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PBOC joins ECB and BoE easing fest, but EUR and risk are wilting
Publication date: 5 July 2012
Author: John J Hardy, Saxo Bank
The Euro was very weak after the ECB cut, even if the cut was in line with expectations. Meanwhile, the PBOC joined the easing action with a rate cut of its own – Aussie tried to jump on the news, but should it?
Draghi cut the ECB benchmark rate 25 bps to 0.75% and cut the deposit rate to zero from 0.25% and was distinctly cautious/dovish at the press conference, suggesting that inflation pressures would wane further in 2012 and 2013 and that growth risks are to the downside. It was a bit surprising that the market apparently took this rate decision as such a surprise. Surveys suggested a large majority were looking for a 25 bp cut and small minorities were looking for either no move or a 50-bp cut. If we use the December 2012 Euribor STIR as a proxy for the level of surprise, it rose some 3.5 ticks as of this writing.
Perhaps the reaction today, in other words, was more about a further unwinding of the “celebration” (or was it merely a cele-shortsqueeze?) of the outsized reaction to the EU summit developments last week. Certainly, the resurgence of the peripheral spreads over the last couple of days were adding some energy to the Euro short argument coming into the meeting.
The weak Euro is the most prominent development of the day, but there are other interesting undercurrents like the JPY trading weakly for a time today and the Aussie trying to post a rally on the PBOC news. The Euro today set a new all time record low against both the kiwi and the Aussie and EURSEK posted fresh new lows since 2000, while NOK was also strong.
The weak Euro is certainly stealing the spotlight today. The single currency crumbled to a new all time low against the Aussie and kiwi today, aided by a cutting and dovish ECB and new easing measures from the PBOC. But is this parabolic chart getting a bit overdone? Certainly, if risk appetite reverses here, the Aussie outperformance may find itself rapidly endangered.
PBOC and BoE duo
As the BoE was out expanding its asset purchase target another 50 billion pounds, China came out simultaneously and announced a 25-bp cut to the 1 year deposit rate and a 31-bp cut to the one-year lending rate, though it said it would not cut bank reserve requirements, so a bit of both “good” and “bad” news for risk, respectively. As I have said before, those who want to jump on the risk bandwagon because of a move like this from China should remember that policy takes some time to take effect, and the fact that this is coming so quickly after the previous PBOC move suggests some measure of desperation. It’s also interesting to contrast the US officialdom and Fed behaviour doing everything it possibly could to minimize the pain from the housing bubble in recent years, while the PBOC said today that speculative housing purchases must be curbed – the latter being a major contributor to recent years’ growth rates in the first place.
Today’s weekly US claims data showed a sudden improvement, thought that appear largely because the raw number didn’t see the normal acceleration in claims that has occurred in every July in recent years – so let’s suspend judgement for another couple of weeks. The most important season for US jobs data runs from October to the beginning of the year, anyway. The ISM non-manufacturing number was marginally weaker than expected at 52.1 as New Orders dropped to 53.3 from 55.5 and new export orders dropped to 49.5 vs. 53.0 previously. The employment index actually improved slightly to 52.3 from 50.8 and prices paid dropped to 48.9 from 49.8 and was the lowest since mid-2009.
Tomorrow we have the US employment report for June, which is not likely to see a huge upside surprise given the weak stream of jobless claims in recent weeks – though today’s ADP number was stronger than expected and the ISM data showed no sudden deterioration in the employment components. But the twisted logic of this market may mean that an in-line to slightly better than expected nonfarm payrolls number might be a bad outcome for risk appetite tomorrow if it’s seen as delaying the next round of easing.
The market has made a strong statement on Euro weakness today – other statement thus far have been far more cautious and it will be interesting to see how we close the week on the risk appetite front (for example, can AUDUSD maintain the 200-day moving average, etc.). It feels like an either/or outcome and more directionality next week after so much indecision of late.
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