20150122 – ‘T’ MINUS ZERO!

High Low High Low
EUR/USD 1.1630 1.1575 USD/ZAR 11.5662 11.5021
GBP/USD 1.5160 1.5122 GBP/ZAR 17.52 17.41
EUR/GBP 0.7679 0.7645 USD/RUB 66.32 64.72
USD/JPY 118.35 117.80 USD/NGN 185.0 190.5
GBP/CHF 1.3107 1.2946 S&P 500 2041 2031
USD/ILS 3.9549 3.9307 Oil (Brent) 49.15 48.52

So here we are, ECB decision day, we only get a few days like this a year, days that could shape the course events for a long time to come. For months the market has speculated on the inevitability of QE in the Eurozone; what form will it take; will there be consensus; how much will be done, how quickly and over what period will it be implemented, how will the risk be shared out etc. And now, after the events of recent days, let me recap:

  • Swiss National Bank (SNB) eliminates the Swiss franc peg to the euro
  • SNB cuts deposit rates to -0.75%
  • Danish National Bank cuts deposit rates to -0.20%
  • German media ramps up anti-QE editorials
  • Chancellor Merkel raises concerns about countries resisting needed structural reforms if QE is implemented
  • Key southern European politicians talk up the importance of QE and question the degree of influence Germany has, as only one member of the group, in the debate
  • Ex Bundesbank head, Axel Weber, questions the future viability of the euro if countries don’t implement German style structural reforms


Seeing all of that put together, it is no surprise that there will such focus on the ECB meeting early this afternoon. We could see significant moves in equity and currency markets today whether Mr Draghi announces QE or he doesn’t.


The minutes of the Bank of England’s MPC meeting were interesting. Whereas previously 2 members advocated rate hikes with 7 keen to keep rates unchanged, the new minutes indicate that all 9 members are now happy to keep rates unchanged. The disinflationary impact of lower energy prices has had a significant impact on the thinking of members and it is clear that the chances of rate hikes in 2015 have receded somewhat. There was a reaction in the currency markets with EUR/GBP jumping 1.2% higher intra-day yesterday, but I would expect that the downward trend will re-assert itself today if QE comes. Indeed GBP has recovered half of its losses against the euro already.


Elsewhere, yesterday, the Bank of Canada cut rates to +0.75% (you know we live in an insane world when I actually have to put a plus sign in front of an interest rate for clarity!). This was not expected and the Canadian dollar weakened significantly with USD/CAD jumping up over 2%. The BoC was keen to offset the impact of falling oil prices, and I have some sympathy in this case, they are huge oil producers, and in their case it is entirely possible that lost production and investment overwhelms the positive consumption effects I’ve mentioned in recent weeks. Needless to say, USD/CAD now trades at its highest (weakest for CAD) levels since April 2009, above 1.23.


Another oil producing nation’s currency was in the spotlight yesterday as the Nigerian Financial Markets Dealers Association agreed to introduce curbs to reign in volatility. Henceforth, the market will halt trading in the naira if it moves more than 2% during a trading session. Apparently dealing was halted, in the past, if 3% was exceeded. Some economists are increasingly concerned that a further devaluation of the naira is inevitable given the low level of oil prices and the depletion of central bank reserves. I agree!


There’s some other macro data coming out today, but I’ll be honest, nothing really matters apart from the ECB’s decision, so I’m not even going to bore you with it. If Mr Draghi announces QE there is a risk that we could see a decent fall in the value of the euro against most currencies, and stock markets should continue to rally. However, I’m not clear how long any stock rally will last. As they say.. it’s the anticipation that’s got market going, but once you get what you want? It might just be a snooze-fest. We’ll see…




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