We had been cautioning that the ECB was not likely to announce any stimulus decision ahead of year end, as they adopt a wait-and-see approach while maintaining dovish rhetoric.
EURUSD slumped on anticipation of further stimulus before the ECB meeting yesterday but Draghi disappointed and late shorts were caught out. EUR had a squeeze higher to a day high of 1.2456 as weak shorts unwound. Draghi said the ECB will reassess the current measures in the first quarter of 2015; new measures could be implemented, if necessary.
The ECB is said to be considering the preparation of a broad QE package for consideration at the January meeting, and a package could include all sorts of bonds including sovereign, but not equities. That said, so far it has been a lot of talk and no plan has been firmed up. The next ECB meetings are scheduled for 22-Jan and 5-Mar 2015. Draghi continues to replicate rhetoric from 2012 when he made the comments“do whatever it takes” but ended up not having to do whatever it takes as markets did the job for him.
The question is will he continue to cry wolf or will he really do the job this time? With ECB event risk out of the way, focus will be on the results of TLTRO take-up rate. ECB’s staff forecasts have been revised downwards, with the median projections for GDP growth now standing at 1.0% and 1.5% for 2015 and 2016, respectively, down from 1.6% and 1.9%. The median projections for HICP inflation were also marked down, with 0.7% and 1.3% for 2015 and 2016. Late in the day press reports regarding stimulus package measures are being mulled by the board for the January meeting kept pressure on EURUSD bears.
Focus now shifts to the Nonfarm Payroll data due out 1330GMT. The balance of risks favours upside surprises in US employment and wage growth data. The 6-month average increase in non-farm employment is 236k, compared to a 36-month average of 200k. A gentle but clear uptrend in payroll growth support the 230k consensus view. Likewise the consensus for the unemployment rate is for no change at 5.8%. Finally, hourly wage growth should pick up. A 0.4% monthly increase would take wage growth from 2% to 2.1% or 2.2% depending on rounding.
US wage growth has been running at 2-2.2% for the last couple of years, and even if you subscribe enthusiastically to the idea that employment growth is concentrated on lower-paid jobs, thereby dragging down average wage growth, a continuation of the long-term mild uptrend means upside surprises are likely. The good news for the US economy is that as CPI and PCE Inflation falls, 2% (or 2.1%) wage growth is stronger in real terms. Currently it appears that the dollar would benefit from a continuation of these modest uptrends in employment and wage growth, or indeed from the continuation of the sharper downtrend in the unemployment rate.
One cautionary caveat to the upside surprise scenario is the unusually cold temperatures across the middle part of the US in the first half of November may have led to some acceleration in seasonal layoffs in outdoor areas like construction and leisure. On the other hand, seasonal hiring for the holiday shopping period ramps up sharply in November.
And The Charts…
Post ECB whipsaw action USD was mixed, with USDJPY hitting fresh 7-year high of 120.25 overnight; EURUSD supported on a small short squeeze.
USD – Short term pullback. Mixed price action for the USD overnight as the greenback rose against the JPY and GDP, but fell against EUR and CHF. Labor data continues to show improvement with initial jobless claims falling to 297k (313k prior). Fed’s Fisher reiterated that Fed should be ending reinvestment process ahead of rate hikes. Given USD strength at multi-year highs as we approach the last NFP release for the year, any weaker than expected NFP number could foil the USD party and see some unwinding in the near term. Resistance at 89.62 (2009 high), with support at 87.62. While we remain constructive of USD strength and have little doubt it can continue to make fresh highs, we continue to caution a short term pull back and counsel reduced sizing on new USD long exposure at current levels.
USDJPY – Shallow Retracements. The USDJPY hit a new high of 120.25 overnight pushed up by the EURJPY following the ECB policy decision. The pair has since retraced from those levels to hover below the 120- figure on the back of a softer dollar tone as well as a news report that the ECB is considering a quantitative easing package in Jan. Cautious trading is likely ahead of US NFP headline risk later. Dips should be opportunities to buy as any retracement is likely to be soft given the ultra-loose BOJ monetary policy. Support for the pair is seen around 119.30, while upticks are likely to meet immediate resistance at 120.75 (26 Jul 2007 high).
EURUSD – Bearish but cautious. While we continue to hold a core bearish view of EURUSD, we remain cautious of an extended squeeze especially should US NFP disappoint, softer data should prompt a further short squeeze towards 1.2550 levels. If data really disappoints the downside trendline form the summer highs would be the next objective in a significant position shake out. It is important to bear in mind that many larger players are approaching year end and will be quick to lock in handsome profits that have been accumulated over the last 6months. As such it is better to wait for better risk reward entries to re-establish bearish EURUSD positions.