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Thursday, November 06, 2014

ECB’s Draghi explains away discord-EUR plummets

The market got its answer from today’s ECB press conference. Investors were seeking some reassurance from Draghi that he is still in control, and remains the leader to save Europe or if he is required to operate behind the curve.

It seems that Draghi has dealt directly with market concerns that potential internal divisions amongst Euro policy makers would impede the freedom for future looser monetary policy, if required. By indicating that the council has tasked a number of staffers to prepare for the possibility for future easing measures, Draghi has basically been able to sidestep any budding barriers that could impede the ECB to get anything done in a timely fashion. The general council was unanimous in its commitment to get anything done if needed. Along with reiterating that the ECB is still looking to take its balance sheet back toward levels of early 2012 the ECB’s toolbox remains open.
ECB will look in the toolbox
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 is 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 is giving has given the market added ammunition to push the EUR lower, much lower. So far, that belief has allowed the market to push the EUR to test the psychological €1.2400 level in one stealth swoop.
It’s not a surprise to see that its a data dependent ECB – future measure are not assured, Euro fundamentals will, as per usual, be “closely” monitored. Despite the obvious market reaction of leaning hard on the EUR, analyst are now expecting the ECB to change the term of its TLTRO at next months December 4 meet, while full blown sovereign QE remains a distinct possibility in Q1 2015.
Investors cautious ahead of NFP
From a technical perspective, short EUR positions will be pleased with this morning sharp drop back towards €1.2400. Obviously breaking through Monday’s low (€1.2435-42) should instill further confidence for the EUR bear, but should investors be expecting much more ahead of U.S non-farm payroll release tomorrow? Despite EUR support remaining thin until another big figure lower (€1.2335-45) a large percentage of the market would probably prefer to keep their powder dry until the release of U.S payrolls.
Yesterday’s upbeat U.S. ADP National Employment Report and in-line U.S. services purchasing managers’ index (employment component increased) have probably marginally increased market expectations for the NFP number. Current consensus is looking for a gain of between +225k to +230k with the unemployment rate ticking along at +5.9%. At or above expectations will give the USD license to roam, again putting pressure on the EUR to test its first real line of defense sub -€1.2355. Through these levels, it will boost the EUR bear’s ego targeting something with a €1.2100 handle in the medium term, while EUR resistance remains close to €1.2500 for the time being.

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