Eur/usd - page 66
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ECB Likely To Sit Tight Awaiting March Forecasts
The European Central Bank is likely to leave rates unchanged this month, as it faces the classic dilemma of whether to consider the low inflation and high unemployment or the improved sentiment and gradual eurozone recovery, and wait for the fresh round of macroeconomic forecasts due in March.
Adding to the ECB's woes are rising money market rates that signal a liquidity crunch and pose a threat to the fragile recovery in the currency bloc. Further, the recent turbulence in the emerging markets has put upward pressure on the euro, consequently fueling the ongoing deflationary concerns.
Many economists feel this week's decision would be a close call and some are looking forward to another round of easing, as deflation worries mount even as ECB policymakers insist there is no Japan-style scenario.
Inflation has retreated to a four-year low of 0.7 percent in January, according to Eurostat's preliminary estimate, a level previously attained in October that prompted President Mario Draghi to announce a surprise quarter-point rate cut the very next month.
The headline figure stayed notably below the ECB's target of 'below, but close to 2 percent' for the twelfth consecutive month. On the other hand, core inflation edged up in January.
Following the policy meeting in Frankfurt on Thursday, the Governing Council is expected to hold the main refinancing rate at a record low 0.25 percent for a third straight month.
The marginal lending facility rate is likely to be retained at 0.75 percent and the deposit facility rate is expected to remain at zero, where it has been since July 2012.
An interest rate cut is definitely in the offing and it is just a question of 'when', economists said. The timing of another rate cut is crucial as it would be the last one in ECB's arsenal before zero-interest-rate-policy and negative rates. There are also doubts regarding the effectiveness of any policy move at this juncture.
"Another small cut in interest rates, perhaps accompanied by a negative deposit rate, seems the most likely course of action, if not at February's meeting then soon after," Capital Economics Chief European Economist Jonathan Loynes said.
Moving closer to zero interest rate risks pushing the euro area into a 'lost decade', the kind Japan had when deflation retarded economic recovery leading to a painfully long stagnation. Some economists said the ECB will most likely try a non-standard 15 basis points reduction in the refi rate before going negative.
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Eurozone business activity best since June 2011
Eurozone private sector business activity in January showed the best performance since June 2011, fresh evidence that a modest recovery is gaining traction, a key survey showed on Wednesday.
Markit Economics said its Eurozone Composite Purchasing Managers Index (PMI) for January rose to 52.9 points from 52.1 in December, the seventh monthly rise in a row.
While this was down from the initial January reading of 53.2, it still represented the fastest rate of growth since June 2011, Markit said.
The index is closely watched as a reliable leading indicator of growth, and a reading above the 50-points growth-downturn line is positive.
"The final reading of the eurozone PMI was down slightly on the earlier flash reading but nevertheless signals a very encouraging start to the year," said Chris Williamson, Markit chief economist.
Markit said the upturn was driven by the manufacturing sector while services remained subdued in comparison, at 51.6 points in January compared with 51 in December.
A separate Markit report earlier this week showed eurozone manufacturing hit a 32-month high of 54 points in January, up from 52.7 in December.
On the Composite PMI measure, eurozone powerhouse Germany hit a 31-month high of 55.5 points while Spain was at a 78-month high of 54.8 points.
France, with the second-biggest economy in the 18-nation single currency zone and which has lagged its peers, was on 48.9 points, still in negative territory but improving.
Williamson said the report overall suggested the eurozone economy could grow 0.5 percent in the first quarter of the year and if that is the case, then 2014 forecasts of 1.0 percent are "already looking somewhat conservative."
"While Germany is providing the main impetus to the recovery ... the upturn is becoming broad-based, which in turns adds to the likelihood that it can be sustained," he said.
At the same time, Williamson cautioned that the "recovery is still all-too dependent on the manufacturing sector.
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ECB leaves key lending rate unchanged at 0.25%
The European Central Bank on Thursday left its main lending rate unchanged at 0.25% Most economists had expected the ECB to remain on hold, though a significant minority had penciled in the potential for a cut in the refi rate to 0.1%.
ECB President Mario Draghi's news conference, set to begin at 8:30 a.m. Eastern, will be closely watched for clues to potential actions by the central bank as it deals with inflation that remains well below its target and a lack of credit growth.
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Euro Rises Most in Two Weeks as ECB Refrains From Extra Stimulus
The euro strengthened the most in two weeks against the dollar after European Central Bank President Mario Draghi refrained from announcing any additional stimulus measures that tend to debase a currency.
The single currency rose versus all except one of its 16 major counterparts after Draghi said both upside and downside inflation risks remained limited. A measure of the euro’s volatility increased for a second day as policy makers kept their benchmark interest rate at a record-low 0.25 percent. Australia’s dollar climbed to a three-week high after the nation reported an unexpected trade surplus. The Russian ruble strengthened for a third day and Turkey’s lira advanced.
“Draghi is pushing back on anything that points to the ECB taking more action,” said Gavin Friend, a foreign-exchange strategist at National Australia Bank Ltd. in London. “Draghi says further analysis on the medium-term price stability outlook will be available next month. The euro is up as some will see this as a signal any policy action will have to wait until then.”
The euro advanced 0.5 percent to $1.3605 at 2:45 p.m. London time, the biggest gain since Jan. 23. The single currency rose 0.7 percent to 138.27 yen after dropping to 136.23 yen on Feb. 4, the weakest level since Nov. 22. The dollar rose 0.2 percent to 101.67 yen.
Draghi, speaking at a press conference in Frankfurt, signaled officials will wait until next month before deciding whether to cut interest rates further as money markets stabilize and the economy shows some signs of recovery.
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ECB rejects deflation fears as it holds rates at 0.25%
The ECB kept its benchmark interest rate at 0.25% after its latest meeting. The rate was cut to its current record low in November.
ECB president Mario Draghi said: "We have to dispense with this idea of deflation. The question is - is there deflation? The answer is no."
Eurozone inflation slowed to 0.7% in January from 0.8% in December.
The figure fuelled worries about whether the euro bloc could suffer deflation, potentially de-railing economic growth.
However, the ECB believes the economies of the eurozone are recovering after the bloc emerged from recession last summer.
In addition to holding its benchmark rate at 0.25%, the ECB also left the rate it pays on bank deposits unchanged at zero.
At a press conference to explain the ECB's latest decision, Mr Draghi said: "There is going to be a low level of inflation for a protracted period of time, but deflation? No.
"The modest recovery is showing encouraging signs. The demand side is getting stronger, not weaker. We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding."
On Wednesday, Markit's Eurozone Composite Purchasing Managers' Index indicated that growth in the private sector last month was its strongest for two and a half years.
Stress tests
Holger Schmieding, chief economist at Berenberg Bank, believes the bank is right to believe the European economy is recovering : "Prices are stable. Leading economic indicators are close to trend.
"The European Commission's Sentiment Index is at 100.9 which is actually a little bit above trend. So the recovery is happening. Draghi should have acted earlier, but belatedly, the recovery is on track."
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Draghi Starts Policy-Action Countdown as ECB Awaits Data
Mario Draghi has put investors on a month’s notice for further economic stimulus after outlining the ingredients necessary for action.
The European Central Bank president cited next week’s snapshot of euro-area economic growth and the need to better assess the inflation outlook as critical for whether policy makers take “decisive” steps when they reconvene to set monetary policy in March. He spoke to reporters yesterday after the Frankfurt-based central bank left its benchmark interest rate at a record-low 0.25 percent.
The ECB is setting up a month of data scrutiny as officials weigh up whether deteriorating price pressures are sufficient to merit fresh aid or a stabilization in money markets and signs of an economic pickup mean the current ultra-loose monetary stance is working. This month’s policy pause was enough to prompt the euro’s biggest gain in two weeks.
“The ECB continues to look at all policy options, but does not seem to have decided on a particular course of action yet,” said Elga Bartsch, chief European economist at Morgan Stanley, who predicts a rate cut in March.
Waiting a month also allows breathing space to assess the selloff in emerging-market currencies and for the ECB to compile its latest macro-economic forecasts. Draghi said that officials will for the first time look ahead two years by providing inflation and growth estimates for 2016.
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Europe Is Fixed: Spanish Yields Tumble To 8 Year Lows (Below US Treasuries)
Is it any wonder Mario Draghi didn't lift a quantitative-easing finger this week?Despite record unemployment, record (and disastrous youth unemployment), record suicide rates, record non-performing loans, and an inextricably-linked banking system facing $3 trillion in exposure to emerging markets... Spanish bond yields have collapsed to their lowest since 2006 (and Italian close behind). With an entirely broken transmission mechanism of monetary policy, it seems the "market" for European bonds knows no bounds as spreads on the riskiest sovereigns drop to pre-crisis levels and 10Y Spain yields are now lower than 30Y US Treasuries.
Europe must be fixed?
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Germany denounces eurozone rescue plan
Germany's top court has issued a blistering attack on the European Central Bank, arguing that its euro rescue plan violates EU treaty law and exceeds the bank's mandate.
The tough language leaves it doubtful whether the ECB's back-stop scheme for Spanish and Italian bonds can be implemented if Europe's debt crisis blows up again, and greatly complicates any recourse to quantitative easing if needed to head off deflation.
The German constitutional court refrained from issuing a final ruling on the plan, known as Outright Monetary Transactions (OMT). It referred the case to the European Court (ECJ), but only after having prejudged the issue in lacerating terms that effectively bind German institutions. "The court considers the OMT decision incompatible with primary law," it said.
The verdict is a blow to the ECB's Mario Draghi, who unveiled the OMT in July 2012 with a pledge to do "whatever it takes" to save monetary union. The gambit restored faith in Club Med debt overnight and averted the collapse of EMU, but Mr Draghi was sailing close to the wind. While the German finance ministry backed the scheme, the Bundesbank opposed it as a fiscal blank cheque for Club Med, and an erosion of ECB independence. "This is a massive attack on Europe's rescue strategy. I don't know whether markets have understood this yet," said Clemens Fuest, head of Germany's ZEW Institute.
Marcel Fratzscher, from the DIW Institute, said the judgment kills the OMT for the time being. "I don't think the ECB can activate the programme as long as the case remains open," he said. "The ECB's nuclear weapon is longer operational, but you could say they bought 18 months of calm so the OMT served its purpose," said one expert. The court judgment was shockingly harsh, though it left a possible way out if the OMT is limited in scope. "There are important reasons to assume it exceeds the ECB's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget," said the court.
The judges said they were "inclined to regard the OMT decision as an ultra vires act", adding that this "creates an obligation of German authorities to refrain from implementing it".
The ECB insisted yesterday that "the OMT programme falls within its mandate". One EU official said the Bundesbank is legally obliged to take part if called upon, but admitted that no one can force it to obey. "If necessary we could still implement the OMT without Germany, but it would not send a good signal," he said.
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EUR/USD Forecast February 10-14
EUR/USD had a positive week, riding on the confident message from Mario Draghi and recapturing the broken uptrend support line. The ECB president will have another opportunity to rock markets now. In addition, industrial production and the all-important GDP figures are the highlights of this week. These are the main highlights for this week. Here is an outlook on the major events and an updated technical analysis for EUR/USD.
The ECB left all rates unchanged and president Mario Draghi gave a calm speech in which he provided an explanation for each inflation worry. Even though the ECB doesn’t really expect a change, it remains open to action, depending on data coming in March. PMI readings released earlier indicated modest improvement in January with positive Services PMIs from Spain Italy and the Eurozone as well as solid figures in the manufacturing sectors but Eurozone Retail Sales disappointed by dropping 1.6%. In the US, the Non-Farm Payrolls report came short of expectations, but another drop in the unemployment rate with a big upgrade to past data left analysts skeptical that the taper train would derail. What is the next direction of the pair?
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EUR Extends Gains Against USD After NFPs
Yellen Speaks Next Week, Will Jobs Number Force Her Hand?
GBP: It All Rides on the BoE Quarterly Inflation Report
EUR Extends Gains after NFPs
CAD: Rebounds on Stronger Employment Data
AUD: RBA Expresses Comfort with Currency Level
NZD: Chinese Service Sector Activity Slows
EUR: Only Upside Data Surprise
Yen Crosses Hampered by Market Uncertainty
Yellen Speaks Next Week, Will Jobs Number Force Her Hand?
For the second month in a row, U.S. companies added fewer jobs than the market had anticipated but this month the initial losses in U.S. assets from the U.S. dollar to the S&P 500 were recovered quickly as investors focused on the bright spots in the labor market. Only 113k jobs were created in January compared to the market's 180k forecast but the unemployment rate continued to fall while average hourly earnings and the labor force participation rate increased. The monthly payrolls report can be volatile and the fact that job growth increased at all is a positive sign for the economy. Over the past 6 months, the U.S. is still adding an average of 177,500 jobs per month. While this is hardly indicative of strong growth, the data is also not terrible enough to alter the Fed's taper plans. The 0.2% increase in average hourly earnings and the labor force participation rate signals that existing workers are making more money and this dynamic is encouraging people to return to the worker force. The broader and more reliable U6 unemployment rate also dropped from 13.1% to 12.7%, its lowest level since November 2008.
The main takeaway from today's labor market report is that the U.S. economy continues to recover, albeit at a slower than anticipated pace. In some ways, this is good news because it means that the Federal Reserve won't taper asset purchases too quickly. Instead, they may have to consider ways to amend and strengthen forward guidance as the unemployment rate approaches their 6.5% threshold. The jobless rate now stands at 6.6% but the pace of job growth has not been strong enough for the central bank to speed up the removal of stimulus. So Janet Yellen will need to decide whether to lower the threshold or drop it completely like Fed President Lacker suggested earlier this week. He said the central bank "will have to reformulate and provide some qualitative way of providing an assessment of what time horizon we think is most likely" for rates to start rising. Our first opportunity to get Yellen's interpretation of the data is next week when she delivers her very first semi-annual testimony on the economy and monetary policy. She is scheduled to testify before the House on Tuesday and Senate on Thursday. Her prepared remarks will be released at 8:30am ET on Tuesday, 90 minutes before she delivers her first public speech on the economy as Chairman of the Federal Reserve. There is no doubt that she will be asked about what the Fed plans to do with their 6.5% unemployment rate threshold and most likely she will say that they will reevaluate the forward guidance in March. Yellen's testimony will be the most important event risk on the U.S. calendar next week but retail sales will also be very important. Consumer spending is expected to stagnate after growing only 0.2% the previous month. Weak demand is another challenge that Yellen needs to address early in her term.
GBP: It All Rides on the BoE Quarterly Inflation Report
U.S. monetary policy won't be the only focus of the foreign exchange market in the coming week. The Bank of England will also release its Quarterly Inflation Report and like the Federal Reserve, their backs are against the wall because the unemployment rate is falling faster than they anticipated. The BoE also tied itself to an unemployment rate threshold and they are now only 0.1% away from that level. Unfortunately the recovery in their economy is not strong enough to handle an increase in interest rates, which they promised would be their first step in unwinding stimulus. Aside from providing their latest economic forecasts, the Monetary Policy Committee has oftentimes used the Quarterly Inflation Report to telegraph major changes in policy. They will need to update their forward guidance this quarter and they could either choose to abandon their unemployment rate threshold or lower it. We think tying monetary policy to the jobless rate was a big mistake for U.K. and U.S. policymakers and both should abandon this rule completely and move to something more qualitative to manage the market's expectations. This option would create less volatility for their financial markets and the currency than a change in the level of the threshold. Today's industrial and manufacturing production numbers confirm that now is not the time for the BoE to tighten monetary policy. The recent slowdown in manufacturing and service sector activity is a sign that the economy still needs support. Sterling traded higher today but a continued recovery will hinge upon optimistic comments from the central bank.
EUR Extends Gains after NFPs
The rally in risk drove the euro higher against the U.S. dollar for the third consecutive trading day. Weaker than expected trade activity in Germany and France along with the German Constitutional Court challenge of the ECB's OMT program should have been negative for the currency and it was up until the U.S. non-farm payrolls report. Euro shot higher after NFPs and when the initially volatility settled, it held onto its gains throughout the North American trading session. A further rally in the currency next week will hinge on the tone of Janet Yellen's testimony because no major Eurozone economic reports are expected until the end of the week when fourth quarter GDP numbers will be released. 2013 was a tough year for the Eurozone with no major acceleration in growth at the end of last year. Meanwhile according to our colleague Boris Schlossberg "The German Constitutional court challenged the constitutionality of ECBs OMT program but did not rule it illegal, passing the final judgment on to the European Court of Justice in Brussels. The EUR/USD initially tumbled on the news dropping to a low of 1.3550, but quickly found its feet and settled down in morning London dealing. Many analysts pointed out that the OMT has never been used and is unlikely to go into effect anytime soon. By referring the matter to ECJ the German court implicitly acknowledged the superiority of Brussels to Berlin and ceded sovereignty on the matter. The ECJ is expected to take a more liberal view of the matter and will likely rule in favor of the program."
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