- Signs of progress in Europe? Better sentiment, lower volatility
A less volatile session saw an improvement in sentiment – or was it the other way around? – as headlines suggest efforts are being made to address the Eurozone slide. The IMF’s Borges made significant and positive comments on the possibility of the Fund extending its support, although his suggestion that support might extend to buying peripheral bonds was later retracted. Meanwhile, the FT reported that the EBA will conduct stress tests on European banks modelling a big write-down of all peripheral Eurozone sovereign debt. The report suggests the exercise could identify shortfalls of as much as EUR200bn, in line with the recapitalisation figure suggested by the IMF’s Lagarde. While the impact on European financials’ share prices might be debatable, there is little doubt that risk markets in general will respond favourably to further positive developments here. In the US, data, while broadly positive, did little to give sentiment that extra push. The ADP report showed a better than expected 91k additional jobs; but while the overall non-manufacturing ISM came in stronger than expected, the employment component was sharply lower. BNP Paribas Economics have revised up the call for tomorrow’s NFP to zero (from a 50k loss), but remain well below the consensus 59k.
- All eyes on the ECB – with a 25bp cut likely to be seen as EUR-positive
All eyes are on the ECB today; the market is currently 50-50 on a rate cut, although analysts are very much skewed towards no action. We expect the ECB to cut rates by 25bp, announce a 12-month LTRO, and possibly a new programme of covered bond purchases. While historically a rate cut is negative for the currency, this time around may be different. We see the following likely reactions to the ECB: (1) The ECB leaves rates unchanged and is not dovish: Almost by definition, EUR would rally initially, but risk would later collapse as the ECB’s inaction suggests that policymakers are dislocated from markets. A dovish statement would probably see a similar reaction but with a more limited EUR decline. (2) ECB cuts 25bps: EUR heads lower initially but rallies along with risk on policy action. Also, we expect the ECB to resurrect the 12-month LTRO and possibly initiate a new covered bond purchase program, both of which would be positive, although the first is largely expected. While the burden may be on the ECB today, a more comprehensive solution to assuage market anxiety remains essential. Until we can have more confidence that one is in the works, EURUSD and EUR crosses remain susceptible to a relapse in the days ahead. The exception is likely to be EURCHF: today’s Swiss CPI release (0.3% y/y expected) will likely reaffirm that the SNB can continue to defend the peg given that inflation is trivial at this juncture.
- Will the BoE pull the QE trigger?
Unlike the scenario analysis presented for the ECB, the BoE decision is binary – proceed with QE or maintain the status quo. Our view is that the BoE will announce GBP100bn in asset purchases. Yesterday’s GDP data strengthens the need for more QE: the level of excess capacity in the UK is greater than the MPC previously assumed. The announcement of QE will leave GBP vulnerable to significant downside especially since the market is not pricing in QE until January 2012, firming our short GBPCAD position. If the status quo remains, then we will only know the extent of the discussion on QE from the Minutes in two weeks’ time.
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http://www.easyforexnews.net/wp-content/uploads/2011/10/Daily-FX-Str_Europe_06Oct2011.pdf
BNP Paribas
Corporate & Investment Banking