet, regardless of bullish or bearish expectations, it is important to remember we are less than $50 from setting a multi-year low on the commodity.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:30

AUD

Trade Balance (Australian dollar) (OCT)

-375M

-284M

A weakened trade balance figure beyond estimated may put further pressure on the Aussi after a disappointing GDP print.

6:30

EUR

French ILO Unemployment Rate (3Q)

11.0%

10.9%

Price action is likely to remain limited until the ECB rate decision.