Good morning

I cannot stress enough the importance of today’s ECB meeting. The question on everyone’s lips is, will Pres. Draghi stand up and deliver or will he continue on his present course and face additional criticism and scrutiny by the Germans (mainly).

The ECB meeting later today might turn out to be a non-event. After what we saw the BoJ do last Friday, while I don’t expect additional easing measures Draghi could surprise us with new larger QE measures. On the other hand he could simply argue that the ECB’s most recent programmes have only just started  and they need time to see the results before considering new measures. Draghi is likely to be grilled on the €1tn target to extend the balance sheet. Chances are he will downplay this question just as he did at the previous meeting. If this is the case, the USD could see another dip lower to recent lows. EURUSD has recovered from yesterday to trade just above 1.2500 as I write this and while I do not expect “fireworks” pre the announcement, traders could try pushing the EUR higher before initiating short EUR positions post the announcement.

GBPUSD traded UNDER 1.5900 after yesterday’s poor services PMI number. I wrote in the blog yesterday (pre number) that the writing was on the cards and a dip to a 1.58 handle was imminent. I got my wish. Since then, the GBP has mounted a comeback to trade pretty much at yesterday’s opening levels of 1.5980. Today sees Industrial and Manufacturing production numbers (9.30am) followed by the rate announcement at midday (no change expected). Depending how the EURUSD trades today, the GBP is in all likelihood going to follow suit. I could very well see GBP strengthening towards the ECB announcement before falling back into sub 1.60 territory.

Minneapolis Fed Kocherlakota was one of three Fed speakers yesterday. He repeated earlier comments that the “sluggish” inflation outlook, with inflation expected likely to be below 2% over the next couple years, intimating in effect that “it’s inappropriate for the FOMC to raise the target range for the Fed funds rate at any such meeting.” . Kockerlakota is the most dovish FOMC member and voted against the decision to end QE3. Fed members, Rosengren and Lacker did not however comment on the economy or on monetary policy in their speeches.

AUDUSD and NZDUSD both staged recovered overnight after hitting recent lows against the USD. AUDUSD fell to 0.8554 – a July 2010 low – thanks to yesterday’s strengthening in the USD. Overnight saw decent employment numbers which boosted the AUDUSD recovering some of the losses to trade up 0.16% to 0.8615. Overall my thoughts for the AUD and NZD remain the same, the strengthening US economy, coupled with a slowdown in China will lean heavily on the AUD/NZD and further losses are expected.

The RUB (Russia) continued in its plummet!!, hitting historic lows against both the EUR and USD after the Russian central bank announced that it would be capping the amount that it spends to defend the currency. In a statement released yesterday, the Russian Central Bank announced that: “In cases when the value of the bi-currency basket stays at the operational band’s boundaries or beyond it during the entire trading session, the volume of the Bank of Russia’s intervention will not exceed $350 million on that day,”
The move, which is seen as a further steps towards the liberalisation and free-float of the RUB, saw the currency fall to 45.3575 taking the losses for the year to over 22.5%. In currency market terms, this is BRUTAL. The sanctions and bad blood between Russia and the West continues unabated which is not helping much. I cannot imagine what the oligarchs must be feeling right now, though with falling oil and commodity prices the weaker RUB is going some way to slow the revenue from those sales (in USD and EUR mostly).

Lastly a quick note on the JPY, after crossing the psychologically important 115.00 threshold late Asian morning, the JPY fell back below that level on profit-taking. With the Nikkei falling 0.86%, the USDJPY fallout has been slowed. We are not expecting much change in the USDJPY trend, though caution is advised given the volatility levels in the JPY (1m 10.50%) with traders expecting more fireworks in the coming days.

Have a good day and good luck