Euro Cracks 1.0600 as ECB Mulls Unorthdox QE

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Market Drivers Nov 25, 2015

Euro tests 1.0600 as ECB mulls new QE measures
AU Construction falls off
Nikkei -0.39% Eurostoxx 0.93%
Oil $42/bbl
Gold $1072/oz

Europe and Asia:
AU Construction -3.6% vs. -1.8%

North America:
USD Core Durables 8:30

USD Weekly jobless 8:30

USD Personal Spending/Income 8:30

USD New Home Sales

Euro took a tumble in morning European dealing today, dropping to test the 1.0600 barrier once again in the wake of a story on Reuters that revealed that ECB considered two tiered bank charges as well buys of more exotic assets all in an attempt to jumpstart the EZ economy via its new aggressive QE program.

According to Reuters ECB officials considered the prospect of introducing a two tiered charge structure for banks that help deposits on ECB’s balance sheet hoarding cash. The central bank is discussing even such unorthodox measures such as buying rebundled loans which have a higher risk on non-payment, although for now it passed on the idea of buying such assets.

It’s clear from the article however, that EZ monetary authorities are determined to use every tool in their arsenal to stimulate credit and relieve the disinflationary pressures that continue to plague the region. There may already be some evidence that such tactics are working as the latest batch of PMI this week showed that growth remained above the 50 boom/bust line improving slightly.

For currency traders however, such talk only reinforced the idea of policy divergence between the ECB and the Fed and sent the EUR/USD reeling towards the 1.0600 weekly lows as the morning session wore on. The pair now finds itself at a key juncture as the 1.0500-1.0600 corridor represents multi-year lows which were tested early in the year and will no doubt be tested now.

The moves this week may also be exacerbated by low liquidity as after today the US goes on Thanksgiving holiday and flows are likely to slow to a trickle. The US eco data is frontloaded to today with Durable Goods and weekly jobless claims and personal spending data the main releases on the docket.

Personal spending data is expected to rise by 0.3% from 0.1% the month prior and any rise would only add to the dollar rally as markets will become even more convinced that December rate hike is a fait accompli. However if the data misses it could introduce an element of doubt into the December scenario especially in light of the very weak Consumer Confidence data yesterday. If the markets sense any problems with the December hike assumption than the move in the EUR/USD could reverse as quickly as it started.

Boris Schlossberg
Managing Director

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