Eur/usd - page 94
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It May Be Non-Tuesday, But The High Freaks Are Cautiously Optimistic
Perhaps the most important "news" of the day is that it is non-Tuesday.
Yes, there was actual news news, like German factory orders dropping -2.8% on expectations of a 0.3% increase, French industrial production down -0.7% on expectations of a 0.3% increase (both misses driven by a soaring Euro which is now spitting distance away from the 1.40 ECB "redline"), the Nikkei tumbling 2.9% to just above 14000, the Shanghai Composite down 0.9%, SocGen Q1 profit plunging 13% and conveniently blaming it on Russia, speaking of Russia things continue to deteriorate even though Interfax reported that the country has received the first part, some $3.2 billion, of the promised IMF bailout - money which will be used to promptly pay Gazprom... and buy gold, a sudden conflict between China and Vietnam escalating over the placement of an offshore oil rig and so forth, but in the new normal, none of this matters.
If there is anything that does matter it will be that the central-planning Chairmanwoman of the "free" world, Janet Yellen will speak before the Joint Economic Committee of Congress at 10am. Algos are surely hoping that she reveals a USDJPY target, and thus S&P 500, EOD target at least 1% above the overnight lows. She better, because with the ongoing demolition of high beta stocks like TWTR and WFM, Alibaba's "largest ever tech IPO" may be Virtu'ed quite soon unless the Fed brings some spring momentum ignition step back to the "high freak" trading vacuum tubes.She better: adding complexity to the "trading" day is that there is no POMO today to spark an indiscriminate buying rampage.
Looking back at yesterday's performance, the S&P500 (-0.90%) fell for the third time in four days this month, with two notable sector underperformers in tech (-1.18%) and banks (-1.5%). The big underperformer was Twitter which fell 17.8% as the company’s insider share lockup expired yesterday. Twitter’s market cap fell to around US$19bn, which is incidentally roughly the same amount that Facebook paid for its Whatsapp acquisition earlier this year. Twitter dragged down other social media stocks including Facebook (-4.4%) and internet stocks in general such as Google (-2.4%) and Amazon (-4.1%).
There wasn’t a single bank in the S&P500 (and only a handful in the Stoxx600) which finished in the black. Barclays set a negative tone for financials at the start of the day when it surprised the market with a 41% drop in Q1 FICC trading revenues. Markets are expecting a significant change in strategy at the bank’s upcoming Strategy Day to be held tomorrow. Softer fixed income trading revenues certainly is a reccuring theme, coming after a number of global broker-dealers reported soft FICC revenues in Q1 and JPMorgan’s trading warning last Friday warning of weak FICC revenues for the current quarter. Low volatility, the Fed’s gradual taper and subdued volumes are all being blamed for the reduction in global FICC revenues. JPMorgan’s CEO also warned yesterday that companies such as Google and Facebook may eventually compete with banks in the global payments industry.
Turning to the day ahead, today’s tone will be largely dictated by the Fed Chair’s JEC testimony. We may get her prepared remarks shortly before the testimony begins at London 3pm. The European data flow includes German factory orders (+0.3% MoM expected) and industrial production numbers in France. Consumer credit is the major data release in the US.
Bulletin highlights from Bloomberg and RanSquawk
read more
German Construction Activity Falls First Time In 12 Months
Germany's construction sector shrunk for the first time in a year in April, as companies reported decline in new orders and weaker employment growth, survey results from Markit Economics showed Wednesday.
The seasonally adjusted Purchasing Managers' Index for the German construction sector declined to 49.7 from 52.5 in March. A PMI score below 50 indicates contraction in the sector.
The latest fall in activity, albeit marginal, was the first since April last year, the survey said.
Among the three sub-sectors, residential building activity fell for the first time in three months. Civil engineering work also contracted, after rising for four successive months.
Meanwhile, commercial building activity rose for the twelfth month in a row, though the rate of growth was the weakest in the latest sequence of gains.
New orders declined for the twenty-fifth month in a row and at the fastest pace in just over a year. Firms blamed the latest decrease partly on increased competition and price pressures.
Consequently, construction firms cut their purchasing activity for the first time in 13 months.
That said, firms hired more workers for the thirteenth month in a row, but the rate of job creation was the slowest since last October.
Input cost inflation eased to a three-month low, but was well below the long-run average. Input prices rose for the fifty-seventh month in a row.
Despite the fall in activity in April, construction firms remained optimistic with 16 percent of those surveyed expecting activity growth in the next 12 months versus 13 percent seeing a decline.
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ECB Preview: a small step to weaken the euro? 4 scenarios
The European Central Bank is facing a big dilemma: should it act or should it wait? Euro-zone inflation is low, but off the bottom. The exchange rate is high and very uncomfortable for exports and for inflation but it also reflects trust in the euro-zone.
There is a lot of uncertainty towards the big event that will set the next significant move of EUR/USD. Here is some background and 4 scenarios.
Missing the target
The ECB has one mandate: inflation of “2% or a bit below” in headline CPI inflation. The target is being missed month after month. Low inflation, also known as “lowflation” makes the debt burden heavier, makes it harder to exit the situation and leaves the danger of the dreaded deflation.
Draghi and co. want to avoid a vicious cycle where falling prices discourage consumption, which in turn lowers production, jobs are lost, consumption falls again, etc. This is what happened in the Great Depression of the ’30s and what happened in Japan’s two “lost decades”. Japan is now fighting deflation using all available means.
Lowflation
The deterioration began in October with CPI falling to 0.7%. The ECB reacted with a surprising rate cut of the main lending rate to 0.25%. Since then inflation bottomed at 0.5% in March, rising back to 0.7% in April (preliminary numbers). Core inflation hit 0.7% twice and climbed back to 1% in April.
ECB members have been busy denying deflation but admitting that if “lowflation” stays for too long, it will be hard to escape it.
Worsening conditions
Later on,the focus gradually shifted to the exchange rate. A strong euro means less competitive euro-zone exports and cheaper imports which push prices down. Moves towards 1.40 in EUR/USD were welcomed with warnings from the ECB, yet it is important to note another currency pair: EUR/CNY.
China is a big trade partner of the euro-zone. The authorities in Beijing began weakening the local yuan against the dollar after a long period of appreciation. This in turn means that EUR/CNY is at levels last seen in 2011.
Talk becoming cheap
The ECB went from dismissing the exchange rate by saying it isn’t a policy target to expressing worries. This continued with strong implicit warnings such as declaring that the governing council is “unanimous about the use of non conventional monetary policy tools” (mentioning QE) to Draghi explicitly connecting the exchange rate to further monetary stimulus.
The first time that Draghi said it resulted in a big Sunday gap. However, the second mention had a short-lived effect. Markets want action, not words.
In a perfect world, Draghi would lower the euro with words and without action. This way, the ECB keeps all the “non conventional” tools after already lowering the main interest rate to 0.25%. This worked with the European debt crisis: Draghi’s “everything it takes speech”, followed by presenting the OMT restored trust. However, now it comes to backfire, with the strong exchange rate.
So what will Draghi do?
4 scenarios
What do you think the ECB will do? Will it act or not? Where will EUR/USD stand in the aftermath of the decision?
The ECB announces its decision on Thursday at 11:45 GMT. Draghi begins his press conference (from Brussels this time) at 1230 GMT.
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Great assessment. I'll keep a close eye on it today!
Let's see what will the ECP do?
Euro adds to gain vs. dollar after ECB stands pat
The euro added to its gain against the U.S. dollar Thursday after the European Central Bank made no change in policy, as expected. The ECB left its main refinancing rate at 0.25%, a record low. The euro EURUSD +0.31% rose to $1.3955 from $1.3910 late Wednesday. The euro traded at $1.3935 just before the decision.
Draghi says ‘comfortable with acting’ in June if needed
That’s a wrap. Investors and economists went into Draghi’s news conference expecting the ECB chief to drop some dovish clues to the next policy moves.
They may have got even more than they bargained for. Draghi was pretty explicit about concerns surrounding the strength of the euro and how that contributes to worries about low inflation.
Of course, the key moment was when he said the ECB stood ready to act in June, albeit with the caveat that policy makers want to see the June update to staff economic forecasts. It’s a pretty sure bet that those forecasts will show a further deterioration in the inflation outlook, economists say, which would seem to cement a policy move next month.
The euro responded accordingly. After coming within a whisker of $1.40 as Draghi began his news conference, it now stands at $1.3887.
Draghi says euro-zone crisis wouldn’t have been as severe if region had enjoyed “more integration” not less. The future also depends on more integration.
Draghi is asked if his comments about June marks the end of the era of the ECB never precommitting to future rate moves.
Draghi says he thinks that era ended a long time ago. The admonishment that the ECB “never precommits” to rate moves was often uttered by Draghi’s predecessor, Jean-Claude Trichet, often after he gave what appeared to be a pretty clear signal that a policy move was imminent.
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Takeaways From Draghi's Press Conference
ECB President Draghi dropped a bombshell today on the euro when he said the central bank is comfortable with easing after the staff forecasts are released in June.
Going into today's press conference investors were looking for 2 things -- an intensification of criticism of the euro or a clear sign that the ECB is ready to increase stimulus over the next few months and Draghi delivered on both. He called the strengthening of the exchange rate a "serious concern," which alone would not have been extremely negative for the euro but Draghi also indicated that the central bank was ready to ease next month. Despite an increase in economic activity and uptick in inflation in April, the ECB feels that an extended period of low inflation, the risks to the economic outlook and a strong euro puts enough pressure on the region to warrant additional accommodation.
We believe that if the central bank eases in June, their most likely course of action will be a cut to the refi rate and/or move to a mildly negative deposit rate. The euro will suffer from the fact that the ECB is one of the few central banks planning to increase stimulus. Also, there's no Federal Reserve meeting in May (next one is on June 18th), so between now and the June 5th ECB meeting, the risk is the downside for EUR/USD. At minimum, we are looking for a minimum move down to 1.3700.
My Top Takeaways ECB Press Conference
Summary - EUR comes within 7 pips of 1.40 only to drop below 1.39 after Draghi says ECB could act in June. If they ease, it will most likely be a cut to the refi rate or a mildly negative deposit rate.
Here's everything you need to know about the key points made in the press conference.
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ECB's Draghi Says Recovery Proceeding; Hints At June Action
European Central Bank President Mario Draghi said on Thursday that the moderate recovery in the euro area is proceeding as expected and hinted that policymakers would decide on further action after seeing the June macroeconomic projections.
"Recent information remains consistent with our expectation of a prolonged period of low inflation followed by only a gradual upward movement in HICP inflation rates," he said during the post-decision press conference in Brussels.
"The signals from the monetary analysis confirm the picture of subdued underlying price pressures in the euro area over the medium term."
Earlier today, the Governing Council decided to maintain the main refinancing rate unchanged at a record low 0.25 percent, for the sixth month in a row.
The ongoing moderate recovery in the Eurozone continued in the first quarter of 2014 as well as in the beginning of the second quarter, the central banker noted.
Reiterating the forward guidance, Draghi said the ECB will monitor economic developments and money markets very closely. "We will maintain a high degree of monetary accommodation and act swiftly, if required, with further monetary policy easing," he said.
"The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation."
Responding to questions from reporters, Draghi said,"The Governing Council is comfortable with acting next time but before we want to see the staff projections that will come out in early June." The euro weakened after the comment, falling below $1.39.
Asserting the central bank's independence, Draghi said calls for ECB action from think-tanks and politicians risks undermining the central bank's credibility.
This week, the Paris-based Organization for Economic Co-operation and Development urged the ECB to reduce rates, given the falling inflation and the risk of deflation.
Risks to the euro area economic outlook remains on the downside, Draghi said. "Geopolitical risks, as well as developments in global financial markets and emerging market economies, may have the potential to affect economic conditions negatively," he cautioned.
Meanwhile, risks to the inflation outlook are broadly balanced, he added. The possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely, he said.
Draghi also called the strengthening euro "a cause for serious concern". That said, the exchange rate is not a policy target, he maintained.
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