Draghi King Boost EUR GBP

Feb 7, 2013 ECB Conference: Draghi spoke, EUR Drops
Mar 7, 2013 ECB Conference: Draghi spoke, EUR Jumps

Today is only 2nd day of the year when EURUSD rises more than 1.0% from open to close (not low to high).

Similarities: GDP & inflation growth forecasts were downgraded in both press conferences, while projecting a pick up in the 2nd half of the year.

Difference: This time, Draghi’s opening remarks did NOT mention “appreciation of the euro” as a factor in downside risks to price developments as they did in February. Mentioning fewer factors to the downside price risks is naturally more positive for the currency, especially when currency appreciation itself is singled out as the distinctive factor between today and February.

Feb 7, 2013 ECB Conference (note on inflation)
“Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate.”

Mar 7, 2013 ECB Conference (note on inflation)
“… risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity”.

The strength in today’s euro rally highlighted by shrugging Draghi’s mention that rate a cut were discussed in today’s Governing Council meeting. Draghi’s handling of the euro topic remains adept, as he was able to contain January’s potentially aggressive rally and this month’s potentially rapid sell-off by making references to the FX impact on inflation instead of growth.

King Outvoted Again?

The Bank of England held off from further asset purchases, raising speculation that governor King was outvoted in two consecutive months for the first time in his 10 year governorship after he voted for an additional $25 bn in asset purchases in February. This further increases chances of reforming the BoE’s inflation target and adding a growth element to the overall policy objectives.

Despite recessionary figures in the PMI indices for construction and manufacturing, these two sectors maybe showing signs of a bottom at the same time as retail sales hit 2 year highs according to the British Retail Consortium. This week’s release in the services PMI, showing 2 straight monthly readings above 50 may have also helped.  Nonetheless, GBP remains the currency with greater scope for declines, with 1.5300 acting a cap, followed by an eventual break below 1.48 and onto 1.46 in late Q2.

Euro’s downside appear relatively supported near 1.2900 as the ECB holds off from cutting rates and an eventual fix in Italian politics via an effective formation of a pro-austerity government leads to stabilization in EURUSD. 1.2900-1.3200 is likely to remains the new range until further clarity is obtained regarding the date of Round 2 in elections.

Canadian dollar is gearing to be the favoured currency to short in the medium term (towards early Q2) as swelling personal debt and shrinking exporter margins force the Bank of Canada to shift from scaling down hawkishness to dovish pronouncements. 1.0480-1.0500 is seen as the medium term target, with support climbing to 1.0200.

Yen is the biggest loser as the unexpected 7K decline in US jobless claims boosted risk appetite and restored the old inverse relation between equities and the USD as well as yen. Yen selling remains the trade by default the risk-on trade due to the “benign neglect” policy from Tokyo with the blessing of the new BoJ head Haruhito Kuroda.