ECB Aftershocks Pummel the Euro

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Resurging investor confidence abounds as global capital markets are on a solid footing as details regarding the much awaited announcement of the European Central Bank’s expanded asset purchase program were released yesterday.  ECB head Mario Draghi announced that the ECB will initiate an asset buying program to the tune of €60 billion a month, a figure which exceeded market expectations of a €50 billion a month program.

The euphoria in Europe has extended to the equity and bond markets with European indices broadly higher and yields on Spanish and Italian debt at record lows.  The euphoria did not extend to the common currency itself as the euro slid to the mid-1.11s against the USD which is an eleven year low.

With the ECB’s commitment  to continue asset purchases until there is a ‘sustained adjustment’ in inflation, the euro itself faces significant headwinds against its peers; this was realized today in a 1.36% slide versus the sterling, as well as multi year lows against the yen.

Buoyed by the good news out of Europe yesterday, Asian equity markets were on a solid footing today despite conflicting information coming out of mainland China.  The HSBC purchasing managers index came in at 49.8, beating expectations but still illustrating activity contracted from the previous month.

This alleviates some of the immediate concerns of a deeper decline in the Chinese economy; however, potentially more troubling than the often cited decline in Chinese manufacturing and investment are signs of potential instability in the Chinese financial system.  This risk has been highlighted as the number of non-performing loans in China jumped the most in a decade in Q4 of 2014.

Additionally, there have been several notable defaults in retail investment products as well as corporate and real estate backed loans which signal potential problems as the Chinese financial system adjusts to a lower economic growth.  Digesting this news the yen has gained ground on both the euro and USD, with the yen up nearly 2% versus the euro trading with a 132 handle and up .41% in the low 118’s versus the greenback.  We have seen a corresponding slide in the yuan as the weak data in China had it slide .32% within its 2% band against the USD.

In North America, equity markets are set to come out the gate strong with S&P500 futures trading higher largely in response to the same ECB announcement that has been driving equity valuations globally. As of yesterday’s close the S&P500 has recaptured all of its losses for 2015 with today set to be the fifth straight day of increases.

Important from a currency perspective today will be data points released on Canadian CPI and retail sales along with Flash PMI data on manufacturing on the United States. Particular attention should be paid to the Canadian CPI numbers as the Bank of Canada’s unprecedented move to cut the overnight rate on Wednesday was driven largely by an anticipated decline in inflation arising from the slide in oil prices and the knock-on effects this would likely have on overall activity in the Canadian economy.

If the CPI numbers come in lower than expected in some ways that will be a vindication of the BoC’s abrupt move on Wednesday as historically the BoC has followed a much more data driven approach to policy rather than one that reacts in anticipation of outcomes that have not yet been borne out by economic data.  With that being said the Canadian dollar continues to give way to US dollar strength, trading in the mid 1.24 handle ahead of the announcement.

The velocity of the slide in the loonie has become increasingly problematic for un-hedged USD buyers,   and given that the CAD is now at six year lows there isn’t much in the way of precedent or technical resistance which would limit the loonie’s continued slide versus the greenback.

By Sean Coakley of Cambrdige Mercantile Group

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