Bank of Japan
Bank of Japan meeting overnight produced no surprises as expected. There was perhaps a bit more activity than expected as one BoJ member, Sayuri Shirai, advocated moving straight to open-ended QE. The rest of the 9 voters voted against her proposal, which makes sense as it is up to the new BoJ leadership to establish policy, not the current lame duck board. But at least we do know now that the new trio of Kuroda and his two deputies will have a least one very sympathetic ear at the next BoJ meeting on April 3-4. The JPY hardly responded to developments overnight.
BoE preview
There is plenty of opportunity for a kneejerk reaction to the BoE today as the market is rather split on whether the BoE moves with an expansion to the asset purchase programme and if so, by how much. As I have said recently, GBP looks incredibly weak, and the best that the late comers to the GBP selling frenzy can hope for is a non-move by the BoE and a kneejerk rally that will give them a fresh selling opportunity into the structural resistance at 1.5200/50. I’m afraid that such a throwback rally in GBPUSD may not be forthcoming and the pair simply continues to melt lower to 1.4200. There is nothing to support the pound save for ebbs and flows in positioning.
ECB preview
I don’t think it is likely that the Draghi ECB moves rates today – it would be seen as too panicky a move in direct response to the Italian election. There is the potential that we see a downgrade in perceived inflation risks and that this serves as a set-up meeting for a cut at the next meeting, though in the end a 25-bp cut is far less interesting than the future of the ECB balance sheet.
What I will be more interested in are signs that some solution is being discussed behind the scenes for a way to bring relief from still high sovereign spreads that is an adjustment or addition to the OMT. The OMT will not function as originally designed in an austerity-weary periphery. Without an eventual way for the ECB to expand the scope of its activities, the systemic risk/EMU exit potential comes more quickly back into view. Of course, we also have to watch for political news on this front as much as ECB developments, because the ECB’s mandate is more than a bit awkward. As for near term Euro reaction, the most Euro bullish scenario for the immediate term would be a pass on cutting now (likely), no downgrade of the inflation outlook (I think it more likely we get a downgrade of the language on growth and possibly inflation) and then no mention at all of anything related to balance sheet options (I don’t know for now…). This could set in motion a EURUSD consolidation back higher to local resistance areas, but the overall down-trend is likely to remain intact beyond the shortest term as such an ECB performance would leave too many questions unanswered and do nothing for the general uncertainty level.
So, whether we get a 1.3150-1.3250 rally (1.3070/80 is short term key) here to consolidate the tremendous move from the 1.3710 top, I’m still focused on downside potential toward 1.2850 (the 200-day moving average) and then the 1.2662 November lows.
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