Markets Trying To End Week On ECB / BOE Punchbowl High

 | Jul 05, 2013 05:26AM ET

Asset markets have ripped higher again on the strongly supportive rhetoric from Carney and Draghi yesterday – will the US employment report spoil the party or can we maintain the sugar high for another while longer?

European asset markets caught a strong bid from the Draghi and Carney rhetoric at their respective meetings yesterday. These good feelings spilled over into the Asian session as the world tries to get feeling good about central bank support. It feels more than a bit late in the ball-game for this, and Kyle Bass would apparently agree with this sentiment – Zero Hedge ran one of his most recent letters about a visit to Japan and his concerns for risk asset markets in general due to the Chinese situation and as CB activism is gaining less and less traction. I’m sure Mr. Bass wouldn’t agree in a longer term sense, but I am starting to get interested in correction scenarios in the JPY crosses – such as the one mentioned yesterday for USDJPY. I will wait until after the US employment report today to flesh out my thoughts there – stay tuned.

Yesterday’s BoE/ECB meetings saw a one-two dovish punch, as Carney made a bit more of a splash than the markets anticipated by specifically talking down the market’s anticipation of rate moves out the curve (and by taking the step to issue a statement at all, which was not the policy under King). And the ECB’s Draghi emphatically abandoned the “no pre-commit” stance of the ECB by vowing that that interest rates would remain low or lower for an extended period.

EURGBP wasn’t sure what to do on the news, as it first shot higher all the way to above 0.8630 on the BoE developments before seeing about half of its gains taken away by the ECB’s guidance – a close above 0.8600 needed to get the rally back on track, or well below perhaps 0.8525 to suggest that downside risk is higher. One must say that Draghi’s performance, in particular, was more bark than bite, as it was obvious that he wanted to avoid the impression of a “tight money” stance after the June 6 debacle. But going forward, is this really enough – we’ll need to see either more “walk the walk” from the ECB (only one more interest rate cut likely, then it is on to QE/LTRO’s/etc., or else…) or more worry at the periphery for the Euro to continue much lower beyond a few days of selling on this development. I prefer the downside in EURGBP eventually, but technically, it isn't there yet.

Looking ahead
Look out for Swiss reserves data and the CPI shortly thereafter this morning – the CHF feels a bit “Too quiet” these days. USDCHF continues to make progress unwinding that enormous backup from above 0.9800 to below 0.9200. A strong close today and for the week would offer strong support for the view that the lows are in and that the pair is finally coiling for a move to parity and higher in the coming weeks/months. A reversal after yesterday’s gains on a surprising US employment report outcome, meanwhile, would suggest a possible test back lower first towards 0.9350/0.9400 – but still looking for the eventual upside resolution in the big picture (see chart below).

Chart: USDCHF