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30 Apr 2013
Forex Flash: What kind of rabbit can Super-Mario pull from his hat this week? - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global head of Currency Strategy at Societe Generale notes that Mario Draghi introduced the LTROs soon after taking over as President of the ECB, and despite initial market scepticism, tackled the bank funding crisis in the process.
He continues to note that then he came back with OMT and the assertion that he would do anything that was needed to defend the Euro. That helped reverse the crisis of confidence in the currency’s survival that took EUR/USD close to 1.20 last July. And for all the weaknesses of the “Cyprus solution”, Juckes notes that the ECB has gone a long way towards insulating European government bonds from the wider economic and debt crisis. He writes, “Here is a man with a track record of introducing innovative policies or issuing clear policy guidance at his monthly press conference. What kind of rabbit can he spring from his hat on Thursday to help repair a broken monetary transmission mechanism to the real economy – and what will that do for markets?”
Juckes, continues to note that only 12 of 39 economists surveyed by Bloomberg look for a 25bp cut to 50bp in the Refi rate but he suspects far more look for the ECB to announce ‘some kind of policy initiative’. He sees that the FX market doesn’t know what to make of this but would react positively to ‘credible’ non-standard measures. Falling inflation and fading fear of disaster are driving investors into any higher-yielding asset they can find, exposing them to disappointment if the ECB delivers too little.
He writes, “The rates market has priced in more than economists expect - - 3/6 FRAs at 18bp and 2yr swaps at 38bp are at their lowest levels of 2013, 5 and 10yr swap rates (74bp and 1.46%) at their lowest levels ever.On past experience, Mr Draghi risks disappointing markets initially (sending the Euro down, and front-end market rates higher), while making innovative changes that do eventually deliver.” He feels that if we are pushed into a corner and told to trade, we’re short the Euro and short the front end of the Euro bond markets. But I can’t remember many meetings surrounded by such vague expectations and preceded by such a sharp pre-meeting market move.
He continues to note that then he came back with OMT and the assertion that he would do anything that was needed to defend the Euro. That helped reverse the crisis of confidence in the currency’s survival that took EUR/USD close to 1.20 last July. And for all the weaknesses of the “Cyprus solution”, Juckes notes that the ECB has gone a long way towards insulating European government bonds from the wider economic and debt crisis. He writes, “Here is a man with a track record of introducing innovative policies or issuing clear policy guidance at his monthly press conference. What kind of rabbit can he spring from his hat on Thursday to help repair a broken monetary transmission mechanism to the real economy – and what will that do for markets?”
Juckes, continues to note that only 12 of 39 economists surveyed by Bloomberg look for a 25bp cut to 50bp in the Refi rate but he suspects far more look for the ECB to announce ‘some kind of policy initiative’. He sees that the FX market doesn’t know what to make of this but would react positively to ‘credible’ non-standard measures. Falling inflation and fading fear of disaster are driving investors into any higher-yielding asset they can find, exposing them to disappointment if the ECB delivers too little.
He writes, “The rates market has priced in more than economists expect - - 3/6 FRAs at 18bp and 2yr swaps at 38bp are at their lowest levels of 2013, 5 and 10yr swap rates (74bp and 1.46%) at their lowest levels ever.On past experience, Mr Draghi risks disappointing markets initially (sending the Euro down, and front-end market rates higher), while making innovative changes that do eventually deliver.” He feels that if we are pushed into a corner and told to trade, we’re short the Euro and short the front end of the Euro bond markets. But I can’t remember many meetings surrounded by such vague expectations and preceded by such a sharp pre-meeting market move.