The Big Picture • Draghi gives in ECB President Draghi has signalled that the ECB is finally going to take some action against low inflation. Speaking on Saturday after the IMF meeting, Draghi said, “The strengthening of the exchange rate requires further monetary stimulus. That is an important dimension for us.” The message coming out from the meeting was that a cut in interest rates is likely at first, possibly into negative territory. Only after that would the ECB attempt a quantitative easing program. As for when the easing measures are likely to begin, press reports say that the Bundesbank is unlikely to support any moves until the ECB revises its economic forecasts in June. However, a lower-than-expected inflation print for April could prompt an earlier response, as happened last November. The preliminary Eurozone CPI for April, due to be released on 30 April, is forecast to rebound from the surprisingly low level of +0.5% yoy in March. No consensus forecast is available yet but some economists have estimated it will return to +0.9% yoy. In any event, Draghi’s comment should be the key for a weaker EUR going forward. The clear divergence between the Fed and the ECB is likely to pressure the euro and support the dollar. • The dollar is starting the week generally higher against both G10 and EM currencies, although EUR is not as weak as one might have expected after the Draghi comments and the worsening crisis in Ukraine. EUR/GBP for example is barely changed from Friday’s opening levels, suggesting to me that EUR has further to fall. The dollar also gained against most EM currencies, although the likelihood of further easing in the Eurozone should keep carry trades in fashion and support the EM currencies vs EUR. Investors who are thinking of putting on EM carry trades should consider putting them on against EUR. • Friday’s US data were relatively positive for the dollar, continuing a string of good US numbers. The producer price index rose more than expected, hinting at a build-up in inflationary pressure that could make the Fed more willing to countenance higher rates. And US consumer sentiment hit a nine-month high. This follows last week’s better-than-expected jobless claims, which fell to a cyclical low. Jobless claims are subject to seasonal factors however and they tend to soar in the week that includes Good Friday, which is April 18th this year. So we could see a big jump in claims when this weeks’ number is released on 24 April. However, they tend to decline by a similar magnitude three weeks later, so the market may ignore the figure. • Today’s news should also be USD-supportive. Retail sales excluding auto and gasoline for March are forecast to have accelerated to +0.4% mom from +0.3% mom, bringing good news about consumption. As for the rest of the week, tomorrow we get the CPI for March, which is expected to accelerate on a yoy basis. That may change some peoples’ view of how quickly the Fed is likely to raise rates. Speeches by Fed Chair Janet Yellen on Tuesday and Wednesday will of course be closely watched for any clues on this matter, and particularly if she clarifies the confusion over whether the FOMC’s stock phrase that “a highly accommodative policy will remain appropriate for a considerable time after asset purchases end” means six months, a number that did not show up in the recent FOMC minutes.. On Wednesday we also get the Fed’s Beige Book, which will give the first hints of how the FOMC is likely to view the economy at its meeting on April 30th. • There are no major European indicators out today, only Italy’s final CPI for March and Eurozone’s industrial production for February. Eurozone’s IP is forecast to have risen 0.2% mom after falling by the same pace in January. The figure is not usually market affecting, however. • There are two speakers today: French Central Bank Governor Christian Noyer and Fed Governor Daniel Tarullo speak at the Europlace Financial Forum at the New York Stock Exchange. • As for the rest of the week, on Tuesday, the Reserve Bank of Australia releases the minutes from its latest meeting. During the European day, we have the German Zew survey for April and UK’s CPI data for March. On Wednesday, we have UK employment data for February and Eurozone’s final CPI for March. Meanwhile the Bank of Canada holds its policy meeting. On Thursday, we get Canada’s CPI for March and on Friday we have Japan’s Tertiary industry index for February.
Posted on: Mon, 14 Apr 2014 08:49:02 +0000
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