Week in FX Europe – ECB Signals more Stimulus in the Pipeline

This week’s ECB press conference explained away some of the markets concerns, especially those pertaining to President Draghi’s leadership. Investors were seeking guarantees that Draghi is still in control, and remains the leader to save Europe. The market was very afraid that he would be required to operate behind the curve and potentially get very little done which would allow his Euro dream to slip away into oblivion.

At the ECB’s Thursday post rate announcement press conference, Draghi was able to dispel market doubts by indicating he remains at the helm. His reassurance has managed to stoke investor bets that he and his fellow policy makers will intensify stimulus for the euro area after indicating he has the backing of policy makers to do so. The press conference again highlighted the notable shift among the G3 – aided by recent data out of the U.S., the BoJ’s unexpected expansion of its QE program last week, and the ECB’s evolving path towards expanding asset purchase.

ECB’s proposal for broad bond purchases

With the ECB calming investors after downplaying dissent, new preparations for more-expansive action and a €1-trillion euro target for boosting the institution’s balance sheet (back to early 2012 levels) suggest momentum is shifting toward a proposal for broader bond-buying, perhaps as early as next month.

Whether it’s tinkering with the terms (size, maturity, and premium) of the long-term refinancing operation, or TLTRO or expanding the private sector asset purchases to corporate bonds, or for that matter sovereign bonds, the market has been reacting to the fact that the ECB is willing to consider doing more. The fact that Draghi notes that the ECB’s balance sheet will be growing while others are shrinking has given the market added ammunition to push the EUR lower, much lower.

The euro fell and southern European bonds rose as Draghi said policy makers are united in trying to revive inflation and highlighted how they’re stepping up their efforts as the U.S. Federal Reserve pulls back. Corporate bonds are expected to be next on the radar, well before the possibility of controversial sovereign debt (market is betting on Q1 2015 if weak Euro data persists).

Dollar wants license to roam

The EUR plummeted (€1.2400) after the ECB kept its policy rates at historic low, as Draghi backed it up with authoritative ‘dovish’ comments. Since printing its two-year low (€1.2364) late Thursday, the single unit prefers to consolidate with its bearish bias as markets await U.S non-farm payroll report later this morning (expected +235k and +5.9% unemployment rate). The EUR/USD has also been weighed down by smaller than expected increase in German manufacturing orders for September (+0.8% vs. +2% expected), a strong USD sentiment and further EUR selling on the crosses.

The next EUR leg move depends on North American jobs. A robust stellar NFP report on Friday will again give the USD license to roam high as U.S yields are forced to back up even further. A breach of Thursday’s EUR low would expose the downside towards sub-€1.2300, then €1.2239, followed by €1.2132 (August 2012 low). EUR market first line of resistance comes in at €1.2448, then at €1.2534 (Thursday’s high).

Next week for Europe:

After this weeks Central Bank events and North American employment situation next week’s economic releases look rather anticlimactic. Fundamental events for the first two weeks in November have been a boom for intraday volatility and market volumes. Historically, the first N.A trading session after a payroll release is usually the quietest trading day of the month.

Nevertheless, China leads things off on Sunday with yearly inflation numbers. The Aussies market gets to look at NAB’s Business Confidence report. Tuesday should be quiet as nations respect veteran’s day in the U.S and Armistice or Remembrance Day in Europe/Canada.

Late Tuesday, the RBNZ Governor Wheeler is due to hold a press conference about the Financial Stability Report, in Wellington. Wednesday is dominated by the U.K with average earning reports, claimant count, while the BoE’s Governor Carney is due to hold a press conference, along with other MPC members, about the Inflation Report also being released that day.

North America rounds off the week with manufacturing and retail sales reports on Friday.

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