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What the ECB, Riksbank and BoJ comments could mean for Fed speculation trading today

CMC Markets

With Chinese markets closed for a holiday and the US in between payroll reports, two central bank meetings in Europe this morning could have a significant impact on USD trading. Although FOMC Vice-Chair Fischer reiterated over the weekend that the Fed does what it thinks is best for the US and expects others to follow its lead, there have been a lot of people in the markets wondering if the Fed would start raising interest rates while other central banks are in full easing mode due to the potential impact on USD. Considering the gains made by the greenback over the last year, one would think that a more relatively hawkish Fed has already been priced in. Still, news out of overseas central banks could keep the pot boiling on September rate lliftoff speculation through to tomorrow’s nonfarm payrolls. Overnight, Bank of Japan member Kuichi suggested the Bank of Japan can’t reach its 2% inflation target alone and that structural reforms are also required. He also indicated that excessive easing could impact price stability. He has been a hawk calling for a reduction of QQE at recent meetings but still this indicates that increases to current monetary stimulus look unlikely. JPY has been steady on the news. Sweden’s Riksbank held its negative interest rate steady today while indicating recent international turmoil hasn’t changed its domestic economic outlook. It also noted current easing has had a positive effect on the economy. The Riksbank remains ready to ease further if inflation falls but it currently expects inflation to return to 2% by the end of 2016. SEK has been soaring since the meeting indicating that the street has taken this statement to mean that unless oil crashes again, the Riksbank is likely done easing. The spotlight now turns to today’s ECB meeting and in particular, President Draghi’s press conference. The ECB had slowed QE purchases over this summer, so an increase back to target should be expected. The question, is whether Dr. Draghi will indicate any plans for further stimulus. If so, this could depress EUR and boost the side calling for the Fed to wait. That being said, there is a growing case for the ECB not to add to current stimulus. European economic data has been improving lately as seen by today’s very strong Eurozone retail sales report. Much of the political turmoil also appears to be subsiding, with Greek election campaign polls showing Syriza and New Democracy both parties willing to push through needed reforms in the lead. In fact, today, the ECB trimmed its ELA support to Greek banks a bit, a sign financial stresses are starting to ease. If President Draghi does not come all out dovish today, it would confirm a shift toward neutrality among the pedal to the metal central banks away from full on stimulus. This shift could open the door to the Fed getting out of emergency mode and starting to normalize interest rates. Heading into today’s meetings, stock markets in the US and Europe have been rising again today. China is closed for holidays, while Australia stocks fell on a weak Australian retail sales report. Crude oil has shrugged off this week’s inventory increases and continues to rebound. Gold is dropping back a bit as capital returns to risk markets. Part of the reason stocks have been so volatile lately is that the reaction to central bank news by stock markets could be changing. For the last several years, stock markets have taken the “bad news is good news” approach that weak economies would mean more central bank stimulus. However, all the moves out of China to stimulate support markets ended up having the opposite effect because it sparked fears things were getting worse. Moves by central banks to say their economies are strong enough that we don’t need any more stimulus could go a long way to restoring confidence in stock markets around the world. After several years, good news for the economy may finally be becoming good news for stock markets as well. Corporate News There have been no major corporate announcements so far this morning. Economic News Significant announcements released overnight include: Upcoming significant announcements include: Sweden interest rate street (0.35%) ECB Lowered the Greek ELA ceiling to €89.1B from €89.7B Eurozone retail sales 2.7% vs street 2.0% vs previous 1.2% Australia trade balance ($2.4B) vs street ($3.1B) Australia retail sales (0.1%) vs street 0.4% Service PMI Reports: Australia 55.6 vs previous 54.1 UK 55.6 vs street 57.7 Germany 54 9 vs street 53.6 Spain 59.6 vs street 59.3 Italy 54.6 vs street 52.5 France 50.6 vs street 51.8 Upcoming significant announcements include: 12:45 pm BST ECB interest rate and QE no changes expected 1:30 pm BST ECB Draghi press conference 8:30 am EDT US jobless claims street 275K 8:30 am EDT US trade balance street ($42.2B) 8:30 am EDT Canada trade balance street ($1.2B) 9:45 am EDT US Markit service PMI street 55.0 10:00 am EDT US ISM non-manufacturing PMI street 58.2 10:30 am EDT US natural gas street 90 BCF CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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