Euro falls as Draghi flags currency risk
As anticipated, much of the focus overnight was on the ECB policy decision, and judging by the Euro's response in the ensuing hours, it would appear President Mario Draghi has successfully navigated the Euro lower.
We noted in yesterday's report Draghi would likely 'keep mum' on his real thoughts of Euro appreciation, given the risk of being seen participating in a beggar-thy-neighbor policy approach by pursuing a weaker currency. Still, Draghi was a little more forthright then we anticipated, noting that while Euro strength is a sign of confidence, it may impact negatively on the economy. He added: "We certainly want to see whether the appreciation, if sustained, will alter our risk assessment as far as price stability is concerned."
Although his language may not have shown any real aggression, the sentiment is clear - a strong currency is not on the ECB's preferred list of outcomes. The ECB's main refinance rate was held steady at 0.75 percent.
In response we've seen the Euro slip substantially across the board; with the benchmark EUR-USD rate falling from 1.3570/80 to lows of 1.3369. Solid losses have been clocked up across the board with losses against the Yen leading the charge lower.
It is, however, abundantly clear the Euro is in need of a sustained reprieve after a period of mostly one-way activity, but value traders, short-term weakness may only strengthen the case for further upside. Markets have a tendency of pricing in extreme case scenarios, and while the same could be said for the upside, it's would appear Draghi's comments have provided an excuse to take some profits of the table. Clearly there is a risk of downside momentum gaining pace, but for now we judge the Euro's fall as a 'bit of froth off the top.'
Across the majors, the most pronounced losses overnight came from the Kiwi after a less than inspiring jobs report, while sterling bucked the trend as traders responded to parliamentary testimony from incoming Bank of England Chief Mark Carney. The Yen continued to consolidate stronger across the board and the Aussie maintained a losing trajectory.
A$ at 3 ½ month low; Chinese data eyed
The local unit remained under pressure overnight with moderately negative risk trends and residual risk currency weakness encouraging further downside. Yesterday's labour market report failed to inject any new life into the Aussie, and although the headline rate and net job's growth beat expectations, the finer points disappointed. The Australian workforce grew by 10,400 in January and the official unemployment rate held steady at 5.4 percent. Still, the data showed a loss of 9,800 full-time positions was offset by and increase of 20,200 part-time jobs. How this affects the Reserve Bank's next policy decision remains to be seen, but for now we see this as a largely neutral result rather than the moderately positive one the headline suggests.
Supportive behavior noted in the latest 24-hours around 102.95 US cents was breached in recent hours with price action forging a fresh 3 ½ month low of 102.72 US cents. Should the balance of risk remain to the side caution, previous support noted around 102.3/35 and again at 102-figure should act as barriers, albeit temporarily.
Nevertheless, the downside inflection has been set and markets will now look to key events such as the RBA Statement on Monetary Policy and data from China to confirm or counter the trend.
Today's Chinese CPI release will be closely watched in the context of stimulus, and just how much scope the government has in resuscitating deficient areas of the economy. The headline inflation rate is expected to fall to 2-percent in January, down from 2.5 percent in December. Data on whole sales prices (PPI) will accompany the release.
Also on the docket is Chinese trade data. How China interacts with the rest of the world is a particularly important barometer for markets as a gauge of both external demand and domestic consumption. China's trade surplus is expected to have narrowed to $US24.20 billion in January, down from $US31.62 billion in December.
At the time of writing the Australian dollar is buying 102.8 US cents.