The single currency starts the day with a bounce in its stride, trading higher against the mighty dollar. More importantly, Euro bonds yields are somewhat steady ahead of the European Bank’s rate decision and Draghi’s highly anticipated press conference.
No changes are expected following the ECB Bank’s monetary policy meeting this morning, however, the market is waiting anxiously for the ECB Presidents comments on any possible change to their monetary policy and whether the recent appreciation of the 17-member European Union’s currency will be assessed.
The ECB is not alone in its decision making today. The Bank of England is scheduled to reveal its monthly rate announcement. BoE officials are likely to refrain from adding stimulus to aid the UK’s economy this morning. Their decision announcement is likely to be trumped by the incoming Bank Chief’s testimony to the UK’s treasury select committee. Current Governor, Mervyn King is expected to keep rates on hold and maintain the ‘Old Lady’s’ target for bond purchases at +GBP375b.
The incoming Governor for the BoE and the outgoing head of the Bank of Canada, Mark Carney’s testimony will be highly scrutinized. Investors and dealers alike will be looking for clues, in way of comments on UK GDP targeting and whether his testimony may shape the future trajectory of the ‘Pound.’ His early comments to the TSC, that the UK central bank will need to “design an exit from unconventional monetary policy’s” has caused Sterling to jump against the dollar and the EUR. The market seems to be positioned for dovish comments and so far, he sounds ‘not’ so dovish. It’s still early days and the market has quite a bit of monetary policy digesting to do this morning.
UK data and the rate decision announcement are expected to play second fiddle to the testimony by the first foreign Central Banker of the BoE. Earlier, the UK’s December IP came in at +1.1%, just above consensus (+0.9%), while manufacturing output also surprised with a +1.6% gain. But on a quarterly basis the data does not tell an impressive story, falling -1.9% in Q4. This is the sharpest fall since Q1 in 2009. The impact of the IP’s print is expected to be negligible on the Q4 GDP.
Amongst all this morning’s hoopla, Spain successfully managed to sell +EUR4.6b bonds with decent coverage. The sale came at the expense of higher yields, yields that may eventually bite into those long EUR positions (think of the pressure on the Spanish government, more austerity will be needed, long recession and potential bailout terms). Overall, Euro macro data has been relatively strong of late. The concerns lay with political stability, particularly with Spain and Italy and ongoing economic problems with Cyprus, which happens to have a large exposure to Greece. It’s no wonder that the ECB goes under the microscope soon.
Overall market consensus does not believe that Euro developments since the last ECB meeting justify a substantially different tone from Draghi and company. Public perception is beginning to wonder if the ECB should be acting on the exchange rate. Even France’s Hollande has broken with the Euro ranks and commented on the recent surge of the EUR, predominantly at the yen’s expense. In truth, there is no reason for policy makers to do anything about it yet.
The recent surge by the EUR has been from a ‘low’ level and its Trade Weighted Index (TWI) remains below the 10-year average by just under +8%. Europe’s exchange rate policy is a tool shared with the 17-finance ministers of the euro-zone and “active policy measures to influence the value of the euro would have to be supported by all member states.” Monsieur Holland should remember this. Recent Euro macro-data indicates that current monetary and exchange rate conditions remain supportive for the euro area as a whole. Policy makers are expected to probably worry more once the EUR trades aggressively north of 1.43.
Do not be surprised to hear Draghi willing to offer some guidance on the central banks view during the Q&A with the press. Central bankers are obviously worried about appreciation, however they are more worried by the speed of appreciation. The ECB still has some tools, namely interest rates, at its disposal should the economic outlook weaken any further. Be weary of the press conference, sometimes things may be temporarily lost in translation, which tends to lead to the first market move being the wrong move! Can Draghi bust the EUR out of this current range of 1.35-1.36?
The ECB has directly commented on the 3y LTRO repayments, highlighting that the repayments reflect improved market confidence. However, they have indicated that they will closely monitor conditions in MM (money markets) and make sure that their monetary policy remains accommodative. Analysts note that this is a reassuring sign that suggests that if repayments go too far and excess liquidity declines too sharply then the ECB will be willing to act.
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