Skeptics Rule As Euro Drifts Lower Ahead of ECB

Posted on

Market Drivers July 5th, 2012
Markets tread water ahead of ECB, BoE US ISM Svc and ADP
Australian Trade slightly better
Nikkei down by -0.27% Europe down -0.18%
Oil at $87/bbl
Gold at $1616/oz.

Asia and Europe:
AUD Trade Balance -0.29B vs. -0.51B
EUR ECB Bank Rate Decision n/a
EUR German Factory Orders n/a
GBP BoE Rate Decision n/a
GBP BoE Asset Purchase Target n/a

North America:
USD ADP Employment Change 8:15
USD Initial Jobless Claims 8:30
USD Continuing Jobless Claims 8:30
USD ISM NonManuf Composite 10:00

FX markets were extremely quiet in post US holiday dealing as traders positioned themselves for a very busy North American session that includes the BoE and ECB rate decisions as well as US ISM Services and ISM report. The listless, low liquidity trade of the past twenty four hours may indeed be the calm before the storm as markets prepare for the news to come.

Presently market expectations are for the ECB to cut the benchmark rate by 25bp while the BoE is expected to increase its Asset purchase program by another 50B GBP to 375B GBP. However, those factors have been largely priced into the market. Instead traders will be keenly watching Mario Draghi’s press conference for any clues to additional LTRO or SMP measures. The EUR/USD has given back all of its post summit gains, as currency markets continue to be concerned with the state of the EZ credit. The announcement on ESM was a step in the right direction but is seen by many as too little too late.

The ECB therefore stands as the only actor in the EZ that is capable of providing the scope and scale for necessary stimulus and if they choose to follow their typical gradualist path lowering the interest rates only, the market will likely be disappointed. Under that scenario the EUR/USD will breaking below the 1.2500 level as most traders will bail from the long trade concerned over the prospect of renewed stress in the peripheral credit markets.

In UK the BoE is expected to increase its QE measures which typically would be viewed as dilutive and therefore negative for the pound, but given the moribund state of the UK economy additional QE is now viewed as positive for risk and could in fact be supportive of cable. The pair however remains under a moderate amount of stress as the LIBOR fixing scandal continues to dominate the headlines and for now any rally is likely to be capped.

After the markets digest the latest monetary policy moves attention will turn to US economic data with both ADP and ISM Services report on tap. The ADP is expected to print at about 103K and anything above 100K will be viewed as mildly positive suggesting that the slide in US labor demand may have stabilized. The other key data point will be the employment sub-component of the US ISM services report which as we have noted many times in the past is one of the more accurate predictors of NFPs.

If the US labor data surprises to the upside it should provide a boost to equities and may help stabilize risk FX if European monetary authorities prove to be reticent to take any further action. Ahead of the day’s events however, the skeptics have the upper hand with most risk currencies drifting lower as markets hold out little hope for any dramatic gestures.

Boris Schlossberg
Managing Director

Leave a Reply

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