Draghi Fuels SNB Anxiety
| Sep 05, 2014 06:12AM ET
The ECB cut all three rates by 10 basis points through a surprise decision in September meeting; the main refinancing rate has been lowered to 0.05%, the marginal lending rate to 0.30% and the deposit facility rate to -0.20%. Additionally, Mr. Draghi introduced strengthening of the monetary stimulus measures including ABS and covered bond purchases to begin on November 2014. EUR-complex aggressively sold-off post-announcement, EUR/CHF tumbled down to 1.20449, fueling speculations that the SNB would react if 1.20 floor comes at risk.
ECB will purchase ABS and covered bonds
In a surprise action yesterday, the ECB announced it will purchase private debt starting from November this year. The ECB looks to stir its balance sheet toward its 2012 levels. The current balance sheet sums up to 2.04 trillion euros worth assets, compared to roughly 3 trillion euros average in 2012 (ranging between 2.6 to 3.1 trillion euros). This means that the ECB will have to buy significant amount of private debt in the coming months and thus the intervention should feel heavy on EUR in an extended period ahead. The measures introduced are “credit easing oriented” said Draghi. Ideally, the ABS and covered bond purchases should reinforce TLTROs (announced in June meeting and will become effective in September/December 2014) as they will free space in banks’ balance sheet to lend credit to non-financial companies through the so-called TLTROs. Despite the negative souvenirs vis-à-vis the securitization (remember, the 2008 subprime crisis has been triggered by CDOs collapse), Draghi encourages positive sentiment as he says the securitization can be done properly. The ABS purchases from the ECB are transparent, says Draghi, while the market needs some more regulatory tuning to fully establish investors’ trust in these products. At this stage, the ECB will be buying only senior tranche and mezzanine tranche with guarantee. This is not considered as QE properly speaking, as we do not refer to government rate curve in this very particular configuration. As the lower bound of interest rates are reached (as Draghi highlighted in his speech yesterday), the ECB should leave a door open for further action if needed, and the sovereign debt purchases would be a potential next step.
“Inflation expectations remain anchored”
As answer to sharp drop in inflation expectations, Draghi said that the current low inflation is nothing but a “temporary deviation”. The inflation is expected to remain low for some time, while ECB sees gradual improvement in 2015, 2016. There is no deflation ahead, according to Draghi. However, the monetary policy cannot do miracles by itself. The fiscal policy and the structural reforms should escort the ECB in its efforts to fight against subdued price dynamics and moderate recovery in the 18-nation Euro-zone.
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EUR/CHF’s negative correlation vs. EUR/USD weakens
EUR/CHF took a dive to 1.20449 in the aftermath of the ECB’s strengthening unorthodox policy. The negative correlation between EUR/USD and EUR/CHF (computed on rolling 40 day) tumbled down from -40% to -10%. This move is perfectly in line with what has been observed for the past ECB interventions. The June intervention had flattened the correlation between EUR/USD and EUR/CHF to levels we could consider these pairs perfectly uncorrelated. We believe that the negative correlation should strengthen back to significant levels. And we have reasons to believe so. Indeed, the interest rate futures jumped above par immediately after the ECB rate cut announcement, as markets adjusted their positions on mounting speculations for SNB reaction. If the selling pressures in EUR/CHF place SNB’s 1.20 floor in danger, a SNB counter-intervention will be unavoidable. Therefore, we see bearish attempts as interesting dip buying opportunities.
2014-09-05T12:30:00 CAD Aug Unemployment Rate, exp 7.00%, last 7.00%
2014-09-05T12:30:00 USD Aug Two-Month Payroll Net Revision
2014-09-05T12:30:00 USD Aug Change in Private Payrolls, exp 213K, last 198K
2014-09-05T12:30:00 CAD Aug Net Change in Employment, exp 10.0K, last 41.7K
2014-09-05T12:30:00 USD Aug Change in Manufact. Payrolls, exp 18K, last 28K
2014-09-05T12:30:00 CAD Aug Full Time Employment Change, last -18.1
2014-09-05T12:30:00 USD Aug Unemployment Rate, exp 6.10%, last 6.20%
2014-09-05T12:30:00 CAD Aug Part Time Employment Change, last 59.9
2014-09-05T12:30:00 CAD 2Q Labor Productivity QoQ, exp 1.60%, last -0.10%
2014-09-05T12:30:00 CAD Aug Participation Rate, exp 66.1, last 66.1
2014-09-05T12:30:00 USD Aug Underemployment Rate, last 12.20%
2014-09-05T12:30:00 USD Aug Average Hourly Earnings MoM, exp 0.20%, last 0.00%
2014-09-05T12:30:00 USD Aug Average Hourly Earnings YoY, exp 2.10%, last 2.00%
2014-09-05T12:30:00 USD Aug Average Weekly Hours All Employees, exp 34.5, last 34.5
2014-09-05T12:30:00 USD Aug Change in Household Employment, exp 225, last 131
2014-09-05T12:30:00 USD Aug Labor Force Participation Rate, last 62.90%
2014-09-05T14:00:00 CAD Aug Ivey Purchasing Managers Index SA, exp 55.3, last 54.1
EUR'USD
EUR/USD has crushed its key support at 1.3105 (06/09/2013 low) following the ECB's decisions. Hourly resistances for a short-term bounce can be found at 1.3000 (psychological threshold) and 1.3110 (02/09/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The break of the key support at 1.3105 (06/09/2013 low) opens the way for a decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low). A key resistance lies at 1.3297 (22/08/2014 high).
GBP/USD
GBP/USD continues its relentless decline, as can be seen by the break of the key support at 1.6460. Prices are now close to the key support area between 1.6284 (38.2% retracement) and 1.6220. Hourly resistances for a short-term bounce can be found at 1.6441 (intraday high) and 1.6497 (03/09/2014 high). In the longer term, prices have collapsed after having reached 4-year highs. Monitor the strong support at 1.6220 (17/12/2013 low) given the general oversold conditions and the lack of previous significant bearish reversal pattern. A key resistance now stands at 1.6739. Another strong support lies at 1.5855 (12/11/2013 low).
USD/JPY
USD/JPY is challenging its strong resistance at 105.44 (see also the 61.8% retracement and the long-term declining trendline). A break of the hourly support at 104.74 (03/09/2014 low) would favour the start of a short-term correction. A key support area stands between 103.56 (28/08/2014 low) and 103.50 (22/08/2014 low). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high).
USD/CHF
USD/CHF moved sharply higher yesterday, breaking the strong resistance at 0.9250. Hourly supports now lie at 0.9250 (previous resistance) and 0.9212 (02/09/2014 high). A resistance can now be found at 0.9404 (61.8% retracement). From a longer term perspective, the technical structure calls for the end of the large corrective phase that started in July 2012. The break of the strong resistance at 0.9250 (07/11/2013 high) opens the way for a move towards the next strong resistance at 0.9456 (06/09/2013 high). A key support now lies at 0.9104 (22/08/2014 low).
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