Dovish Draghi Unlikely to Derail Euro

From the BBH Currency Strategy Team

– The euro was bid to new highs for the move earlier in Asia to $1.3640 before pulling back to the figure to await the ECB meeting 
– This price action cautions against expecting a reversal of the trend in response to today’s developments, whether it is the ECB press conference or the US data 
– Norway’s central bank may have provided the biggest surprise of the day 
– We discuss some of the developments out of Japan, including supplemental budget, purchases by Japanese investors, and the price action for the yen and Nikkei 
– Australia reported a larger-than-expected trade deficit and announced a free-trade agreement with South Korea 
– A monkey wrench of sorts has been thrown into the digital currency world today by China’s decision to ban financial institutions from trading Bitcoins 
– The minutes to last week’s COPOM meeting just came out, but it doesn’t seem conclusive either way on whether the pace of hikes will be kept at 50bp for the next meeting 

Price action: After a brief spike higher, EUR/USD fell back to trade just under 1.36, while GBP/USD is at 1.6350. USD/JPY continues to trend lower, but has not yet managed to make a decisive break below the 102 level. NOK and SEK are underperforming on the day, trading down to 6.1790 and 6.5190, respectively. In the EM space, BRL (yesterday’s close) and ZAR are the underperformers, while INR and RUB are outperforming. The MSCI Asia Pacific index lost 0.4% with the Nikkei down 1.5%. EuroStoxx and S&P futures are flat.

• The euro was bid to new highs for the move earlier in Asia to $1.3640 before pulling back to the figure to await the ECB meeting.  It is notable that the euro remains bid even as the market expects dovish comments from ECB President Draghi and, after yesterday’s strong ADP jobs estimate, increased speculation of near-term slowing of the Fed’s asset purchases.  
• This price action cautions against expecting a reversal of the trend in response to today’s developments, whether it is the ECB press conference or the US data. US data includes weekly initial jobless claims and what is widely expected to be an upward revision to Q3 US GDP, giving it a 3-handle.  Every year, since the US economy bottomed, there has been at least one quarterly growth number that put the annualized rate about 3%.  Many had given up on it this year, but recent inventory data points to that quarter being Q3.  That pace of growth, however, does not appear to be extending into this quarter.  
• Norway’s central bank may have provided the biggest surprise of the day.  The decision to keep rate on hold was widely anticipated, but the bank pushed out the first rate hike a full year from where it had indicated in September.  The market punished the krone, sending it to the lowest level against the euro since late 2009.  A fall in CPI in early 2014 would likely renew speculation of a rate cut.  The euro rose above NOK8.41 briefly.  The next band of resistance is seen in the NOK8.4250-NOK8.44.  
• There were a few developments in Japan to note.   First, the dollar has been confined to about a half a yen at the lower end of yesterday’s range, which straddles the JPY102 level.  Second, the Nikkei lost another 1.5% and finished the Tokyo session near its lows and just below the 20-day moving average (15181).  As discussed yesterday, the gap lower opening Wednesday is an ominous technical development.  It was not filled today.
• Third, the Japanese cabinet approved the JPY18.6 trillion (~$182 bln) supplemental budget.  Most of it was spending already announced, but there is JPY5.5 trillion that is new and meant to offset next year’s retail sales tax increase.   It will not be debt financed, but through the higher tax revenue (due to stronger economy) and unspent funds.  Fourth, Japanese investors bought foreign bonds for the 8th consecutive week, but this was offset in full by the sales of foreign equities.  Foreigners continued to buy Japanese shares, but on a net basis, the purchases (and of Japanese bonds) by the sale of bills.  
• Shortly after Australia reported a larger-than-expected trade deficit (A$529 mln vs A$350 consensus), it announced a free-trade agreement with South Korea.  Australia’s exports were flat, while imports rose 0.8%, producing the fourth consecutive deficit.   South Korea is Australia’s third largest export market and fourth largest trading partner.
• In Europe, we note that the French unemployment rate ticked up in Q3 to 10.9% from 10.8% and is approaching the modern record of 11.2% seen in Q4 1997.  The divergence between the French and German economies was amply driven home with the latest PMI readings.  Spain’s survey data has been more promising and Moody’s upgraded the outlook to stable late yesterday. Still, the real sector in Spain continues to struggle. Industrial output in Oct was expected to have slipped by 0.1% and instead fell 0.7%, with downward revisions to the Sept report.
• The Italian Constitutional Court is forcing political reform on the Letta government, which desires to implement such reforms but appears to have lacked a consensus.  The Court ruled the existing electoral law violates the Constitution by giving extra seats to the winning party/coalition, which denies voters from choosing individual candidates.
• A monkey wrench of sorts has been thrown into the digital currency world today by China’s decision to ban financial institutions from trading Bitcoins.  The public can still access Bitcoins through the internet.  The ban only applies to financial institutions.
• The minutes to last week’s COPOM meeting just came out, but it doesn’t seem conclusive either way on whether the pace of hikes will be kept at 50bp for the next meeting. What seems to be calling the most attention is the new reference to the lag in monetary policy effects. This could imply that not much more is needed in terms of tightening, so opening the door for a slowdown it the pace of hikes – but not decisively so. On the other hand, the bank maintained language saying that “the pace of rate increases is adequate,” which implies no change in the pace. November IPCA inflation comes out Friday and is expected at 5.81% y/y vs. 5.84% in October.  Perhaps the weaker BRL will balance out against lower energy prices (from passion on the bill to Petrobras) in the minds of Brazilian policymakers. We still expect the USD/BRL 2.20-2.40 to hold for now, albeit with some possible overshooting.