New EURO Paradigm

It was too good to be true. Until now, the lure of “almost free” liquidity has been too hard to turn down. To constantly have upbeat expectations for global growth, given the slew of data pointing to further slowing, including China, has been an expensive position to hold ever since the FOMC and Spain added their weight to global concerns earlier this week. For the EUR, Spain remains the immediate outlier. The single currency has little potential to rally considering the rising concerns over the country. The lack of demand for that country’s bonds, coupled with last weeks Euro M3 money supply report is leaving the market with the impression that the ECB may have to deliver liquidity again to keep periphery debt yields from spiraling higher.

This morning, the EUR is currently knocking on strong psychological support levels (1.3050-60) and is attempting to suggest that the market is about to embark on a more important move lower. This despite many juggling with their positions ahead of tomorrows NFP and the long holiday weekend. Expect North American investors to continue to limit their exposure in the run up to payrolls. There is probably a risk for a surprise either way in the announcement. Even liquidity will be a concern due to the holiday. However, its remains unclear if market wants to add to their dollar hoard on a weak number or if the impact on sentiment is enough to revers some of the dollar gain this week.

Yesterday’s ECB meeting was overall a non-event, however, Draghi was able to counter punch the hawkish comments over the past three weeks from the Bundesbank by first, repeating the traditional statements from most Cbankers that all unconventional measures are, by “nature, temporary and that price stability remains the anchor of the monetary policy decision.” Second, after this sleight of hand, the rest of his tone from the ECB’s prepared monetary statement was very much biased on the dovish side. Why? Inflation which is “the key” for the ECB and currently running above their +2% target, was explained away by an unchanged statement, repeating that it will remain above their desired target this year with upside risk prevailing.

However, he also reaffirmed that over the medium term inflation risks are seen as “broadly balanced and in line with price stability.” Interestingly, he indicated in the press conference that there has not been any step up in the rhetoric on inflation over the past month. There is a risk to price stability by “gauging” so its necessary to look to the core-inflation (+1.5%) and its that that remains within the policy line. Third, clearly the ECB is taking some liberties with inflation in dealing with the debt crisis and its affect on growth. It has too; “downside risks” prevail as indicated by Draghi referring to the impact of the EU high unemployment rate. The president’s comments that the discussions on an “exit strategy” were premature certainly go against a hawkish Bundesbank.

On one seems to be anticipating any surprises from the BoE this morning. They are expected to toe the recent party line. However, that cannot be said for the country’s currency. Sterling trawls the currency lows outright after official figures showed that in February, UK manufacturing output posted its sharpest drop in two-years. However, expect the “Pound” debate to be trumped by the CHF move this morning. Against the EUR, the currency has briefly breached that 1.20 floor set by SNB. Central banks, specifically the BoJ and SNB will be expected to be out in full force if the market continues its recent developments.

Other Links:
FED and Spain Game Change for EUR