Five Things to Know Beyond and Before the ECB

The outcome of the ECB meeting today and Draghi's press conference are the most important events of the day.  We suspect those looking for bold action will be disappointed and the euro's recent uptrend (since early February) will remain intact.  

Yet there five other developments to digest.  The first and more significant is the fact that there has been no escalation to the two immediately vexing issues for market participants:  Russia's invasion of Crimea and the relatively rapid fall of the Chinese yuan.  The EU is debating sanctions today, but they seem largely focused on the former Ukranian president. 

Fears that this was the first domino and Putin was beginning WWIII never struck us as plausible, or that without a firm (military ) and resolute (NATO) response Russia would march on.  References to Hitler seem over the top, hyperbolic and gratuitous.  At this juncture parallels to Reagan's move on Grenada in the thirty years ago seems a greater historical relevance the WWII.  

After reaching almost CNY6.18 at the end of last week, the dollar has eased back to CNY6.11 today and now holding just below CNY6.12.   It is in the range seen on February 25.  Here too we thought the markets were exaggerating and read it more as teaching a lesson than a prelude to a new policy, though admittedly the jury remains out.  We suspect the same is generally true  the potential corporate failure (tomorrow) of a small solar company.  It would be the first bond default in modern times and its significance is likely more in terms of moral hazard rather than spark that triggers a re-assessment of China risks.  

Second, after extending its losses on Monday, the Australian dollar's recovery has been extended and is trading near last week's highs after two incredibly strong reports.  The January trade surplus was 14x larger than economists expected.  The A$1.43 trillion surplus was the third consecutive surplus.  Exports rose 3.7% and imports rose 0.87%.  On top of that, the December surplus was revised up by a little more than A$120 bln, which itself was more than the consensus expectation for January.   Retail sales jumped 1.2%, three times greater than the consensus expected and the December series was revised to 0.7% from 0.3%.

The Aussie shorts are being squeezed.  The next target is near the 100-day moving average ($0.9080), which it has not been above since last November, which corresponds to a retracement objective of the decline since the late-Oct high near $0.9760.   

Third, the dollar-bloc is the strongest (AUD, NZD, CAD, in that order and with about a 0.5% difference between them after Aussie's 1.4% advance).    The Bank of Canada sounded more neutral than dovish, but a soft IVEY today may prevent additional Canadian dollar gains today, ahead of tomorrow 's employment report.  The consensus calls for a decline to 53.1 from 56.8 in this volatile series.  Tomorrow it is expected to report a 15k increase in employment, about half of the January gain.  Separately, the January trade balance will also be reported and a small improvement in the deficit (to C$1.2 bln from CAD1.66 bln) will still it about twice as high as a year ago. 

Fourth, the Bank of England meets and no one is expecting a change in policy.  Yet, it does face an interesting decision.  About GBP8.2 bln of a bond that it bought in its QE operations is set to mature soon (March 14).  It must decide what to do with the proceeds.  It needs to make a deliberate choice to reinvest it, otherwise its GBP375 bln of holdings will decline.  Its balance sheet will shrink.  Market participants would likely see this as the beginning of the passive unwind of QE and a prelude to a rate hike and possibly push back against BOE's forward guidance.   If it does announce it will reinvest the proceeds to maintain its current holdings, sterling may initially retreat.  

Fifth, the Japanese yen and Swiss franc are the poorest performers this week. The weaker yen and news that yet another government panel has recommended that the large Government Pension Investment Fund (GPIF) diversify away from its domestic bond focus, help lift the Nikkei 1.6% and to its best closing level in over a month.    The dollar is flirting with the upper end of its recent range against the yen in the JPY102.80 area.    Similarly, owing primarily to yen weakness, the euro is knocking on a corresponding level near JPY141.30.  We anticipate the weak yen story has more room to play.   Our next dollar objective is JPY103.10-60 for the dollar and JPY142.00-50 for the euro.