FINANCIAL MARKETS RESEARCH Daily FX Strategy May 2010

FX
6 March 2014

Daily FX Strategy
DM %ch vs USD past 24 hrs
AUD CAD NZD NOK GBP SEK EUR CHF JPY -1.0% -0.5% 0.0% 0.5% 1.0%

ECB preview: EUR to take fright from QE-lite?

Currency view 24h call

USD: The Ukraine-Russia crisis has stabilised somewhat over the last 24 hours, but a failure of mediators to make a major breakthrough means sentiment is at best fragile. Discussions today will focus on US-Russia dialogue in Rome and an EU Summit in Brussels, following yesterdays $15bn offer of financial aid to Ukraine. For now volatility in major FX markets is contained, but macro events in the EZ (ECB meeting today) and US (labour report tomorrow) are set to play a greater role near-term. USD Index could easily find itself testing 80.

Source: Thomson Reuters

EM % ch vs USD past 24 hrs

INR ZAR KRW CNY TRY ILS CZK RUB HRK KZT -0.5% 0.0% 0.5% Top 5 1.0%

EUR: The major macro event today is an ECB policy decision (full preview on pg2). Increased talk of significant policy easing leaves us somewhat concerned that absent it today (or a strong hint for next month), the EUR might rise sharply. More minor easing, i.e. halting SMP sterilisation, will probably have only a transitory EUR impact. Look out for the ECBs 2016 inflation estimate. A 1.5% or lower forecast would be consistent with a need for looser policy. Elsewhere, markets are set for a very soft US payroll report tomorrow, after poor ISM employment and ADP figures. Overnight the Feds Beige Book highlighted the on-going negative impact of severe weather. For now the FOMC is unlikely to be persuaded from its tapering path. Barring a major surprise from the ECB, we doubt EUR/USD can make headway beneath 1.3700 support. JPY: USD/JPY is enjoying decent support on the back of this weeks recovery in US 10Y Treasury yields, from a low point near 2.60% to the current 2.70%. Although a break of resistance in the 102.75/85 risks a move toward 103.5, a weak NFP or deterioration in the Ukraine-Russia crisis could easily see USD/JPY reverse. Ultimately we believe USD/JPY is a 110 story this year, but we are cautious for the immediate future. AUD: Political or financial crises remain largely localised for now in the EM space. This is confirmed by relatively subdued volatility in the liquid G3 FX arena. Risk sensitive currencies are even on the rise, with the likes of AUD benefitting overnight from good retail sales and trade balance data. This is firming confidence that the RBA has entered an extended period of steady interest rates. More clarity might come overnight with RBA Governor Stevens meeting with the House Economics Committee. Despite positive sentiment, we do not believe AUD/USD can sustain a move above 0.90.
Key data releases and events
Country United States GMT 1230 1330 1500 1245 1100 1200 1500 0800 0800 Data/event ING forecast Consensus Prior 11.6 348 -1.5 0.25 -0.5/6.0 0.5/375 56.8 -1.9/4.4 1.6/0.8

Bottom 5

Source: Thomson Reuters

Two year German-US spread

1.39 1.38 1.37 1.36 1.35 1.34 1.33 Oct 13 Dec 13 Feb 14 0 -5 -10 -15 -20 -25 -30 EUR/USD (lhs) Ge-US 2Y Spread (rhs)

Source: Markit

Eurozone Germany UK Canada Hungary Czech Rep

Source: ING

Feb Challenger Job Cuts (YoY%) Weekly Initial Jobless Claims 340 336 Jan Factory Orders (MoM%) -0.5 Feds Dudley (1315), Plosser (1800), Lockhart (2300) speak ECB rate (%) & press brief (1330) 0.25 0.25 Jan Factory Orders (MoM%/YoY%) 0.9/7.5 BoE Bank Rate (%) APT (bn) 0.5/375 0.5/375 Feb Ivey PMI (SA) 50.0 53.1 Jan P Ind. Production (MoM/YoY%) -/4.7 -/4Q13 GDP (QoQ/YoY%) -/-/-

Daily FX Strategy 6 March 2014

ECB preview: EUR to take fright from QE-lite?

Todays ECB decision has markets debating what new policy stimulus tools might be unveiled. However, with a Novemberstyle aggressive policy move (ie, rate cut) not on the agenda, it is hard to envisage the euro suffering a sustained sell-off. The ECBs inconsistency of policy in recent months injects added uncertainty to events, as does todays first release of projections for inflation in 2016. Unless accompanied by a strong hint of more forceful policy easing soon, even a low 2016 CPI projection of 1.5% YoY is unlikely to see EUR/USD make much headway beneath 1.37. Our sense is that with the economic recovery slowly progressing, the ECB ideally wants to retain a threat of negative deposit rates and full quantitative easing (QE) for as long as possible, without actually executing on it. In the meantime, this leaves the ECB with a challenge to convince markets that its forward guidance for steady or easier policy is credible. Dovish commentary, in an environment of inflation far below target, and piecemeal quasi easing tweaks will therefore take centre stage for the time being. Markets are far from convinced, with the euro stubbornly strong. Barring a major surprise, consensus has converged on a view that the ECB will today announce an end to the sterilisation of bond purchases made as part of its defunct Securities Markets Programme (SMP) in 2010-12. As Figure 1 shows, the SMP amounts to around 175bn. If this is to be no longer be sterilised, it will effectively add to excess liquidity at the ECB (currently 114bn), taking it toward the 300bn mark. Recall that excess liquidity at the ECB has been a key focus in recent times, with the ECB first highlighting, and then diluting, the link between falling excess reserves and tighter financing conditions.
Fig 1 ECB liquidity & Securities Market Programme (bn)
ECB excess liquidity SMP wkly purchase (x10 scale, rhs) SMP cumulative (rhs)

Fig 2
105

EUR even stronger than many realise

1.55 (Jan09=100) EUR EER20 EUR EER39 EUR/USD (right)

900 800 700 600

250

200

100

1.45

150 500 400 100 300 90 200 100 0 10 11 12 13 14 0 85 09 10 11 12 13 1.15 50 1.25 95 1.35

Source: Bloomberg, ING

Source: ING, EcoWin, ECB

President Draghis attempt to downplay the link leads us to the view that the impact on the euro of any such policy decision will be negative, but minimal and probably transitory. That said, were markets to interpret (or Draghi to hint) it as a step toward major QE soon, the EUR would fall much harder. This seems less than likely. Furthermore, we do not think an announcement today to stop sterilising the SMP is so clear. Constitutional arguments against QE are very much alive and quite how the ECB can distinguish between the two is uncertain. Some argue that the ECB has received cover to make an SMP move by a Bundesbank admission that it is open to such a change if it is suited to stabilising money markets and liquidity conditions. We wonder though whether this is sufficient public backing for Draghi to forcefully push such an agenda. Another major focus today are new quarterly ECB staff forecasts, which for the first time include inflation and growth estimates for 2016. Last time around (December), the ECBs mid-point estimate for 2015 inflation was 1.3% YoY and for GDP 1.5% YoY. Unless the 2016 CPI estimate is at least 1.6% YoY, it will be difficult for the ECB to explain why it is leaving interest rates unchanged at 0.25%. This will be a major communications challenge for Draghi today. Indeed, in Draghis words only on Monday, EZ inflation is way below target. There is evidence that the current 0.8% YoY could prove the cycle low, but this is not guaranteed. On this front, the ECB is seen again refraining today from citing the strength of the euro as a downside risk for inflation. This is somewhat confusing. As Figure 2 shows, the euro is strong by any measure. But a look at the ECBs broader, but less publicised, EER39 measure, shows the euro now considerably higher than its peak of 2011. The ECB will be conscious of this, but whether it is prepared to signal greater concern today is doubtful. We retain a view that EUR/USD ultimately comes lower, later this year. However, if the ECB delivers the bare minimum today and tomorrows US labour report disappoints, EUR/USD might find itself pushing through major resistance at 1.3850.
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