It’s a rather quiet trading day so far as most major pairs and crosses are stuck in tight range. Euro staged a rebound overnight but is struggling to keep on with momentum. Nonetheless, Euro is still firm ahead of the issuance of EUR 2b in three months ESM bills later today. There was some support from Japan’s comment as Finance Minister Aso said the country would buy a portion of Europe’s ESM bonds continuously using foreign reserves as Europe’s financial situation would help stabilize currencies including the Japanese yen. Also, Aso noted that ESM bond is considered by Japan to be a “major investment tool” just like euro-denominated sovereign bonds”. Meanwhile, it’s seen that purchase of ESM bonds would help Japan avoid criticism from Eurozone on currency manipulation and would also help weaken the yen. So far, Japan bought around EUR 7b of ESFS bonds, around 6.7% on issue. Regarding monetary policy, Aso said the government is keen to issue a joint statement with BoJ and the 2% inflation target would be the main focus in the statement. He is doubtful on using employment as a policy objective and noted that only Fed is doing that in the world.
Euro rebounded broadly overnight on building expectations that ECB would keep the policy rate unchanged at 0.75% this week. According to a Reuters poll, 67 out of 73 surveyed economists are expecting ECB to stand pat. Though, forward rate contracts are still pricing in a 25bos cut by then end of June. It’s perceived that while ECB has indicated the openness to a rate cut, the decision will largely depend on the willingness of core Eurozone countries. Germany CPI rose more than expected to 2.1% yoy back in December while Eurozone CPI also continued to stay above ECB’s target and was at 2.2% yoy. The stubborn inflation reading would probably tie up ECB’s hands for cutting rates in Q1. Also, ECB President Draghi warned before that cut in the main refinancing rate would imply a negative deposit rate of a smaller spread between deposit and main rates. Negative deposit rate would be uncharted territory and the very last resort. meanwhile, lower spread would reduce the incentive for interbank lending and is no preferred.
In Eurozone, unemployment rate rose to another record of 11.8% in November. A total of 18.8 million people were unemployment in Eurozone, up 113k from prior month. So far, Spain had the highest unemployment rate at 26.6% while Austria has the lowest unemployment rate at 4.5%. Eurozone confidence indicators generally improved in December with economic confidence rose to 87.0, industrial confidence rose to -14.4, services confidence rose to -9.8. Consumer confidence was revised up to -26.5. German trade surplus narrowed to EUR 14.6b in November. German factory orders dropped -1.8% mom in November.
Other data released today saw Swiss unemployment rate was unchanged at 3.0% in December. UK BRC sales monitor rose 0.3% yoy in December. Data from Australia saw trade deficit widened to AUD 2.637b in November, bigger than expectation of AUD 2.30b. Prior month’s deficit was also revised higher to AUD 2.433b. The 1% growth in exports were more than offset by the 2% jump in imports.
EasyForexNews Research Team