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ECB downgrades growth and inflation projections. Eyes now on US employment data for August. Fed hawk counsels against hike delay

Currencies
ECB downgrades growth and inflation projections. Eyes now on US employment data for August. Fed hawk counsels against hike delay

By Raiko Shareef

The EUR is the weakest G-10 performer this morning, after the ECB toughened its language a touch with regards to its QE programme.

NZD stands atop the leader-board, but looks capped just above 0.64.

The ECB left the pace of bond purchases unchanged at €60 bln, as widely expected. But in the wake of a raft of downgrades to growth and inflation projections, the Governing Council felt compelled to strengthen its ultra-loose monetary policy stance. The 2016 inflation forecasts were cut from 1.5% y/y to 1.1%, a significant delay in the return to the near-but-below 2% target.

In particular, the Governing Council pledged that asset purchases would run until the end of September 2016 “or beyond if necessary”. That last phrase is a fresh addition to the policy statement. ECB President Draghi noted that the forecasts were finalised in mid-August, before the worst of the China-originated market turmoil that saw EUR/USD spike to above 1.17. That is, risks to the downside (and toward a ramping up of QE) had grown before the ink on the new forecasts had even dried.

Little wonder that EUR holds the wooden spoon for G-10 currency performance today. EUR/USD traded below 1.11 briefly, but looks supported above the 100- and 50-day moving averages, which sit at 1.1130 and 1.1085 respectively. However, these would likely give way in the face of a strong set of US employment readings tonight.

NZD/USD took the path of least resistance higher overnight, with the 0.63 level proving resilient throughout this week. The spit above 0.64 looks to have been exacerbated by NZD/AUD buying, which accelerated up through 0.91. We eye resistance at 0.9150.

Tonight, the US labour market reports will clearly be the highlight. Ahead of those, Richmond Fed President Lacker will deliver a speech entitled “The Case Against Further Delay”. With that already public, the market has no excuse to be surprised by hawkish comments, which would be true to his recent form.

Just note that a low-ball print in non-farm payrolls growth, relative to the +218k consensus expectation, might not engender as sharp a reaction as might otherwise be expected. Many commentators are noting that, in recent years, August’s initial estimate tends to be revised higher by around 80k over the next couple of reports, a much larger revision than seen for other months.


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Raiko Shareef is on the BNZ Research team. All its research is available here.

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5 Comments

Nice summary Raiko. Thank you.

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Sovereign wealth funds sales will have to match central bank purchases to affect at best a policy standstill.

“GPIF sold massive amounts of Japanese debt and the BOJ absorbed it very quickly,” said Shuichi Ohsaki, a rates strategist at Bank of America Corp.’s Merrill Lynch unit in Tokyo. “So now that GPIF’s selling has finished, the focus will be on who else is going to sell. Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations." Read more

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SH, if sovereign bond selloffs continue (like recently in the US), when do you expect we'll see bond yields rise?

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The market seems to have that matter in hand - currently a base is in place to stage a selloff to affect a reach for higher yields . Graphic view

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Thanks, but are you referring to only NZ bonds or to US treasuries recently dumped by China?

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