Below trend growth to continue
Friday’s session was hallmarked by comments from ECB President Draghi, which kept markets on the scent for a range of easing measures at next week’s hotly-anticipated meeting.
Friday’s session was hallmarked by comments from ECB President Draghi, which kept markets on the scent for a range of easing measures at next week’s hotly-anticipated meeting. As a result, EUR underperformed among currencies, and European equities reversed early losses. AUD bucked the G10 trend to break higher against the USD.
Draghi said that policymakers would “do what we must to raise inflation as quickly as possible,” in a keynote speech delivered to a banking conference. We’d be surprised if the overtones of ‘do whatever it takes’ (à la Draghi, 2012) was a complete coincidence.
While that sound-bite got the most press attention on Friday night, it was coyly prefaced with “If we decide that the current trajectory of our policy is not sufficient to achieve our objective…” The ECB’s attempts to inject some modicum of ‘will they, won’t they’ largely falls on deaf ears, judging by EUR’s inability to catch a break since late October.
True to form, Bundesbank President Jens Weidmann told the same conference that the fall in crude oil prices was “more of an economic stimulus for the euro area than a harbinger of deflation”, and that he saw “no reason to talk down the economic outlook and paint a gloomy picture”.
Unsurprisingly, Draghi’s star power carried the day, with EUR/USD closed 0.8% lower at 1.0646, within striking distance of the seven-month low of 1.0617 hit earlier last week. European equities lifted after his comments to eke out a gain for the session, with the Euro Stoxx 50 up 0.1%. In the US, equities held onto to early gains to close moderately higher (+0.4% for the S&P 500), capping a strong week.
AUD/USD’s tear higher was the other notable feature of Friday’s markets, finishing 0.6% stronger despite another crunch lower in iron ore prices. The latter was down 1.2% to $44.8, having shed 2% for the week to stand only a hair’s breadth above the July rout low ($44.6). Metals fared poorly across the board, with gold off by 0.4% and the London Metals Exchange Index down by 0.8% to a fresh 7-year low.
AUD’s gains appear driven by technical as well as market positioning. Friday’s moves took AUD/USD above strong resistance levels, including the 100-day moving average, and the down-trend that has prevailed since September 2014. It suggests room for further outperformance in the face of deteriorating fundamentals, and augurs well for FX Strategy’s long AUD/JPY position from ¥85.95. We should note too that AUD/EUR sheared through the 200-day moving average.
The CFTC IMM positioning data for the week to Tuesday 17 November made for interesting reading, especially in the context of the stop-loss driven USD sell-off that began on Wednesday. Speculative investors once again added significantly to long USD positions, up from 300.1k to 372.9k, and within reach of March’s record high (399.8k in the week ended 10 March). EUR once again contributed most to the weekly change, with net shorts extending from 142.9k to 164.2k. This still remains well shy of the 181.1k net short position built into 10 March (and which extended to a record 226.6k in the fortnight after). Today, JPY net shorts contribute proportionately more to the overall USD position, with that position extending from 66.9k to 78.6k. It stood at 59.4k in early March.
Net AUD shorts extended significantly, from 52.8k to 66.5k. This puts it in ‘extreme’ territory, with net shorts only ever being larger back in March, and through Q2 2013, as AUD/USD fell from 1.05 to 0.89. We’d expect to see this short position dialled back in the week to tomorrow, given the extent of AUD’s 2% rise in the back end of last week.
In Australia this week, RBA Governor Stevens’ speech to the Australia Business Economists’ conference on Tuesday will be a highlight, as will the closely-watched private capex report for Q3 on Thursday. Elsewhere, the US PCE inflation report (Wed) stands out in an otherwise relatively quiet week stateside, where investors will be tempted to make a four-day weekend of it, after Thursday’s Thanksgiving holiday.
Today, net migration in NZ will get but a cursory glance, and then we’re headed into the slew of preliminary Markit PMIs for November. Germany and the euro-zones are due first up, with the US edition later in the session. The latter remains well clear of the break-even 50 mark, unlike the more market-sensitive ISM (see Chart of the Day), which is due next week.
On global stock markets, the S&P 500 was +0.40%. Bond markets saw US 10-years +1.41bp to 2.26%. On commodity markets, Brent crude oil +1.09% to $44.66, gold-0.1% to $1,076, iron ore -1.2% to $44.91. AUD is at 0.7232 and the range was 0.7228 to 0.725.
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