Draghi's Sentiment Booster / The Day Ahead

With sentiment boosted following Draghi’s comments on more possible Eurozone monetary stimulus (the third time in a year), an overnight report from the Nikkei stated The Bank of Japan were also taking a serious look at expanding its monetary easing measures. "If falling consumer prices resulting from crude's plunge are making more people feel that prices are less likely to rise, then we should consider additional easing," said a senior BOJ official. 

Japan also decided to lift sanctions on Iran today following last Saturdays UN statements. A Japan-Iran investment agreement will be signed "soon" and "Japan would like to further develop its traditionally friendly ties with Iran." Oil prices at both sides of the Atlantic have rallied. 

Asian stock markets and traders liked what they heard with indices rebounding, tracking the positive close on Wall Street with Australian stocks following suit, boosted by resource and energy stocks. The Nikkei is the standout performer closing up 5.88%.

The FX market adopted a positive risk sentiment as the feel good factor kicked in, albeit in a rather sedate way.  

This could be brought to a sharp halt as we have an eventful day to close another volatile week; with a raft of flash manufacturing and services PMIs from across the Eurozone. While retail sales and public sector borrowing data from the UK will also keep the GBP traders busy.  Apart from data, we have speeches from ECB President Mario Draghi and Board member Benoît Cœuré at the World Economic Forum in Davos, Switzerland. While BOE MPC Member Cunliffe is due to speak at the Bruegel Research Institute, in Brussels.

Looking towards the North American session, there are also plenty of risk events, with the CPI and retail sales data from Canada, while from the US, flash manufacturing PMI and existing home sales data will be reported. 

Good luck and have a great weekend.

Draghi's ECB Dilemma

Ladies and Gentlemen,

Tomorrow, Thursday 3^rd December at 12.45 GMT the ECB make a rate announcement and then at 13:30 GMT hold a press conference.

These events are eagerly anticipated as changes to both ECB policy and the Inflation outlook are expected.

On the Policy front the changes that could take place to interest rates are outlined below:-

(Source Bloomberg)

	Consensus	Prior	Low	High
Deposit Finance Rate	-0.30%	-0.20%	-0.45%	-0.20%
Refinancing Rate	0.05%	0.05%	0.00%	0.05%
Marginal Lending facility	0.30%	0.30%	0.10%	0.40%

On the Quantitative Easing front the options are:-

• 1)      Size extension, a larger amount each month.
• 2)      Time extension, buying the same amount for a longer period.
• 3)      Both of the above

Now that the Policy options have been set out, let’s look at the inflation outlook. Presently 11 member countries have negative CPI inflation these are Cyprus, Estonia, Finland, Germany, Greece, Ireland, Latvia, Lithuania, Slovakia, Slovenia, and Spain. We would like to draw your attention to a recent Mario Draghi Statement “we will do what we must to raise inflation as quickly as possible.” Recent concerns are that households have started to adopt a disinflationary mind-set and this is clearly something that policymakers want to avoid.

As you can see there are a lot of possibility and there has been a lot of speculation. Reuters put out an article on the 25^th November detailing a “two tiered” depo rate as a policy option. At the October Meeting Mario Draghi made it very clear that the degree of monetary policy accommodation would need to be reassessed in December, this statement was further backed up in a speech he made on 20^th November “If the General Council conclude that the balance of risks to our medium term price stability objective is skewed to the downside we will act by using all the instruments available within our mandate”. Reiterating that the asset purchase programme is powerful and flexible instrument that can be adjusted in terms of size, composition or duration to achieve a more expansionary stance.

In the Q&A session Draghi indicated that a further cut to the depo rate was one of the measures for consideration.

I continue to believe that Mario Draghi will maintain his bearish stance and the there is a possibility of further forward guidance and the distinct possibility of a rate cut and more QE, we prefer to sell rallies in EUR/USD and would like to highlight the divergence in rhetoric from the ECB compared to the Federal Reserve. Other recent bearish EUR stories include the reduction in weightings that EUR holds in the new IMF Special Drawing Requirements (SDR). This is a session that should be closely watched.

Good Luck 

Anish8FX

Event Risk - ECB rate announcement and press conference

Ladies and Gentlemen,

Tomorrow at 12:45 BST we get the ECB rate announcement no change is expected, so why is this an Event Risk?

At 13.30 the President of the ECB, Mario Draghi chairs a press conference on his 67^th Birthday, he will be his dovish self, highlighting external risk, so what is new?

Since the last meeting the concern was Greece now it is China and in that time period €/$ has rallied from 1.0809 to 1.1714, over 900 points.

The important factor is the ECB are the first major Central Bank to take centre stage after a volatile summer, there will be concerns about growth, a deflationary environment and new external risks beyond their control.

The ECB is still in the easing cycle and I expect rallies to be sold and the 200 day moving average at 1.1291 to be the first major resistance level.

Good Luck

Anish S. Lal @anish8fx

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

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