Living 30 days with the new rates

The general situation in Eurozone looks bad - the threat of deflation is still present, which still gives a small chance for the decrease of the deposit rate at the upcoming meeting

The outgoing week produced a new chunk of information regarding the ECB's intents, nervous statistics from Asia, weak American data, and new oil speculations. The market was in turbulence searching for reliable factors and was not able to find anything better but rather continued the panic with regard to stock assets. Not paying attention to "the week of silence" required before the meeting, Reuters, on Thursday after ECB's intermediate meeting, published the inside from 5 anonymous members with skeptical comments regarding adoption of measures for further weakening of the monetary policy. Let's not forget that the same thing also happened before December 3: the same Reuters produced information which stated that more than 0.1% rate decrease was planned with simultaneous expansion of QE volume.

Subsequently, the market's unreasonable expectations resulted in the growth of euro after the ECB's meeting despite the extension of the EQ period, decrease of the rate, and announcements with regard to reinvestments. The Protocol of the previous meeting was easy. It is quite likely that now, before the next meeting more moderate market expectations will be expressed for greater effectiveness in order for the effect from the upcoming verbal interventions or/and real actions by the results of the ECB meeting on December 21 to be more powerful.

The general situation in Eurozone looks bad - the threat of deflation is still present, which still gives a small chance for the decrease of the deposit rate at the upcoming meeting. On Thursday, the information regarding the final inflation data in the Eurozone countries in December will be published, a small upward revision is expected. However, the continuing crashes on the American, European, Asian stock markets force the market to have an active close up of carry trade operations with the use of euro. Although the risk of the collapse of the Chinese economy still supports the interest to euro, Europe does not need its currency to be expensive. If oil is becoming cheaper, the prices of European shares also fall; the dynamics of the stock markets and the exchange rate of euro need to be detached from the general global tendency. Therefore, although, on Thursday, ECB will leave its policy without changes by the majority of forecasts, Draghi will try to balance the situation with his comments and will not allow EUR/USD to leave 1.1000/1.1050.

Last month showed that after rates were raised no recovery can be expected; and, by all means, FRS knows this fact very well. Today, the Federal Reserve is ready to change its rhetoric in order to devalue the US dollar. Gradually, market expectations with regard to the rates and FOMC forecasts are moving closer. FRS will tolerate low inflation, while the dramatic acceleration of its values will cause aggressive tightening of monetary and credit policy. Again we can see the intensification of "talks" that the American economy will survive the planned 4% rate increase in 2016.

The analysis of the data of the Beige Book and the Friday American data shows that despite the affirmations of the American statistics, if there are some improvements in the economy, they are still insignificant; we can see the "mixed" effect (the positive and negative in equal proportions). The most important thing in the reports is the negative effect of the strong dollar, low prices, and weak growth of salaries. If dollar continues its growth before the FRS meeting and the panic on stock and raw materials markets does not stop, then there will be a high probability of FRS "dovish" tone, which will result in dramatic growth of EUR/USD. The lower Draghi will "drop" euro, the higher will be the chances of EUR/USD growth by the next FRS meeting.

Some other news worth of mentioning are the following:

  1. The embargo on Iranian oil was removed, and Iran received access to frozen assets in the amount of 50 bln dollars and the opportunity to attract foreign investments. Despite the weak first reaction, this event was included into the price of oil, the market was convinced that the sanctions would be removed; now, it is logical to wait for profit fixation, because the largest oil contracts were executed last week. Hedge funds increased bearish positions in oil to record-breaking values.
  2. Last Friday, Blumberg and Reuters published several articles stating that Germany's influential bankers and politicians recommended Merkel to communicate to Draghi that the time for the end of the period of low rates and for the development of the strategy for ending the QE program came. Such statements look strangely at the time when raw materials prices are at the lowest level for the last 10 years.
  3. The week started with a gift for dollar - NBC introduced reserve requirements for Chinese banks that provide services for opening deposits in off-shore yuans. Those requirements in the amount of 17.5% will not apply to non-resident banks; however, they will kill speculators that pushed USD/CNH pair upward, which produced progressive destabilization on the markets.
  4. Despite the weak statistics (industrial production reduced by 0.9% m/m, business activity index in the services sector - by 0.8%), the US dollar behavior still remains the determining factor for the Japanese yen.
  5. The Chinese data published in the morning turned out to be quite negative, there are obvious signs of slowing down. However, there is no new fall of stock indexes on the pessimistic market. The market is tired of falling, most likely, the prices of assets had already considered the possible negative regarding China. Investors, so far, have been patient with Beijing's slowing down, which is honestly recognized by the latter.
  6. The season of company stock reporting in the USA has been almost invisible in the midst of the raw materials market and China. However, if the panic slows down a little, we can pay attention to the reports this week. Bank of America, Morgan Stanley, IBM - on Tuesday; American Express - on Wednesday; Goldman Sachs, BHP Billiton Limited - on Thursday; General Electric - on Friday.

EUR/USD still retains the mid-term range: support at 1.0820/1.0800/1.0780, resistance at 1.0940/1.1000. USD/JPY showed support at 116.50, despite an upward movement, the technical picture remains negative. Resistance remains at 117.90/118.20/118.50. It is necessary to follow the news,; however no opening of new positions until the ECB's meeting is recommended.

Author: Lachlan Patel,
ForexChief Currency strategist