It’s no surprise to witness a range bound multiple asset session ahead of tomorrow’s highly anticipated economic release, US non-farm payrolls and today’s BoE and ECB rate announcements. Independence Day holiday in the US has already encouraged many interested parties to wade to the sidelines, as they prefer to trade in more liquid of times. In today’s North American shortened trading session, price action will be dominated by entities not bothered by a liquidity premium. They are interested in adding to or paring positions after what Draghi has to say in his routine press conference after the ECB rate notice.
The jury is currently still out on whether the ECB or the resignation of Portuguese Government Ministers poses more of a threat to the 17-member single currency. Portugal’s benchmarks are leading the charge in Europe this morning. This follows ‘fast on the tails’ of some heavy losses being recorded in the previous Euro sessions after the resignation of two key cabinet ministers earlier this week over austerity measures. The sense that an ongoing constructive meeting’s between coalition members has allowed Portuguese bond yields to ease a tad, but they still remain at highly elevated levels. The markets obvious concern is the spill over effect to other neighboring periphery yields. Is the fear of contagion contained?
The current domestic yield of Portugal’s 10-year product (+7.23%-100bp higher since resignations) could leave the country firmly shut out of the bond market and raise questions about the sustainability of its debt. The present Iberian crisis will likely be putting further pressure on the ECB and President Draghi. Portugal is another reason for the central bank to sound more ‘dovish’. This could pressurize Draghi to hint at new measures to help the weaker economies during this morning’s press conference. The existence of the ECB to be a “buyer of last resort” in the secondary market, coupled with ongoing global central bankers dovish comments, offer confidence that the “Iberian crisis is to be contained.” If that is the true situation, then it’s a Portuguese specific issue and the Euro peripheries get ‘another’ reprieve.
If it’s not Portugal, then its Egypt or Greece that could very much keep investors on their toes in the coming days. A bloodless coup by the military in Egypt and the replacement of their president by the head of the constitutional court will only heighten investor uncertainty. Despite not being a country of oil production, commodity prices will be focusing on the accessibility of the Suez Canal – the gateway to the region. Any threat to crude distribution and we have global price concerns. Greece will remain a moving target with Euro-officials continuing to lay threats until the country meets its public sector reform targets. The ECB will likely have to look through the volatility and focus again on fundamentals.
What are we to expect from Draghi and company this morning? First and foremost, the ECB needs to speak more clearly. Analysts are anticipating that the Euro policy makers will acknowledge that recent data has shown some improvement. They should also continue to stress that the risk to economic growth in Europe remains to the downside. It has been suggested that this could be done by the introduction of “forward guidance for interest rates.” The overall theme, like many central banks, will be to stress the message that monetary policy will remain very accommodative for some time. How will the EUR react? Any further dovish innovations by Draghi and his cohorts would likely be negative for EUR. Portugal’s political uncertainty also throws a wrench into most peoples trading plans. There are market buyers of the single currency on dips and better sellers on rallies. The in-between is influenced more by the illiquid moment and tomorrows NFP.
And what about the BoE’s new financial rock star? Today’s meet is Governor Carney’s first after only four day’s in his new job, head of the “Old Lady.” Nothing seems to be amiss with the new Governor keeping key interest rates on hold after such a short period in the “new digs.” The market prefers to be looking towards the August Inflation Report for further discussion of forward guidance. Anticipating no surprises from the BoE, in the short term GBP should mostly be taking its cues from the developments in EUR and in USD.
Due to the day that is in it, US Independence Day, market reaction should be short and swift, as liquidity and the cost of that liquidity becomes an issue. Traders will mostly prefer to wait for tomorrows NFP fallout for a full-blown reaction.
A EURO For Your Thoughts May Soon Cost Two
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX