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Canada cut sets the stage for big ECB decision

CMC Markets

Central banks have been in focus again today with more countries joining the dovish parade ahead of tomorrow’s expected unveiling of a new QE stimulus program for the ECB. The Bank of England kicked things off as minutes showed that the two hawkish dissenters have disappeared (to be fair one retired). The unanimous vote to stand pat was seen as a dovish shift by the street with the FTSE rallying and GBP declining. The biggest surprise to many and subsequently the biggest trading action was in Canada today after the Bank of Canada ended four years of holding steady with a 0.25% interest rate cut. While I had thought that after the oil price crash and Norway’s rate cut last month that the Bank would take a more dovish stance, the quick action surprised even me. The news sent CAD to a 2% loss and the S&P/TSX 60 to a 2% gain on the day. The Bank of Canada indicated that while it is seeing the recovering US economy and lower CAD benefitting the economy in the longer term, the oil crash poses a bigger risk to employment and incomes in the shorter term, hence the move to support the economy. The good news is that at least they had gone back up to 1.00% a few years back which gave them the flexibility to act now when it’s really needed. A rebound for crude oil helped energy stocks on both sides of the border but WTI and Brent both remain essentially stuck in a $45-$50 range. Natural Gas also picked up but remains stuck below $3.00. AUD and NZD have been under pressure overnight after Chinese PM Li indicated that the country is entering a slower growth phase as a new normal and that reforms are more likely than stimulus in the area of policy actions. Better than expected PMI didn’t help the NZD at all which continues to drift lower following a break of $76.00. There are a few smaller announcements, but who am I kidding? The stage is now set for the ECB to dominate the headlines for the next 24 hours. Today, the latest in a series of “leaks” (read trial balloons) suggested the central bank may be planning an €50B per month QE purchase program starting in March. At that rate, the ECB could grow its balance sheet by €500B this year (a number that has been kicked around before). If this program were open ended, the ECB would be on track toward meeting its goal of restoring 1 trillion to its balance sheet by mid-2016. Once again, it was good for the central bank to drain away some liquidity over the last two years to give it firepower for when it’s really needed. The big question facing trader is whether whatever program the ECB announces has already been baked into market prices, and if the ECB will be aggressive enough to satisfy market hopes? The street didn’t seem to think much of today’s rumour, as gold (which has been tracking the ECB balance sheet up and down for years) fell back under $1,300 on the news, the Dax continued to stall out and EUR rebounded a bit. Regardless of how the decision pans out, it’s looking to be another active day for trading. Corporate News SanDisk $1.30 vs street $1.27 eBay $0.90 vs street $0.89, guides Q1 to $0.68-$0.71 vs street $0.76 American Express $1.39 vs street $1.38 Kinder Morgan agrees to purchase Hiland Partners for $3B, indicates consolidation in the oilpatch (pipelines in this case) getting underway. Economic News Significant announcements released overnight include: Canada interest rate decision no change expected UK Bank of England meeting minutes 9-0 in favour of maintaining interest rates and QE at current levels NZ Business PMI 57.7 vs previous 55.2 UK jobless claims (29K) vs street (25K) UK average weekly earnings 1.7% as expected UK rolling 3M jobs change 37K vs street 74K UK unemployment rate 5.8% vs street 5.9% US housing starts 1,089K vs street 1,040K US building permits 1,032K vs street 1,058K Upcoming significant announcements include: TBA Brazil interest rate 0.50% increase to 12.25% expected 11:00 am AEDT NZ consumer confidence previous 126.5 11:00 am AEDT Australia new home sales previous 3.0% 8:00 am GMT Spain unemployment rate street 23.5% 8:30 am GMT Sweden unemployment rate street 7.4% 9:00 am GMT Italy industrial orders street (0.6%) 10:00 am GMT Italy retail sales street (0.9%) 3:00 pm GMT Eurozone consumer confidence street (10.5) 12:45 pm GMT ECB deposit rate (0.20%) no change expected 12:45 pm GMT ECB interest rate 0.30% no change expected 12:45 pm GMT ECB new QE program speculation has varied between €500B and €800B 1:30 pm GMT ECB president Draghi press conference 8:30 am EST US jobless claims street 300K 9:00 am EST US house prices street 0.3% 10:30 am EST US crude oil inventories street 2.5 mmbbls

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