Draghi versus Germany

<p>FX markets have been trading in relatively tight ranges overnight as we await the ECB decision today at 12.45pm. The stakes have increased for further […]</p>

FX markets have been trading in relatively tight ranges overnight as we await the ECB decision today at 12.45pm. The stakes have increased for further stimulus measures to be announced in the form of sovereign debt purchases following Super Mario’s speech at the Frankfurt Banking Congress on November 21st (speech below). The research pieces tend to suggest that at most we get a further cut in the ECB deposit rate (currently -20bp) whilst abolishing the 10 basis point mark-up that applies to the TLTRO loan mechanism scheme. In terms of expectations, 84% of banks polled by Reuters expect that QE will be announced in Q1 2015 and most likely at the next meeting on the 22nd of January as the ECB highlight will continue to sight downside risks to the inflation forecast and GDP today. The market will be looking for a pre-announcement similar to what we learnt in June with regards to the ABS purchase programme, so look for a commitment that preparation work related to the purchase of sovereign bonds has intensified.

ECB President Mario Draghi on Friday Nov 21st:

“Both economic theory and international experience suggest that the magnitude of portfolio balance effects is a function of the size of the central bank’s balance sheet. As this effect stems from the displacement of portfolios, it is logical that the greater the purchases, the greater the displacement across asset classes. This is why the Governing Council has communicated its expectation that the combination of all the decided measures will expand the Euro-system’s balance sheet towards the levels prevailing in early 2012. And in this context, the addition of purchases of covered bonds to our ABS purchases will allow us to conduct interventions on a scale that will achieve the intended effects in terms of portfolio rebalancing and signalling. Let me underline however that contingent on outcomes, we are committed to recalibrate the size, pace and composition of our purchases as necessary to deliver our mandate. This is why the Governing Council has tasked ECB staff and the relevant Euro-system committees with ensuring the timely preparation of further measures to be implemented, if needed.

The AUD couldn’t buck its bearish trend despite stronger data releases in the form of retail sales and the trade balance. The former came in at 0.4% versus the 0.1% expected, as the trade deficit declined from 1.8 billion to 1.3 billion. Local Australian banks joined the increasing view that the RBA will start cutting rates in Q1 2015.

USD/JPY trades close to 120 as support for PM Abe increases following the latest polls in Japan suggesting that Abe’s Liberal Democratic Party could increase their seats in the lower house to 300 from 294, which would suggest reforms will be easier to pass.




Supports 1.2290-1.2225-1.2120  | Resistance 1.2330-1.2385-1.2425




Supports 119.70-119.20-118.85   Resistance 120.05-120.30-121.00




Supports 1.5620-1.5585-1.5535  Resistance  1.5720-1.5760-1.5820





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