Draghi Says Weaker EUR Fundamentals Much Better
| Aug 08, 2014 05:48AM ET
The ECB maintains the policy rates unchanged at the current historical low levels. The main refi rate remains at 0.15%, the marginal lending and deposit facility rates at 0.40% and -0.10% respectively. The ECB President Draghi’s speech was broadly in line with dovish market expectations. In his monthly press conference, Mario Draghi said that the negative deposit rates have been a success and that the rates will stay at these levels for an extended period of time (2017-2019 as target). The divergent path between ECB versus the Fed and the BoE has been the critical highlight.
Inflation slows yet long run expectations remain anchored
Draghi said that further slowdown in short-term inflation is expected, largely due to energy prices. Nonetheless, the long-term inflation expectations remain anchored, as there is no formation of self-fulfilling cycle of low prices, leading households to delay their spending, and by doing so help deflation to materialize. Mr. Draghi sees gradual recovery in price dynamics by 2015-2016, aiming for a pick-up towards ECB’s 2% target.
Lending remains weak
The loans show signs of stabilization according to Draghi, there is improvement in net loan demand from non-financial institutions. However as the credit standards remain “rather tight”, only banks can act by improving their capital positions. In this respect, the ECB President stresses out the importance of structural reforms to allow private business to develop. At the moment, the starting process of individual business remains too long, thus limiting the speed of recovery in the Euro-zone. The TLTROs aim significant expansion in credit, anticipated between 450 to 850 bn euros. The program happens at the “right time” according to Draghi, there is need for such liquidity. Yet the efficiency of transmission still depends on EZ governments’ common will to proceed with “growth-friendly” fiscal reforms, including lower taxes to allow the liquidity to circulate within the economy. The ECB also intensifies its preparation for ABS purchases. A potential QE program (including public and private bond purchases) will be considered if needed.
Euro-zone is an unfinished union
Despite progress in building common rules, led by the baking union, Draghi sees improvement in Euro-zone integration, stating a capital markets union is likely. Yet the structural reforms remain of critical importance, “it is high time to share sovereignty” says Draghi. The ECB’s commitment for additional stimulus measures, as government bond purchases via QE if needed, keep the core-periphery spreads at relatively low levels, the Germany/Spain 10-year government yield spread stands at the lowest levels since the second quarter of 2010 and should further narrow ideally to decrease core-periphery fragmentation.
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Strong fundamentals for lower EUR
Perhaps the most important highlight has been Draghi’s view on “stronger fundamentals for weaker exchange rate” being “much better compared to 2-3 months ago”. The highly accommodative ECB policy, including negative deposit rates, TLRTROs, the stabilization of the excess liquidity above 100 bn euros (140bn euros as of today), the preparation for ABS purchases and the consideration for additional QE should keep the selling pressures tight on EUR despite low inflation dynamics. “We decoupled our monetary policy from the US, UK” said Draghi; the divergent ECB policy from the Fed and the BoE’s should lead to weaker EUR in the mid-run, in theory. “Other central banks decrease exposure to EUR” he added, as the euro should pay lower real rates moving forward as the EUR rates will remain low for “much longer time”.
July 29th CFTC data confirms the significant surge in EUR-short speculative positions. The short-EUR futures reach the levels last seen on August 2012. The mid-long run bias is well bearish yet post-Draghi failure to break into 1.3296/1.3333 support zone (Nov 2013 low / Aug 6th low) allowed for some profit taking towards 1.3400, the large volume of speculative shorts leave room for further correction at this stage. However, the short-term corrective bids should be capped by offers and option barriers trailing above 1.3400. Solid resistance is eyed pre-1.3463/1.3500 (21-dma/ optionality).
2014-08-08T12:30:00 USD 2Q P Nonfarm Productivity, exp 1.60%, last -3.20%
2014-08-08T12:30:00 CAD Jul Net Change in Employment, exp 20.0K, last -9.4K
2014-08-08T12:30:00 USD 2Q P Unit Labor Costs, exp 1.10%, last 5.70%
2014-08-08T12:30:00 CAD Jul Full Time Employment Change, last 33.5
2014-08-08T12:30:00 CAD Jul Part Time Employment Change, last -43
2014-08-08T12:30:00 CAD Jul Participation Rate, exp 66.1, last 66.1
2014-08-08T14:00:00 USD Jun Wholesale Inventories MoM, exp 0.70%, last 0.50%
2014-08-08T14:00:00 USD Jun Wholesale Trade Sales MoM, exp 0.70%, last 0.70%
EURUSD is holding the low implied by Wednesday's hammer. Coupled with the proximity of the key support at 1.3296, a short-term rebound is likely. Resistances can be found at 1.3444 and 1.3503 (05/06/2014 low). An hourly support stands at 1.3333 (06/08/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A key resistance lies at 1.3549 (21/07/2014 high).
GBPUSD remains weak, as can be seen by the recent (marginal) new lows below the hourly support at 1.6814 (01/08/2014 low). A break of the resistance at 1.6893 (01/08/2014 high) is needed to suggest exhaustion in short-term selling pressures. Another resistance can be found at 1.6955 (30/07/2014 high). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A key support stands at 1.6693 (29/05/2014 low, see also the 200 day moving average).
USDJPY continues to weaken. The hourly support at 101.72 has been broken. Another support lies at 101.32, while a key support stands at 101.07. Hourly resistances can be found at 102.00 (07/08/2014 low) and 102.46 (07/08/2014 high). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. Another resistance can be found at 104.13 (04/04/2014 high), while a major resistance stands at 110.66 (15/08/2008 high).
USDCHF displays many significant daily upper shadows near the resistance at 0.9107, suggesting strong selling pressures close to these levels. Monitor the support at 0.9041 (01/08/2014 low), as a break would invalidate the short-term bullish technical structure. Other supports can be found at 0.9008 (24/07/2014 low) and 0.8969 (17/07/2014 low). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. As a result, a test of the strong resistance at 0.9156 (21/01/2014 high) is expected.
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