Saxo Bank | May 13, 2014 01:33AM ET
Brief recap of last week’s European Central Bank (ECB) meeting: it was clear after ECB president Mario Draghi’s press conference that the central bank is set to move on policy in June. It is my assumption that the critical focus will not be so much the next batch of staff projections on inflation, but, as Draghi said in his opening statement on Thursday, the (further information and analysis on) “the availability of bank loans to the private sector”. As well, Draghi’s mention of EUR 160 billion in capital flows from Russia is a shocking number and could help to explain much of the Euro’s resilience over the last several weeks, even as it became clearer that the ECB is set to ease policy. Last week, Russian president Vladimir Putin showed signs of blinking in the confrontation over Ukraine and sent Russian stocks sharply higher – suggesting at least some of this flow has reversed, or at least that the pressure is easing. This could be a key element in helping the euro lower as well and may explain some of the force of the sell-off since Thursday.
Chinese president Xi Jinping signaled over the weekend that the Chinese government is not set to launch any major new stimulus and that China must adapt to a “new normal” of lower growth. This is a key policy signal that lowers the prospects for growth globally. The argument has been thrown around that the Chinese government at some point could panic in avoiding a deflationary and growth crunch from a collapsing credit bubble, but no signs of this are forthcoming… The Eastern Ukraine referendums on secession proceeded over the weekend, but were widely condemned as illegitimate and poorly executed. Markets appear calm in Russia on this even as the signs of conflict on the ground are worrisome. Note that New Zealand House Sale volumes were down 20 percent year-on-year in April. Lower activity is the first sign of a slowing market, preceding lower prices – stay tuned. Looking ahead The calendar this week is fairly quiet, but we’ve had a tremendous “setup” coming into the week after the reaction to the ECB meeting and as the US dollar is staging a comeback attempt, and not just in EURUSD. The comeback comes importantly just after the greenback set new lows for the cycle. Key questions this week are whether the cable reversal will deepen, whether the USDCAD has turned sustainably back higher, and whether the AUDUSD rally fades below the first support levels. Chart: GBPUSD GBPUSD reversed late last week to the first important support level around 1.6820. That level and down to perhaps 1.6750 is an important support zone that, if breached in the wake of Wednesday’s Bank of England inflation report, could mean that we’ve put in a cyclical high. On the flip-side, the pair needs to take out 1.7000 to prove the bullish case, (a soft euro, by the way, might have GBP bulls preferring to short EURGBP).
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