Will Draghi Sink the Euro?

Posted on

Market Drivers for April 4, 2013
BOJ doubles monthly QE extends maturity sends USD/JPY through 95.50
EZ PMI services misses sending EURUSD through 2800 UK better helping cable at 5050
Europe 0.45% Asia 2.20%
Oil $94.44/bbl
Gold $1542/oz.

Europe and Asia:
AUD Building Approvals 3.1% vs. 2.4%
AUD Retail Sales 1.3% vs. 0.3%
EUR ECB Rate Decision
EUR ECB Deposit Facility Rate
EUR German PMI Services 50.9 vs. 51.6
EUR Euro-Zone PMI Services 46.4 vs.46.5
GBP BOE Rate Decision
GBP BOE Asset Purchase Target
GBP PMI Services

North America:
USD Initial Jobless Claims 8:30

A very busy night in the currency market with movements in all the key pairs but USD/JPY undoubtedly taking center stage today after the BOJ unveiled an extremely aggressive QE program that exceeded market expectations and sent USD/JPY higher by more than 200 points in Asian and early European trade.

The BOJ announced that it will double its bond purchasing program increasing the volume to approximately 74 Billion dollars per month. It will also extend the maturity of its bonds from 2 to 7 years and it will focus its efforts on from targeting the overnight call rate to the monetary base as it seeks to increase it to 270 trillion yen by 2014.

However perhaps the most dovish aspect of the BOJ monetary policy was the temporary suspension of the “bank note” rule which pledges to keep the value of its bond holdings below the cash in circulation. Such a move signals that the BOJ is extremely serious in its goal to increase inflation to 2% over the next two years and a as the key reason for markets enthusiastic response to the new proposals.

USD/JPY quickly sliced through the resistance points at 94.00, 94.50 and 95.50 before topping out at 95.68 – fully 300 points off the session lows. The announcement from the BOJ was exactly what the bulls in the pair were looking for, but whether it can make fresh yearly highs remains to be seen.

As we noted yesterday, since the start of the year the rally in USD/JPY has been driven by a combination of Japanese monetary policy dovishness and better than expected US economic performance which helped push US yields higher. However, the most recent data suggests that the US economy may be starting to stall which is why this Friday’s NFPs could be critical to the future direction of USD/JPY. With markets already tempering their expectations any print near the 200K level would be seen as bullish and could propel USD/JPY to fresh yearly highs. However, if the data disappoints the pair could stall at current levels despite the herculean efforts by the BOJ to further weaken the yen.

Meanwhile in Europe the economic data continued to show further contraction as the final GE services PMI printed at 50.9 versus 51.6 and the news weighed on the EURUSD which dipped below the 1.2800 level in morning European dealing. The market will turn its full attention to the ECB meeting at 12:30 GMT as Mr. Draghi will no doubt be peppered with many questions regarding the resolution of the Cyprus financial crisis. However, Mr. Draghi’s assessment of the economic conditions on the ground is likely to be of much greater importance for the EURUSD.

With EZ mired in a deep recession with no end in sight, some analysts are pressing for further stimulative action from the ECB. If Mr. Draghi hints that the central bank is open to a rate cut, the news may initially cause a knee jerk reaction lower in the pair, but could eventually be viewed as positive. It’s clear that EZ officials must do something to stimulate demand, as austerity has been an abject failure in the periphery and the slowdown is now making its way to the core, with France in full blown contraction. The EUR/USD has been remarkably resilient in the face of negative news, but if the market does not see any encouraging signs from Mr. Draghi today the pair could tumble through its support at 1.2750 as the day proceeds.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *