- EU finance ministers conference call communique sends equities and risk lower
While much of the Asian and NY trading sessions were relatively quiet, the turnaround came following headlines out of the EU finance ministers’ conference call. The EU finance ministers agreed to lend EUR150bn to the IMF. Four non-euro users (the Czech Republic, Denmark, Poland and Sweden) agreed to pitch in while Britain will define its contribution in early 2012. However, the EU finance ministers failed to agree on raising the joint ceiling of the ESM/EFSF above EUR 500bn and disagreed on the ESM 85% voting rule. The news weighed negatively on risk, pushing equities to close more than 1% lower. While this adds to the downside pressure on the EUR, the threat of ratings’ agencies downgrades should also continue to drag on the EUR. But there could be some potential short-lived support for the EUR today as the focus turns to the size of the take-up for the first of the ECB’s 3-year LTROs. The interest comes on the back of speculation that the LTRO might provide a new source of demand by banks for eurozone sovereign debt. Some believe that the LTRO would allow banks to embrace the opportunity to engage in repo-to-maturity type trades. Thus, such activity might support the EUR (say over EUR200bn) if the buying depresses peripheral yields and pulls some bond markets away from distressed yield levels.
- RBA reveal December rate cut was pre-emptive
In the RBA December meeting minutes the RBA said some factors suggested that there was not a strong need for a rate cut but the mining boom, domestic economic growth levels and solid growth in trading partners meant no strong need to cut interests rates. AUD/USD gained 10 pips on the minutes above $0.9920. We remain short AUDNZD (target 1.26) which continues to trend lower.
- Riksbank expected to cut by 25bp, but there is a risk of a 50bp cut
Another potential positive for the EUR could be from the German Ifo Survey given our expectations of a slight blip up in the headline and expectations component. In our view, the expectations index should slowly bottom out, but downward corrections in the assessment of current conditions are still to come. Outside of Euroland, this morning’s RBA minutes will be scrutinised for hints of a future rate cut. We believe that the RBA will in fact cut rates in February as growth will likely to fall below trend in early 2012 due to downside risks to global activity, thereby forcing the RBA’s hand in a 25bp point cut. A dovish set of minutes may lead to a short-lived negative reaction as the market has priced in over 100bp of cuts from the RBA over the next 12 months. Meanwhile the Riksbank decision later today will be the key driver of the SEK. While the market may have already priced in a 25bp cut—which we as well expect—the key question likes to whether or not the Riksbank will follow in the footsteps of the Norges Bank and cut 50bp. If this is the case then the SEK should suffer.
- Canadian CPI to move further below the BoC’s 1-3% target
Over the last month CAD has performed reasonably well in the G10 space, gaining against all G10 FX except USD and NZD. But, CAD may suffer a setback on Canadian CPI. We expect headline inflation to move further below the BoC’s 1-3% target in November as food and energy prices decline, but core should continue its upward trend. A decline in inflation may lead markets to pricing in rate cuts from the BoC especially in an environment where other central banks are cutting rates. The market is pricing in less than 40bp of cuts over the next 12 months. But, we expect the BoC to cut rates in Q1 2012 as global growth slows.
BNP PARIBAS