What to Expect from Today’s ECB Decision

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Market Drivers Nov. 8 2012
Aussie labor numbers surprise to upside
Spain meets financing goal but long term yields sharply higher
Nikkei -1.51% Europe 0.32%
Oil $84.92/bbl
Gold $1717/oz.

Europe and Asia:
AUD Employment 10.7K vs. 0.2K
AUD Employment rate 5.4% vs. 5.5%
JPY Economy watchers 39 vs. 40.6
CHF Unemployment rate 3.0%
EUR GE Trade Balance 17B
BOE meeting
ECB meeting

North America:
USD Trade Balance 8:30
USD Initial Jobless Claims 8:30

Risk currencies turned lower in mid morning European trade hurt by sliding sentiment in the equity markets and lingering concerns over the status of the periphery sovereign bonds ahead of the ECB meeting later today. Italian stock market was sharply lower at -1.2% as traders remained on edge awaiting fresh news from ECB President Mario Draghi, who only yesterday painted a very dour picture of the EZ economic situation noting that the slowdown has now spread to Germany.

Today’s German trade balance data confirmed the weakness in demand with exports declining by -2.5% while imports shrank by -1.5%. Meanwhile Spain saw an auction of medium and long term bonds today and although the country was able to meet its financing goal for the year by completing 4.5 Billion offering with relatively decent bid to cover ratio, it saw the yields at the long end of the curve explode. Spanish July 2032 Bond Maximum Yield came in at 6.366% vs 4.791% on Oct 21, 2010 indicating that the pressure on Spain remains. The Spanish/German spread rose to 439 bps reflecting the elevation in risk aversion flows.

The Spanish situation remains unresolved, as the sovereign refuses to formally ask for formally ask for the bailout, content to enjoy the lower yields on the short end of the curve as a result of Mr. Draghi verbal promise to implement an OMT program. However as some analysts have pointed out, Spain may find itself in an uncomfortable seesaw next year if its economic situation does not improve. The country bonds could seesaw between the support from implied OMT bid on the short end while long term yields spike higher as its credit moves to junk status.

Today, currency traders will look for some clarity from Mr. Draghi although few expect any fresh bold initiatives from the ECB today. The central bank will likely wait until December when its staff produces the yearly inflation projections until making any new policy choices. Still,a reaffirmation of the economic slowdown in the region and the lack of any progress on the implementation of the OMT program could weigh on the EURUSD and push the pair below the 1.2700 figure to fresh three month lows, as the day proceeds.

Elsewhere, Australian employment beat expectations rising by 10.7K versus 0.2K eyed helping to push AUDUSD above the 1.0400 in early Asian trade, but the pair saw no follow through in European dealing as broader risk aversion flows capped the rally.

Australian employment picture improved markedly with jobless rate declining to 5.4% from an expected rise to 5.5% as the number of full time jobs increased for the fourth consecutive month rising by 18.7K. Temporary jobs lost -8K in the month of October. The news continues to confirm that Australia’s mining industry is the primary driver of growth adding 45K jobs year to date while the construction sector has shed 70K jobs this year.

The upward surprise in Australia stood as sharp contrast to the disappointing labor data out of New Zealand where the unemployment rate rose to 7.3% from 6.7% eyed. The stark difference in job creation led to a strong rally in AUDNZD with the pair breaking through the 1.2700 level. If the weak labor data leads the RBNZ to consider a rate cut as the year comes to a close the cross could challenge the 1.3000 figure on interest rate differential flows.

Boris Schlossberg
Managing Director

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