FOREX: Euro Hopes for Lifeline as All Eyes Turn to the ECB

By Ilya Spivak, Currency Strategist Thu Dec 02 06:28:00 GMT 2010 Key Overnight Developments

NZ Dollar Outperforms as Stocks Rise on US Reports, ECB Hopes Australian Dollar Misses Risk Rally on Soft Retail Sales, Trade Data Critical Levels

The Euro continued to follow the risky asset complex higher in overnight trade, adding 0.2 percent against the US Dollar. The British Pound yielded a flat result, oscillating in a narrow range above the 1.5600 figure. We remain long the US Dollar against the Euro, Kiwi and Japanese Yen.

Asia Session Highlights

Capital Spending excl Software (3Q)

Trade Balance (Australian dollar) (OCT)

The New Zealand Dollar outperformed once again in overnight trade, adding 0.6 percent on average against its top counterparts as Asian stock exchanges followed Wall Street higher, boosting the risk-correlated currency. The MSCI Asia Pacific regional benchmark index rose 1.5 percent – the most in nearly a month – following an encouraging set of US economic data as well as amid speculation that the European Central Bank may announce new measures to snuff the sovereign debt crisis festering in the Euro Zone at the upcoming monetary policy meeting (see below).

As yesterday, the Australian Dollar failed to share in the risk-driven advance, yielding a largely flat result on the session after October’s Retail Sales report proved disappointing. Receipts fell 1.1 percent, marking the first decline in eight months and the largest since July 2009. The Trade Balance surplus widened, but the outcome failed to excite considering it came courtesy of a drop in imports rather than robust export growth. Inbound shipments fell A$558 million – or 2.5 percent – while overseas sales added A$253 million (1.1 percent).

On balance, it’s no surprise the Kiwi is overtaking its antipodean counterpart as the go-to beneficiary of risk appetite. The Reserve Bank of Australia has turned noticeably timid – with markets are betting on no further rate hikes for the next 12 months – while the RBNZ is tipped to add 58bps to benchmark borrowing costs over the same period according to a Credit Suisse gauge of traders’ priced-in expectations.

Euro Session: What to Expect

French ILO Mainland Unemployment Rate (3Q)

French Mainland Unemployment Change (3Q)

French ILO Unemployment Rate (3Q)

Gross Domestic Product (YoY) (3Q)

Gross Domestic Product (QoQ) (3Q)

Retail Sales (Real) (YoY) (OCT)

Purchasing Manager Index Construction (NOV)

Euro-Zone Gross Domestic Product s.a. (QoQ) (3Q P)

Euro-Zone Gross Domestic Product s.a. (YoY) (3Q P)

Euro-Zone Household Consumption (QoQ) (3Q P)

Euro-Zone Gross Fixed Capital (QoQ) (3Q P)

Euro-Zone Government Expenditure (QoQ) (3Q P)

Euro-Zone Producer Price Index (MoM) (OCT)

Euro-Zone Producer Price Index (YoY) (OCT)

European Central Bank Rate Decision (DEC)

The monetary policy announcement from the European Central Bank takes top billing on a busy calendar of scheduled event risk, with investors hoping for bold action to contain sovereign stress on the edges of the currency bloc after a story in the Financial Times suggested Jean-Claude Trichet and company may increase their purchases of periphery bonds, thereby lowering borrowing costs and boosting liquidity. Furthermore, if the amount of renewed purchases is sufficiently large, this would markets that the ECB is confident enough in Europe’s ability to contain the crisis to risk a sovereign default against itself, an unequivocally bold statement that would likely send the Euro as well as the entire risky asset complex higher.

On balance, such an outcome seems unlikely. The ECB has given no indication that it was prepared to commit to expanding its balance sheet and several of its members (including Axel Weber, the likely candidate to succeed Trichet as the bank’s President next year) have publicly expressed their unease with the modest bond purchases already being undertaken. Furthermore, the ECB is notoriously incremental and slow-moving in its approach to monetary policy, hinting that a smaller step, like pausing the unwinding of its emergency long-term lending facilities (LTROs) for Euro Zone banks, are likely to come first. Indeed, the ECB may opt for a still more cautious approach, whereby LTROs are kept in place for the banks of those countries still under stress while phasing out those for other Euro Zone members as scheduled.

Elsewhere on the docket, the second revision of Euro Zone Gross Domestic Product figures is expected to confirm that output added 0.4 percent in the third quarter. Separately, Swiss GDP is forecast to grow 0.5 percent in the three months to September while the UK Construction PMI report shows the home-building sector slowed for the second consecutive month in November.

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Thu Dec 02 06:28:00 GMT 2010

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