| Market Analysis Forex - 05 12 2011 |
 It will be a V-E-R-Y exciting week in the Eurozone. First in line will be the ECB rate decision next Thursday. Despite an inflation rate of 3.0%, with all the recent rhetoric and sovereign debt indebtedness, we have changed our feeling and believe the ECB is very likely to cut rates again, thereby, fully reversing this year's 2 hikes. But there could be more. Last week's missed sterilisation effort of the bond purchases reflected the weak state of European banks. Some rather prefer to hold cash than parking their money at the ECB. We do not exclude new unprecedented liquidity measures, eg, several-year tenders or some temporary changes to the collateral rules. On bond purchases, the ECB is likely to stick to the well-known line. Any additional commitment will be conditional to the outcome of the EU and Eurozone summits – and these summits will be the highlights of next week. Superlatives for this week’s summit are hard to find. They are worn out. Masterplans, comprehensive packages, Grand Bargains – we have had it all. Nevertheless, probably more than ever, the future of the Eurozone is at risk. Eurozone leaders will need to come up with a credible package that finally combines a loaded bazooka for short-term problems and a quantum leap for economic governance to tackle fundamental issues.In the face of the crucial ECB meeting and EU summit even the high-profile German industrial data look minuscule. The crisis should have taken its toll on new orders and output and we expect the data to signal contraction in German Q4 GDP. In the USA, sentiment in the non-manufacturing sector should have ‘brightened’ slightly in December. ECB meeting: rate cut to 1.00%. In recent weeks, the ECB Council members unanimously declared that a rate cut in December would depend on the new Euro System staff projections. We expect a significant downward revision on September, particularly with regard to growth, which should prompt the ECB to cut its refinancing rate from currently 1.25% to 1.00%. This view is supported by our Taylor rule, which calculates an ‘estimate’ for the ECB key rate based on inflation and growth forecasts. When factoring in the envisaged downward revisions to the ECB projections, this rule shows a Taylor rate slightly above 1.00% for 2012 and moderately below 1.00% for 2013. Like in May 2009, when the ECB last slashed the refi rate to 1.00%, it should not exclude further monetary easing this time against the backdrop of still-existing downside risks to economic growth. More likely than not, ECB President Draghi will not exclude further monetary easing at the press conference. On top of that, we argue that the ECB Council will be open to tender operations with maturities of more than one year. We do not yet expect a decision on their implementation at this meeting, though. The US data flow remains healthy and this week’s numbers should also offer encouragement with another increase in consumer sentiment likely while the non-manufacturing ISM will underline the robust performance of the retail sector. Central bank meetings will be a key theme in other developed markets with Australia’s RBA likely to cut rates to support activity, but the Bank of England and RBNZ are set to remain ‘on hold’ in the UK and New Zealand. |
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