Mike Paterson’s Daily Forex Brief
The ECB President yesterday got the approval from the majority of his Governing Council and delivered his “Draghi Plan” despite the opposition still coming from Bundesbank member Weidmann.
The ECB aims to cut the borrowing costs of debt-burdened Eurozone members by buying their bonds. The Spanish and Italian governments’ implied borrowing costs fell sharply after the announcement. Mr Draghi said the ECB would engage in ‘Outright Money Transactions’ (OMTs) to address "severe distortions" in government bond markets based on "unfounded fears".
OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes. In other words, countries will still have to request a bailout before the OMTs are triggered.
The maturities of the bonds being purchased would be between 1 and 3 years and there would be no limits on the size of bond purchases. The ECB will ask the IMF to help it monitor country compliance with its conditions.
After an initial buy-rumour/sell-fact scenario which saw the Euro fall rapidly, despite no cut in interest rates, we’ve since seen a concerted rally as equity markets welcome the move with a sigh of relief.
EURUSD fell from 1.2625 back to areas around the strong pivot line at 1.2550 but has since hit the heady heights of 1.2686 as the risk-on sentiment returns across the board.
GBPUSD also fell after the plans were announced but similarly rallied to cap as I type at 1.5977. Big barrier option selling interest coming in at 1.6000.
EURGBP has been a bit-part player, dipping and rising with the Euro but struggling to get back through 0.7950 (1.2579) on the rally.
The BOE left interest rates and QE on hold but the Minutes should make interesting reading when published later this month. As the (temporary) feel-good factor spreads we’ve seen the Aussie dollar too shake off some of its recent woes but with worrying news still coming out of China each day it surely has to lose this demand when the dust settles.
The Draghi Plan is a can-kicking exercise while they think of something better to come up with as he himself almost admitted at yesterday’s press conference. Will it prove to be effective? Not sure about that especially with the Germans voting on the validity of ESM next week but the markets seem grateful for small mercies right now.
But in this busy month of actions and decisions we have key Non-Farm Payrolls data out today from the US at 13.30 BST which will have undoubted impact given that it’s Uncles Ben’s big indicator to press the money printing button. Expect a busy afternoon, and hey, it’s Friday!
Commiserations to the GB Basketball team who put up a brave show last night but still have a Bronze medal to play for and congrats to Jonnie Peacock, David Weir, Hannah Cockcroft, Sarah Storey and Josef Craig, all putting in stunning performances to take Gold. And good luck of course for tomorrow to the mighty Shrimpers who look to build on their recent run of good results. Ok, one win and one draw maybe, but that counts as a decent run to us loyal supporters! Have a great week-end.
Interbank Rates at 08:38 BST
Today’s Data: BST
09.30-UK – Industrial Production / Manufacturing Production / PPI Input/Output
11.00-EU – German Industrial Production
13.30-US – Non-Farm Payrolls / Unemployment Rate / Average Weekly Hours
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Mike ‘Oscar’ Paterson has been in the Forex trenches for nearly three decades working as a senior Spot trader in London at UBS, Chief Dealer FX at the State Bank of Victoria and in charge of Spot CHF at Credit Suisse with a daily turnover in excess of $1.5 billion. Mike now works as an independent consultant providing a fully bespoke service to the corporate and private sectors in physical FX delivery as well as guiding those who wish to improve their currency trading. Mike also presents seminars and workshops and writes for a number of publications.
To contact Mike please call +0044 (0) 1732 700383 or email email@example.com
The views expressed above are those of the author and should not be taken as investment advice. MSP Foreign Exchange Services will have no liability for, or to, any persons executing trades based on the content above.