Inflation outlook and implications for The ECB

hello,

Euro inflation fell to 0.5% in March, which is the lowest rate of inflation in more than four years. The ECB has said the decline was a surprise and has stepped up its dovish stance and now communicates that it is ready to use unconventional instruments “in order to cope effectively with risks of a too prolonged period of low inflation”. The message from the ECB is that a worsening of its outlook for price stability would warrant a monetary policy response, but it needs more information to assess whether this is the case. In light of this, future inflation remains very important.

We expect inflation to rise to 0.8% April, and although this might be lower than what the ECB expects, we do not think it is low enough for the ECB to conclude that its medium-term inflation outlook has changed. Thus, our main scenario is that the ECB will remain on hold in May.

In June, the ECB will publish new inflation projections and due to lower-than expected inflation in H1, we think it will lower its forecast. However, the lower inflation in 2014 will not necessarily lead to a change in the medium-term outlook for inflation and we think it is 50-50 whether the ECB will ease in June. The better growth outlook and a potentially higher growth forecast in 2014 makes more easing less likely.

Having said that, our forecast is that inflation will only increase slightly to 1.0% in Q4 compared to the ECB’s current projection, which is around 1.25% in Q4. Hence, if our forecast proves right, it will lead to another downward revision of the ECB’s inflation outlook. The continued process of the ECB lowering its inflation projection implies that it cannot be ruled out, that the ECB will eventually deliver in accordance with its easing bias.

Today, We will see the CPI Flash Estimate y/y (Change in the price of goods and services purchased by consumers) at 11 am Warsaw time.

regards,

oscarjp

tomorrow is FOMC !

hello,

Below, found on the web very interesting phenomenon :)

The Dow is now practically unchanged year-to-date... but ex-Tuesdays is down over 7%. Despite stocks hitting new highs, treasury yields continue to slide, gold is up, and credit markets are not making new tights.

Just remember, when it comes to investing, "it's not the economy, stupid! It's Tuesday.. oh and tomorrow is FOMC."

Year-to-date - it's all Tuesday...

chart 1. Dow in 2014 vs. Dow in 2014 (ex-Tuesdays); 2014-04-29

chart 2. Average daily performance for the Dow in 2014; 2014-04-29

chart 3. Tuesday - 2014 YTD Performance

regards,

oscarjp

Two forces acting on the EURUSD with AT

hello,

For EURUSD pair, they seem to act now two forces with opposite direction.

On the one hand, the factors strengthening the dollar may be rising yields of U.S. Treasuries, increased expectations for interest rate increases observed even on the basis of FRA contracts and the possibility of starting a program of QE in the euro zone, on the other hand, the euro could remain strong for continued growth rates LIBORu in EUR and Euribor.

At very low rates for the dollar on the interbank market, investors prefer to keep their deposits in euros or buy euros on the market to be able to locate them in deposits, interest on the basis of of these rates, because they have a greater interest and provide a fast and secure profit.

Below, a change in EURIBOR rates in the context of a weekly and monthly basis. Interest rate rises across the curve, making the euro attractive in every term capital investment.

chart 1. Euribor Fixings Curve, 2014-04-24

These markets should therefore be closely watched in the context of further changes in EURUSD, which is still in wide consolidation.

Euribor and libor for EUR increasingly higher

The European Central Bank today announced that the liquidity surplus in the banking sector of the euro area fell below 100 billion EUR.

This is the lowest level since 2011. Following this message euribor rates and libor in eur recorded another increase.

As a result, increases the spread between the two rates in relation to the dollar, making the euro more attractive on the interbank market.

chart 2. Libor USD vs. Libor EUR, 2014-04-24

In addition, today we had a press conference the president of the ECB - Mario Draghi

The most important sentences:

- falling inflation may require the program to buy assets [QE];

- A strong euro also reflects the improvement in the eurozone;

- The ECB may cut interest rates yet; (what for?)

- We can add liquidity to the market if needed;

- We publish minutes, but they should not describe the position of the individual members of the ECB;

- We expect that lending activity will revive.

AT

chart 3. EURUSD Weekly, 2014-04-24

I believe that in the near future we will still viewed the following, but limited appreciation of EUR. The representatives of the ECB are limited in recent times only to verbal threats. Pointing out that it was the strong euro, we observed levels of inflation below the target. I believe that lowering the reference rate to lower levels than we see at present there is no benefit. The rates on the interbank market for quite some time have nothing to do with the rate established by the ECB.

Therefore, I believe that as long as Mario Draghi will not perform specific actions to improve liquidity and market situation, we are WATCHING strengthening of the EUR continues. I also think that the ECB in the near future will not take any action until it receives more data on the current situation of individual economies in the euro zone.

best regards,

oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

What hedge funds are buying and selling

hello All,

With reference to the previous entries about the SP500 Index. Today I present a summary of recent movements of hedge funds in selected markets. Summary of these were created by Bank of America Merrill Lynch Global Research.

My earlier posts showing the movements of the volume and the smart money moves.

link 1

link 2

The report shows that, large speculators reduced ther S&P 500 positioning to net short this week and their NASDAQ longs to a one-year low. They also decreased their long exposure to US Dollar (raising their AUD longs to a record high) and maintained their long exposure to 10-year Treasuries. Across all asset classes, positioning is at extremes.

chart 1. 30-yr T-bond futures, 2014-04-21

chart 2. SP500 Index futures, 2014-04-21

chart 3. Nasdaq 100 futures, 2014-04-21

Chart 4. Russell 2000 Index futures, 2014-04-21

chart 5. Gold futures, 2014-04-21

chart 6. Silver futures, 2014-04-21

chart 7. Copper futures, 2014-04-21

chart 8. 10-yr T-note futures, 2014-04-21

chart 9. 2-yr T-note futures, 2014-04-21

In summary, I showed another source of information demonstrating that continuing high level of SP500 Index is not confirmed by volume. Therefore, still recommending a short position. The upcoming short week should bring answers is pointed good strategy.

best regards,

oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

more broadly about the current correction on the SP500 Index

hello,

Looking at the chart the SP500 Index, for the period of the last three days it's hard to say anything clever about how it should behave in the next few days. However, I am a person who does not give up easily. I will try to introduce you to my point of view what is currently happening on the chart.

First, I completely NOT accept that this is the end correction. You can read about it in my earlier entries. Therefore, I will not be looked for starting an uptrend but I will try to find where is the potential end correction.

For a better understanding of my analysis, the first will put the chart :)

chart 1. fSP500 Index M15, 2014-04-17

Here we go.

As you can see, I thought that the market had drawn a built-in correction ABC. Correction, which was shown inside the correction marked with a green color shows that it was a so-called correction. slightly hurtling. Then he was drawn with another wave of ending the entire formation correction.

I think it is worth spending some time about the sharp increases that occurred twice. I hope that without fear you will find them on the chart.

A few days ago in the media quite a lot of attention devoted to the upcoming publication of financial results of U.S. companies may give disappointing results. The reality turned out to be slightly less pessimistic than previously assumed. What moved the strength of the SP500.

Good results showed primarily Citigroup: EPS: $ 1.30; expecting 1.14 USD. What shows that the banking sector can have another successful quarter.

Coca-cola also showed better results than expected. Net operating profit amounted to 10.58 billion USD, compared to consensus of 10.53 billion.

Intel: Earnings per share in the first quarter was better than expected (38c vs. 37c); revenue totaled 12.76 billion to 12.81 billion expected. For the next quarter Intel announced revenues of $ 13 billion by typing in market expectations.

Returning to the chart. I recommend taking a short position with a stop loss above 1856.6 points

regards,
oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

update current transactions

hello,

Polish market in recent days is for me a very predictable and hence very generous. Including a three transactions profit is more than 100 points. At the moment, I expect further falls. 

chart 1. fWig20 Index M15, 2014-04-15

As regards the gold market. On today has a lot of interesting situations. Overall, the market was falling heavily at me sadly closed transactions using the stop. The sale resulted in a profit slightly below $ 13 on the Index. I still believe that price of gold will rise in the coming days, so I watched the market at the right time to take long positions.

chart 2. Gold Market, 2014-04-15

If you have questions or would like to learn more. Please contact with me. I give answers to all emails.

regards,
oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

3 markets and 3 directions according me

hello,

On the markets is beginning to happen more and more interesting. I'm not clairvoyant in saying that we are in the correction and it seems that her end is an average long way. Why average? Because I think it's only correction in up trend. 

Following is an update of my analysis regarding the three markets. Polish WIG20 Index, German DAX Index and the American SP500 Index.

Here, whereas you will find links to my previous analyzes of these Indexes.

SP500 Index on the "financial" doping; 25th March 2014

SP500 Index - where is Smart Money ?; 26th March 2014

S&P preferably short; 7th April 2014

Is the FED was indeed the "dovish"?; 10th April 2014

fWIG20 Index very interesting moment at the chart; 22nd January 2014
only two scenarios and nothing more; 27th February 2014

I recommend a look at the first with previous analyzes, so that you will be easier to understand the following. In the case of fWIG20 Index expect in the next few days continuing falls below 2,400 points. Stop loss should be set above the levels marked on the chart.

chart 1. fWIG20 Index M30, 2014-04-15

chart 2. fDAX Index H1, 2014-04-15

In the case of Index fSP500 important moment in the chart will overcome the 1800 points. Then be expected to falls to levels 1730 - 1680 points. Stop loss should be set as a safe place in the neighborhood of 1,840 points.

chart 3. fSP500 Index H4, 2014-04-15

In February, the United States were received 85.7 billion of long-term capital. It was expected that the flow will reach $ 32 billion for the previous publications of $ 7.7 billion.


best regards,
oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

Is the Fed was indeed the "dovish"?

hello,

In yesterday's entry, entitled: "Dovish FOMC Minutes". <link> I presented the expectations of investment banks before the FOMC Minutes and the opinion of Mr. Mattias Bruer, who said that the FOMC report is dovish. Anyway, the all market as stated that, what was shown on the strong growth on, for example: SP500 Index.

But is that really the message was encouraging to buy stocks?

After a thorough analysis of the entire report can infer really interesting conclusions. I think the main reason why the share price began to rise, it was notice by the Investors that several members of the Fed pointed out that expectations about the pace of interest rate increases are exaggerated. And it made ​​the market less valued the opportunity to raise interest rates in June 2015 and moved those expectations clearly a few months later. In the medium term it is worth noting that the Fed rhetoric still remain more "hawkish"

To tell the truth Minutes did not bring anything new - commented that the weaker data in the winter, the effect of weather, that the improvement in the labor market is systematic. Do not include references indicating the date of the first interest rate increase, but it was difficult to expect them to. Therefore, the document should be neutral for the market, but has been used as an excuse to sell the dollar and increases in the stock market.

In addition, today met weekly data from the labor market in the United States. The number of new unemployment records in the first week of April amounted to 300 thousand. and was lower than the best forecast in a Bloomberg survey, and the lowest since May 2007! As a result, 4-week average of 316 thousand. and is the lowest since September, when at one point was 315 thousand. The data are very strong and suggest that in the coming months, employment growth should exceed 200 thousand. strengthening the hawks position at the Committee of the Fed.

In addition, we had today occurrence representatives of the ECB

Praet:

- Recent data confirm that the euro area comes to life,

- However, the recovery is uneven across the euro area,

- The euro area economy to reach potential growth up to 2017,

- Debate on the unconventional activities is ongoing,

- The ECB may implement many measures to prevent lower inflation.

Constancio:

- decrease in inflation by 0.5 percentage points is the result of a high rate of EUR, 

- In Europe, the lack of demand.

In summary

I maintain a long position on the gold market <chart 1>, which I wrote about in an earlier entry.  still open

I still recommends a long position on EUR/USD for the publication of the inflation data. 

I strongly recommends that a short position on the SP500 Index and European Indexes. <more info>

Today, I made a short position on my home market index fWIG20 <chart 2> still open

chart 1. GOLD H1, 2014-04-10

chart 2. fWIG20 Index, 2014-04-10

trade safe,
best regards,
oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

"Dovish" FOMC Minutes + two trades with recommendation

hello,

FOMC Minutes will find here

what investment banks expected before FOMC Minutes:

BofA: Given the market’s read on the March FOMC meeting as more hawkish than expected, the minutes will be poured over with some interest. Recall that the minutes historically give a platform against current policy to the (mostly nonvoting) hawks, and that risk continues in March. Our expectation is that the overall discussion among the voting members will be more in line with Fed Chair Janet Yellen’s most recent speech, which leaned dovish. Yellen made a strong case for still significant levels of slack in the economy. While many FOMC participants likely see continued slack for some time – recall that the FOMC’s estimate of the long-run unemployment rate edged lower to 5.4% in their updated March forecasts – the better-than-expected drop in the unemployment rate appears to have encouraged some Fed officials to shift up their funds rate projections slightly in the Fed’s “dot plot.” The discussion around those year-end interest rate forecasts will certainly get a lot of attention.

In addition to the extent of slack, another question facing the Fed is the persistence of low inflation. Some Fed officials have started to sound more concerned recently, and we will look to the discussion of inflation risks to assess whether the FOMC is starting to downplay the idea that transitory factors are holding inflation down. A third question is how to respond to financial stability concerns. A recent speech by Governor Stein reveals that even proponents of greater weight on this issue are unsure how to operationalize, so look for that conversation to continue. Finally, we will look for any discussion of operational details for the reverse repo facility, further talk of factors that might change the pace of tapering, potential updates to the exit strategy principles first laid out in June 2011, and possible communication refinements. Discussion over how long from the end of reinvestment to the first rate hike (in light of Yellen’s “six month” remark) or potential changes in the SEP – including acknowledgement of the limitations of the dot plot – would be notable.

CS: The minutes from the March FOMC meeting will be of interest to see if there was any debate about the potential length of a “considerable period,” as well as discussion about the idea of a lower equilibrium/terminal policy rate. Additionally, some Fed officials have grown increasingly vocal about asset bubble concerns, with statements that have gone so far as to suggest that tightening might be warranted before the output gap has closed and inflation returned to target in order to head off potential risks. The extent to which such scenarios receive mention and the specificity of any discussion may offer insight as to how widespread these concerns are.

BNPP: We expect the USD to regain its feet in the weeks ahead as improving US data puts renewed upside pressure on US yields. The data calendar is quiet this week, but today’s FOMC minutes release may provide some support. In her speech last week, Fed Chair Janet Yellen seemed keen to push back against the hawkish market interpretation of the March FOMC statement. However, the projections of the FOMC members for rate hikes did shift forward, and the minutes may contain some discussion of the reasons for this. As the chart below shows, the USD has tended to gain ground following the release of FOMC minutes, possibly a reflection of the greater visibility of the views of the more hawkish FOMC members relative to what gets incorporated in the FOMC statement.

Barclays: We expect the minutes of the March FOMC meeting to provide color surrounding the discussion to move away from thresholds to qualitative guidance. While the FOMC statement indicated that this shift “does not indicate any change in the Committee’s policy intentions as set forth in its recent statements,” the median forecast of the fed funds rate rose by 25bp to 1.0% for 2015 and by 50bp to 2.25% at the end of 2016. We look for further discussion surrounding this increase, including whether it was prompted by a faster-than-expected decline in the unemployment rate as we believe.

Credit Agricole: The FOMC minutes likely focused on refining guidance and telegraphing the committee’s views without quantitative thresholds. The discussion on the outlook for tapering will likely continue to solidify expectations of a taper of USD10bn per meeting, although we will hear some arguing for a quicker wind-down of the programme. With the shift in forward guidance away from quantitative thresholds, there was likely discussion of how to refine guidance further and which labour market indicators FOMC members are focused on. The minutes are likely to highlight the views that formed the Summary of Economic Projections, and how the various FOMC members believe the Fed should telegraph its outlook on economic and labour market conditions that in turn influence its policy decisions. A range of Fed speakers have recently noted that beyond the unemployment rate, they are looking at the number of those who are unemployed long-term or working part-time for economic reasons, the number of workers wanting jobs relative to the number of job openings, the number of people voluntarily leaving their jobs, and the slow rise in wages. The minutes will also likely highlight the committee’s views on inflation. Recent Fed speakers have noted their concern about low inflation, but have highlighted expectations that inflation is bottoming and is likely to pick up this year as economic growth accelerates. There may be some discussion of adding additional press conferences for the Chairwoman after each meeting, as St Louis Fed’s Bullard alluded to in a speech this past week.

and after the FOMC Minutes, according to Mattias Bruér:

"According to the FOMC minutes, several participants noted that the increase in the median projections of the fed funds rate overstated the shift - so while the dots were hawkish indeed, the FOMC did not intend to send such a signal. Meanwhile there was a clear divergence of views over how much slack there is in the labor market. The market was taking the minutes as dovish with the Dow up around 80 points half an hour after the release.

BLAME WEATHER: Most participants noted that unusually severe winter weather had held down economic activity during the early months of the year. Business contacts in various parts of the country reported a number of weather-induced disruptions, including reduced manufacturing activity due to lost workdays, interruptions to supply chains of inputs and delivery of final products, and lower-than-expected retail sales. Participants expected economic activity to pick up as the weather-related disruptions to spending and production dissipated.

WHAT IS THE TREND? Participants noted further improvement, on balance, in labor market conditions. The unemployment rate had moved down in recent months, as had broader measures of unemployment and underemployment. Other labor market indicators, such as payrolls and hiring and quit rates, while not all showing the same extent of improvement, also pointed to ongoing gains in labor markets. Going forward, participants continued to expect a gradual decline in the unemployment rate over the medium term, with judgments differing somewhat across participants about the likely pace of the decline. It was also noted that uncertainty about the trend rate of productivity growth was making it difficult to ascertain the rate of real GDP growth that would be associated with progress in reducing the unemployment rate.

CHINA IS A RISK: Several participants pointed to international developments that bear watching. It was suggested that slower growth in China had likely already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth. In addition, it was noted that events in Ukraine were likely to have little direct effect on the U.S. economic outlook but might have negative implications for global growth if they escalated and led to a protracted period of geopolitical tensions in that region.

WHY THE NEUTRAL RATE IS LOWER NOW: Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee's objectives. In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit."

and finally my two trades

First transaction was opened and closed on the same day on Tuesday. It was a long position on the EUR/USD market. The resulting revenue is 53 pips.

chart 1. EUR/USD M15, 2014-04-08

The second transaction, more interesting. This long position too in gold, trade still open with the target to $ 1420. And it is my recommendation at the moment. With stop loss slightly below the lows of the day.

chart 2. Gold M5, 2014-04-09

best regards,
oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

S&P preferably short

hello,

In reference to the previous entries directly concerning the current situation on the fSP500 Index, I will try to describe what is currently happening on the chart. In the previous two entries paid attention to "escape" so called Smart Money Flow Index that is shown on the chart <here>. Analyzing the chart today spread between the two indexes increased even more.

It should also be remembered for a record number of investors who took a loan to purchase shares, which may result a sudden falls on the equity markets <more info here>.

Since the last analysis, market quite unexpectedly went up strongly <chart 1>. I did not see the reasons for which the market so hard to behave where in addition it was clear outflow Smart Money.

chart 1. fSP500 Index H4, 2014-04-07

Another factor, which only confirmed my fears about the further growth was volume regarding futures contracts on the CME <chart 2>.

chart 2. futures E-mini SP500 Futures, 2014-04-07

The chart is easy to see decreasing volume to strength growth. This means that fewer and fewer takers was to deal long positions. It was the perfect time to buy short positions. In the coming days, definitely I expect a continuation of the fall the SP500 Index. I believe that we are at the beginning of the correction that its range can come close to the levels of 1738 points.

best regards,

oscarjp

The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.

21. Summary of the trades (March 15th, 2014 - March 31st, 2014)

Welcome,

In the last two weeks of March were done a lot of transactions. Of course, not all are shown on my blog but I recognize that it was a pretty good time for me. It so happened that no one consecrated attention to the market and trying to be active on several simultaneously. Of course demonstrates that the position of the unprofitable. But keep in mind that it is inscribed in the profession what we do. It is important that every week or month ended with a positive balance.

Links to all these transactions:

trades: 1 and 2

trades: 3, 4, 5 and 6

closing trades: 3, 4, 5 and 6

trade: 7

I do not think you need to once again describe these transactions. Simply browse the links listed above and corresponding trade and if appears some questions. Very please contact me. With the greatest pleasure explanation various intricacies.

In the coming week, much attention will be devoted to the gold market, the fSP500 Index and, of course, surely the EUR/USD. But more on that in a broader form in subsequent entries. So I encourage you to follow my blog. This blog is completely non-profit and its sole purpose is to publish my thoughts on financial markets and the recommendation of the transaction.

Summary of trades

best regards,

oscarjp

Scenarios for EUR/USD into the ECB - Goldman Sachs

hello,

Below I present a possible scenario of events for the currency pair EUR/USD during the meeting the ECB by investment bank Goldman Sachs (GS)

The central expectation of Goldman Sachs' European economics team remains that the ECB will this week cut the deposit and MRO rates by 15 bp. They do not believe in a game changer like QE because they see HICP inflation bottoming out in March and then rising to 1.8% in 2016, 3/10ths above the ECB forecast.

But given that recent commentary around QE has clearly grown and some argue that this is clearly what “should” happen, GS discusses in a recent note to clients all the ECB potential easing steps and their impact on EUR/USD.

GS estimates that:

1- A complete end to SMP sterilization could see the Eonia fixing fall around 6-7 bp, with longer-dated rates rallying a bit less.

"We think the instantaneous impact on EUR/USD would be quite small, around half a big figure," GS projects.

2- A deposit and MRO rate cut of 15 bp could see EUR/USD react more.

"We think that the instantaneous drop would be no more than one-and-a-half to two big figures given our estimated sensitivities. Of course, this range is subject to great uncertainty, given the lack of historical precedents (certainly for such a large currency area) and the potential for asymmetry as the deposit rate goes negative," GS adds.

3- Any indication that sovereign asset purchases by the ECB are imminent would be a game changer for EUR/USD.

"That is because we see the main support for EUR/USD coming from flows into periphery assets, notably stocks and bonds. The only way to “discourage” these inflows is to make the underlying asset expensive, thereby discouraging inflows. We think QE from the ECB would discourage foreign inflows into the periphery and help turn the direction of EUR/USD. We see ECB purchases of private assets, like bank loans, as an extension of sovereign bond purchases, with a similar conceptual downward effect on EUR/USD," GS argues.

"In conclusion, we think only QE holds the promise of materially impacting EUR/USD and reversing its trend rise. Neither SMP sterilization nor a deposit rate cut have, in our opinion, the potential to do that, though they may naturally enhance the ECB’s forward guidance and act as a drag on EUR/USD as US data pick up," GS adds.

"In practice a lot depends on communication, of course. For example, if there is an ECB deposit cut and President Draghi uses the press conference to emphasize that there could be a lot more similar easing measures, this could signal a swifter move to unconventional territory and could see EUR/USD fall more. In contrast, if any easing is talked about as a one-off measure, the instantaneous impact on EUR/USD could be less, and quickly reversed. In addition, it is possible that the effect on Euro area rates could spill over into US interest rates, in which case the effect on the interest differential would be less," GS argues.

What about if the ECB does nothing this week?

"The EUR would most likely rally on the heels of no action. Front-end rates could play some catch-up with the US, particularly in 2-to-5-year maturities," GS answers.

Another investment bank Citi still holds EUR/USD Short:

pic. 1. Citi -77 pips EUR/USD

This is what scares the Fed & This is what scares FX market most - opinion Deutsche Bank

"There is nothing that scares the Fed more than losing control over the back-end of the curve. The last few tightening cycles show that a better way for the Fed to avoid back-end yields from overshooting is for policy to be proactive at the front-end. As the Fed slowly evolves toward this conclusion, history shows the associated front-end led bear flattening, should prove significantly more positive for the USD versus majors, than the recent curve flattening between the 5 year and the back-end, but steepening from the front-end through the intermediate sector. „

With positioning much cleaner, we expect an orthodox currency response to data this week i.e. USD up on stronger than expected US numbers. A short basket of JPY, SEK and CAD is preferred to avoid being caught out by any individual currency idiosyncrasies. Note however that US short-term rates are not at levels that have definitively changed relative funding costs among the low yielders, and back-end yields are not at a point that will mitigate against duration risk, suggesting follow through from real money into the USD will remain restrained for the time being

Nothing scares the Fed more than a bond market overshoot. Nothing would scare the markets more than a USD that does not get at least a temporary lift from more definitive evidence that the weather was a major US data depressant in the last few months. While strong FX follow through to decent US data is unlikely, we are not at the point where the USD will not respond favorably to strong data against most currencies."

Alan Ruskin, macro strategist - Deutsche Bank

best regards,

oscarjp