Central bank cavalcade over next 30 hours, with ECB the focus

More John J Hardy, 3 days ago07 December 2011 Non-Independent Investment Research The RBNZ, ECB and BoE are all on tap in the next 30 hours, with an ECB cut likely tomorrow. Beyond technical measures aimed at providing orderly markets, might any more dramatic ECB announcement have to wait until Friday?

The US equity trading session ended on a high note yesterday and the good vibes carried over into Asia. This naturally sent the USD weaker and AUDUSD is trading up close to 1.0300 again after a stronger than expected Q3 GDP report out of Australia. USDCAD is heavy down at the first key support below 1.0100 after a slightly hawkish BoC meeting yesterday and a strong Ivey PMI for November.

China looking to halt CNY appreciation?
The Chinese commerce ministry said that increases in domestic inflation and weak demand abroad were at risk of severely straining its export potential next year and a Bloomberg article from this morning discusses whether this kind of rhetoric is aimed at a soft announcement that no further CNY appreciation is desirable for at least the near term. Certainly the degree to which the CNY has been allowed to appreciate over the last 12 months versus the USD relative to some of its smaller Asian counterparts is noteworthy over the last several months, though its gains against the USD have effectively slowed to nil over the last several weeks. The wind may well be at the Chinese regimes back if indeed China is headed for a landing of some kind, as inflows might transition to outflows.

Greek run on the banks
An interesting article over at Der Spiegel yesterday discusses the extent to which Greek citizens are emptying their savings accounts, such that only EUR 170 billion in deposits remains versus some EUR  238 billion at the beginning of 2010, and recent months have seen an acceleration of deposit withdrawals. More or less wealthy Greeks figure that some kind of devaluation is imminent, perhaps, and that any savings might be taxed away and even possibly revalued in drachma from Euros. The effect on the run on banks, of course, is a declining spiral in spending in the economy and the ability to collect tax revenue, which will make the new targets for the Greek budget nearly impossible to uphold. 

Looking ahead
Today is yet another day of positioning and uncertainty ahead of tomorrow’s ECB meeting and the EU summit announcements on Friday. It is amazing how well the market assumes things will turn out at these things. The reaction pattern of the last couple of major interventions is worth consideration here:

The July 21 boost to the EFSF saw optimism rising and spreads tightening into the day of the announcement, only to see them widen sharply to new record wide levels in its immediate aftermath. Then the ECB intervened in early August and managed to blast the spreads tighter again – for a few weeks until the next aggravation in the spreads began in early September.

The late October EU summit saw a similar pattern, though the actual tightening in the peripheral spreads was rather modest while the Euro strengthening was very pronounced. Then, on the very day after the summit, spreads began to blow wider and the Euro corrected lower as the EFSF leveraging was seen as providing insufficient firepower relative to the magnitude of funding needs.

This time around, it is clear that European officialdom is taking the situation even more seriously and changes will be dramatic, but while longer term austerity promises might be impressive, the critical question for the short term is whetherl sufficiently credible liquidity arrives on the scene from this week’s decisions and keeps the situation from blowing up in the face of policymakers once again starting as early as next week. The market is pushing spreads tighter on the assumption of credible liquidity provision, while not pushing Euro significantly stronger precisely because of said assumed liquidity.

On that note, the market has a fairly good idea of the promised mechanisms for austerity and EU treaty changes, while the more immediate issue of liquidity pressures and the ECB’s role remains unaddressed/uncertain. Tomorrow’s ECB  meeting might address technical measures the ECB hopes to take to provide orderly markets in addition to the expected cut, but a major role change might have to wait until Friday’s summit announcements.

On that account, the ECB is up tomorrow, as is the BoE (no surprises expected there just yet after the meeting before last saw the asset purchase expansion announcement). Tonight we have the RBNZ out announcing its decision on the cash rate. With the latest rise in risk appetite, forward expectations have eased back into neutral, which means that there will be two-way reaction potential for the NZD in the crosses from the meeting on forward guidance.

Another important data release in Asia is the Australian employment report, where payrolls have turned up rather sharply over the last couple of months relative to the previous few readings, suggesting a bit higher risk of mean reversion (negative reading) relative to expectations of an approximate 10k increase. With AUDUSD pushing the envelope to the upside, a supportive report will be necessary to carry the pair higher through resistance at 1.0330, and then the 200-day moving average awaits just above 1.0400.

Keep an eye on EURCHF for the rest of the week, as the pair hasn't seen two daily closes above 1.2400 since back in May (closed yesterday above that level.)

Economic Data Highlights
Australia AiG Performance of Construction Index out at 39.6 vs. 34.7 in Oct. UK Nov. Shop Price Index rose 2.0% YoY vs. 2.1% in Oct. Australia Q3 GDP rose