Will Draghi Downplay Growth?

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Market Drivers March 9, 2017
Chinese inflation cooler
Macron leads in 1st round ECB on tap
Nikkei 0.34% Dax -0.24%
Oil $49/bbl
Gold $1204/oz.

Europe and Asia:
CNY CPI 0.8% vs. 1.7%

North America:
ECB Rate Decision 07:45
ECB Presser 08:30
USD Weekly Jobless 08:30
CAD Capacity Utilization 08:30

It been a quiet calm night of trade in the currency market with euro slightly better bid ahead of the ECB meeting while commodity dollars were weaker both on the plunge of oil below the $50/bbl mark and weaker Chinese CPI data.

Chinese CPI came in at only 0.8% versus 1.7% eyed indicating that final demand remains muted leaving both Aussie and kiwi exposed. Aussie dipped below the .7500 figure while kiwi broke .6900 as both antipodeans drifted lower.

Meanwhile crude broke below the psychologically important $50/bbl mark for the first time since December pushing USDCAD above 1.3500 figure. The decline in crude could a troubling sign for global demand as it occurred despite and OPEC agreement to curb production.

The focus today however will be on ECB as the central bank holds its monthly presser at 1330 GMT. The market is expecting little newflow from the event as Mr. Draghi is likely to keep guidance on an even keel. Although the economic output is improving with trade, manufacturing, services and employment all at five year highs while inflation has now reached the central bank’s target, Mr. Draghi is likely to demur on any policy changes for now for several reasons.

The primary reason for caution is political. With elections in Netherlands, Germany and France scheduled over the next several months, markets remain on edge over the risk of a populist win. Although Emmanuel Macron in France has shown some strength in recent days, pulling ahead in round 1 of polling for the first time today, support for Marie Le Pen remains firm at 26% which means that she will almost certainly go on to the final round of elections. Despite the fact that she trails Macron by nearly 20% in the second round polling, the risk of an upset given the Brexit and Trump results of 2016 remains quite high in investors minds and Mr. Draghi is keenly aware of that fact.

German yields have reached record lows as investors seek safety. But the move has actually liquidity and credit growth as yield spreads between Germany and other EU members have widened exacerbating the credit crunch rather than ameliorating it. That’s why it would be hard to for ECB to begin the taper now as it could snuff out the fragile recovery in the region. Mr. Draghi, as always, will be very careful with his words but he is unlikely to commit to a hard date for taper, precisely because doing so would only make the current yield disparities in the region worse.

Boris Schlossberg
Managing Director

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