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EUR/USD
AUD
CAD
- Important data releases (notably manufacturing and services PMI and ISM readings, US non-farm payrolls) will take a back seat next week as the much-awaited ECB meeting takes place on Thursday.
- In our opinion the EUR/USD trading close to 1.05/06 is already pricing a pretty bold action by the central bank. Of course, the ECB could surprise with more, in which case EUR/USD would come under additional pressure. But it is important to emphasize that from a medium-to-long-term perspective, any potential EUR weakness from current levels would represent an even more pronounced undershooting relative to equilibrium. This would be largely “ECB-induced” and could only delay the start of the reversion process towards fair value going into next year.
- We should know that Draghi’s track record, specifically his inclination to surprise, must by now have been incorporated into the market’s perception.Consequently, we think that investors are going to the meeting “well-prepared” even allowing for the possibility of some surprise.
- We think ECB President Mario Draghi will announce a package of measures that includes all of the following:
- 1) A 10-15bp cut in the deposit rate. The market is fully pricing in a 15 bp move, this has now become a very close call. If the ECB were to opt for a two-tiered charge on excess liquidity, as suggested, room for an even larger cut in the deposit rate (20-30bp) would increase.
- 2) Additional purchases of about EUR 500 billion to boost and extend the asset purchase program. This would put the ECB’s QE2 at about 45% of the size of QE1, which compares with 35% for the Fed’s QE2. Therefore, if in line with our forecast, the expansion would be bold. Some targeted enlargement of the pool of purchasable assets appears likely, with German state debt set to be included in the list of eligible securities
- 3) We think the monthly pace of asset purchases will be raised from EUR 60 billion to about EUR 75 billion, with the remaining part of additional purchases being used to extend the program into 2017.
- 4) A clear statement that the easing bias remains in place.
- We do not expect the new QE framework to envisage any tapering of the monthly purchases over the course of 2017. Although that would make sense from a purely economic perspective - it would be fully consistent with the expected progressive return of inflation to target - markets may interpret it as an early tightening signal, and react accordingly. Therefore, the ECB may prefer to avoid going down this route.
- A bold ECB stimulus package may drive the EUR/USD below this-year minimum at 1.0457. A deeper cut in the deposit rate would mostly trigger a short-term psychological effect on the EUR/USD, pressuring it towards the 1.03-1.04 area.
AUD
- The Reserve Bank of Australia is likely to stand pat again at its December meeting, leaving the official cash rate at 2%, as latest economic data in Australia, like the strong employment report for October, do not seem to provide a catalyst for the bank to rush into more cuts. Still, the door for more easing will be likely left open: a speech by bank governor Glenn Stevens last Tuesday was revealing as to the bank’s stance at the moment. Stevens kept an upbeat tone saying that “prospects for firmer conditions in the non-mining economy are improving”, but also pointed out that inflation does not pose a barrier to more easing, if needed, and that the effects of the AUD decline on the economy and prices have been a bit slow to come through.
- We do not expect a stronger AUD/USD reaction to the RBA decision. However, the AUD is likely to appreciate against the NZD and the JPY.
CAD
- We expect the Bank of Canada to remain on hold at its December meeting. Since its last meeting, the Canadian economy has delivered better labor data with 44.4k net job creation and a lower jobless rate at 7%, while CPI and Core CPI remain stuck at 1% and 2.1% yoy, respectively (both within the Bank of Canada 1-3% reference band for inflation). GDP growth for the third quarter, which will be released on December 2 as well, is likely to rebound by 2.5% after the 0.5% fall in annualized terms seen in the second quarter (our forecast is slight above the market consensus). We think that there is not enough reason for the Bank of Canada to alter its current neutral stance.
- The CAD may strengthen slightly after the BoC decision. However, we stay sideways on the USD/CAD and prefer short EUR/CAD position due to broad EUR weakness. In the medium-term we continue to expect a gradual CAD rebound given also against the USD.