Is ECB Digging Its Own Policy Grave?

Posted on

Market Drivers for April 11 2014

Euro rejected at 3900

Chinese, German inflation in line

Nikkei -2.38% Europe -.38%

Oil $103/bbl

Gold $1315/oz.

Europe and Asia:

CNY CPI 2.5% vs. 2.5%

EUR GE Final CPI 0.3% vs. 0.3%

GBP LEI 0.4% vs. 0.6%

North America:


USD U of M 9:55 AM
The dollar saw some mild gains in Asian and early European trade today after being battered for the past few days as many traders squared up ahead of the weekend amidst quiet and uneventful session.

The economic calendar is very subdued today with only a smattering of second tier reports. The CPI data out of China came in generally in line and saw little reaction from the market as did the final CPI readings from Germany which matched the initial flash estimates of 0.3%.

Although the inflation data offered nothing new, it did confirm the fact that German price levels remain historically low at 0.9% and well below the 2.0% ECB target. Furthermore Spanish HICP readings slipped into disinflationary zone at -0.2% versus -0,2% expected suggesting that deflationary forces remain firmly in place.

European officials have been constantly reiterating the point that the ECB is only focus on intermediate term inflation expectations and therefore are unswayed by the current deflationary data. However, all future expectations are inevitably affected by present day impressions and the longer such conditions exist in Eurozone, the more hardened those views become.

The longer the ECB holds off on action the more dangerous the situation will become as the region could fall into a deflationary trap. The recent declines in equity prices as well the rise in the EUR/USD towards the 1.400o level are two factors that will just exacerbate the deflationary trends and make it harder for the central bank to adjust it monetary policy. The ECB therefore is digging its own policy grave by passive and non-chalant regarding this issue.

The EUR/USD has been a teflon trade for the past week or so as the unit shrugged off all worries regarding deflation and has even decoupled from risk appetite, rising amidst falling equity prices. Today, however it once again found pause at the 1.3900 level as the one way trade in the pair finally slowed. There is of course the key 1.4000 level ahead and many market players may begin to speculate that the ECB will become markedly more vocal about the exchange rate if the pair approaches that figure.

But there is also the issue of Ukraine. That geo-political hotspot has been ignored by the market as Russia’s military adventures appeared to have ended with Crimea. However over the past few days, the world has seen growing evidence of instability in east Ukraine with Western powers proclaiming that Russia is instigating discontent in order to initiate an invasion. Although the market remains non-plussed about the events on the ground, a Russian excursion into east Ukraine would be a much bigger geo-political crisis than the absorption of the Crimean peninsula and could weigh on the EUR/USD.

Turning to North America, the US calendar is also light with only PPI and U o M data on tap. With such heavy selling over the past few days, equities may try to rebound especially if U of M report shows some improvement in consumer sentiment. That could help USD/JPY rally towards the 102.00 level, but with nerves frayed traders may not want to remain bullish into the weekend and the pair could have a tough time holding its gains into the close.

Boris Schlossberg
Managing Director

Leave a Reply

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