What Will Draghi Do?

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Market Drivers for November 6 2014

USD/JPY pops through 115.00 but then quickly retreats on profit taking
AUD Employment bit better than forecast

Nikkei -0.86% Europe .61%

Oil $78/bbl

Gold $1114/oz.

Europe and Asia:

AUD Employment 24.1K vs. 20.3K

EUR Factory Orders 0.8% vs. 2.2%

GBP UK IP/MP 0.4% vs. 0.3%

North America:

EUR ECB Presses 08:30

USD Weekly Jobless 08:30

CAD Ivey PMI 10:00

USD/JPY busted through the 115.00 barrier in relatively thin news free Asian session today hitting a high of 115.50 in a burst of short covering, but as Nikkey turned lower the pair quickly reversed course dropping more than 100 points off the highs as profit taking quickly kicked in.

Having risen more than 500 points in less than a week the pair is now likely find some pause and could see volatility increase around these levels. The key release for the pair will be tomorrow’s US NFP release, but with the market already primed for a 200K+ number any upside surprise is likely to have only minimal impact on price unless the beat was dramatic. On the other hand a miss tomorrow given the generally upbeat expectations could usher in a much sharper correction and late longs bail out of the pair.

Elsewhere in Asia, Australian employment figures printed a bit better than forecast at 24K vs, 20K eyed. The data showed that the unemployment rate is starting to level out near the low 6’s remaining steady at 6.2%, the same as last month. Most encouraging of all was the gain in ful time employment to 33.4K versus a decline of -34.9K the month prior.

Overall the jobs data out of Australian delivered a solid result and together with the Retail Sales numbers earlier in the week paints a picture of a steady quietly growing Australian economy. Against this backdrop the RBA is likely to remain stationary for the time being and although the monetary authorities would like to see the Aussie lower, the unit is likely to hold its ground around the 8500 level for the time being. The AUD/USD rose steadily throughout the night recapturing the 8600 handle in response to the news.

In Europe the calendar was generally quiet with only German Factory orders missing their forecast as they came in at 0.8% vs. 2.2$% eyed. The data out of Germany has shown a pronounced slowdown in activity over the past several months, but policymakers from EZ largest economy continue to oppose any further accommodative measures by the ECB. That’s why today’s presser by the central bank could prove to be market moving as traders try to ascertain the extent of the conflict on the governing council.

Earlier in the week reports surfaced of discontent with Mr. Draghi’s governing style and while it’s unclear if this is simply rumblings from smaller members or a prelude to a coup, the discord on the ECB board is certainly not helping matters by taking focus away from policy. With respect to policy the absolute most important question will be whether the ECB will finally commit to purchasing a wider array of instruments including corporate and sovereign bonds as a means to inflate assets and stimulate growth in the moribund EZ economy. It is unlikely that Mr. Draghi will unveil anything new today, but if he does hint at broader monetary measures to come despite the opposition from some members, the EUR/USD could fall to fresh yearly lows testing support at 1.2400 as policy divergence continues.

Boris Schlossberg
Managing Director

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