Week in FX Europe - ECB Pulled The Trigger And Kept The Door Ajar
He did it, Draghi turned on the lights when the market least expected. The ECB cut its refi-rate by -0.25%, to just above zero on Thursday. Perhaps more importantly and because of the global benign inflation phenomena, the Euro policy makers kept the downward bias to its forward guidance. In other words, the door was kept open to take Euro deposit rates into negative territory. Negative deposit rate are generally tied to a more deflationary economic backdrop, the late 90's in Japan is a good example. Europe is not there yet according to Draghi. During yesterday's press conference he indicated that there is no danger of deflation, although policymakers expect a prolonged period of low inflation.
North American Job numbers beat all expectations. Hands down, US and Canadian data were much better than expected. The +204k reported stateside pushed US yields higher, while the uptick in the unemployment rate to +7.3% was explained away by the US partial government shutdown last month. The net effect probably puts the prospect of a Fed taper closer to December rather that at the end of Q1 2014. CTA's have been dominating the selling along the US fixed income curve, with the long-end obviously leading the rout. The dominant trading strategy involves adding more 'steepeners' to investor's portfolios. For the "mighty" dollar - it has had many reasons to rally over the past few weeks. The Fed gave it support when policy makers delivered an unexpected positive economic outlook last month. US domestic data has improved – stronger manufacturing reports have been delivered. Throw into the mix the ECB's surprise rate cut this week (interest rate differential) and add a robust US GDP report gives investors enough reasons to want to own more USD's. Obviously topping the pile is Friday's NFP report. With information overload prominent it will probably take a few more trading sessions to allow the dust to settle somewhat before the USD can probably kick on to greater heights.
China posted encouraging results this week. Exports rose 5.6 percent beating expectations in October. Analysts had forecasted a 3.2 percent growth. Imports grew less than expected by rising 7.6 percent. Both numbers resulted in a net surplus of $31 billion in October. September's surplus was half of that at $15.2 billion. The market took the Chinese trade data as a suggestion that global demand continues to improve. The figures support the statements by Chinese Premier Li Keqiang that the Asian economy is on track to reach the 7.5 percent growth target in 2013. A far cry from the 10 percent pace China set in the past three decades, but a sign of the impact the global economic crisis has had on growth.