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Euro Remains Heavy ahead of ECB


The US dollar is broadly firmer though the Antipodean currencies continue to enjoy residual strength.  The Canadian dollar is not being dragged up with them on account of Bank of Canada meeting today.  

Although Governor Poloz dampened expectations for a cut with last week's reiteration that the January rate cut was an insurance policy to buy time.  Yesterday's somewhat firmer than expected Q4 GDP (2.4% vs 2.0% consensus) would have seemed to have solidified such expectations, the details were less encouraging, keeping some wary of a cut today.  Inventory accumulation accounted for 0.4 percentage points and the two sectors the central bank has identified as key for the recovery, investment and exports both fell. 

The US dollar has been carving out a large triangle pattern against the Canadian dollar since the end of January.  The bottom of the triangle is flattish around CAD1.2450.  The top is marked by a falling trend line that coming in now near CAD1.2620.  We look for an eventual break higher.  

Earlier today, India surprised the market with another 25 bp rate cut (to 7.50%) between central bank meetings.  The timing surprised the market, and it seemed to be at least in part to a response to the recent budget agreement.  China, which cut key lending rates over the weekend, followed up today with a cut in the short-term lending facility.  The overnight rate was cut 50 bp to 4.50%, and the 7-day repo rate was cut to 5.5% from 7%. 

Turning to the other BRIC countries, note that Brazil is widely expected to hike the Selic rate later today by 50 bp to 12.75%.   Russia's central bank meets at the end of next week, and many are looking for it to cut its key rate, which stands at 15%, having peaking at 17%  before the late January cut. 

Japan, UK, and the eurozone reported somewhat disappointing service  PMI figures.  Japan's was the most disturbing.  It fell to 48.5 from 51.3, the lowest since April 2014.  The  eurozone service PMI slipped to 53.7 from the 53.9 flash reading.  It is still higher than the January's  52.7 reading.  Hence, the report does not undermine the idea that the region is finding better traction.  

The UK's service PMI slipped to 56.7 from 57.2 in January.  The consensus anticipated a small increase to 57.5.    The composite PMI was unchanged at 56.7 as well.  This seems broadly consistent with around 0.6% quarterly GDP.     Despite the respectable growth, the deflation headwinds appear to have strengthened as BRC shop prices fell 1.7% (accelerating from -1.3%).  Food prices are -0.4% lower than a year ago (vs -0.5% in January), while non-food prices are off 2.5% (after -1.8% in previously).  

The euro continues to trade heavily ahead tomorrow's ECB meeting.  The optionality and stops around $1.1150 were taken out, and the euro approached $1.1115.  The $1.11 area is thought to hold additional barriers.  As has characterized Draghi's tenure at the helm of the ECB, a bold action is announced, which is light on details.  Later those details are provided.  That is what tomorrow's ECB meeting is largely about:  details of its sovereign bond purchase plans. 

In addition, the the Bank of Canada meeting, the North American session features the US service ISM, which is expected to be slightly softer than the 56.7 reading in January, and more importantly the ADP employment estimate.  The ADP report appears to have stolen some the thunder from the national report.  However, barring a major surprise with the job creation, which has been particularly volatile, the focus has shifted toward earnings.  

The ADP report sheds no light on hourly earnings.  However, there are a number of developments that point to some modest upside pressure, which the Federal Reserve would like to see before hiking rates.  First, as we have noted many cities and states have risen or will rise minimum wage.  There has been industrial action on West Coast ports that is now resolved.  There is also one of the largest strikes against refineries in a couple of decades.  This remains unresolved.  Walmart and T.J. Maxx are rising wages this year and next.  That could impact as many as 8 mln workers. 

Oil prices are firmer following yesterday's API report showing less than a 3 mln barrel build in inventories, somewhat less than expected.  The official Department of Energy estimate will be released later today.  Meanwhile, the Saudis, heading off calls for an emergency OPEC meeting, suggest the market is stabilizing, and it boost prices to Asia, where the competition has been among the fiercest, by the most in three years (reduces discount). 






Euro Remains Heavy ahead of ECB Euro Remains Heavy ahead of ECB Reviewed by Marc Chandler on March 04, 2015 Rating: 5
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