Europe is only part-way done with a period of volatile news releases; with QE now set to take place from March this year at a pace of 60 billion EUR per month, things are temporarily looking better for the troubled union. However Europe is not out of the woods yet – with deflation and an ongoing depression being the norm in Greece, traders are watching developments in Greek parliament closely. The Greek voters go to the polls this Sunday (January 25th) to elect their new leaders, and not all parties are entirely Euro-friendly, causing some concern for those who would like to see a united Europe.
Political coalition Syriza is leading the polls currently, with the party expected to receive about 35% of the vote. Syriza isn’t anti-Euro as much as they are anti-austerity, however there is fear that a victory for the radical left could mean either a Greek exit from the Euro or demands for painful concessions from creditors. The incumbent right-wing New Democracy party is currently polling second, though at around 31% of the vote the race is quite close.
Because the event has potential to swing sentiment about the Euro, traders are wary of holding positions over the weekend – part of the concern is due to the recent Swiss Franc liquidity crisis and the potential for markets to gap significantly over the weekend. The announcement of the ECB’s new QE program has the potential to turn around sentiment, however, so talk of a Greek exit is not a foregone conclusion if Syriza wins. It is possible that easing financial conditions and Greek growth finally turning positive could see Greece’s fortunes pick up – Greek growth has recently moved back in to positive after several hard years of contracting economic activity. While not much, it is at least hope for the Greeks that, along with a QE program to spur growth, that things might pick up.
Regardless of the outcome the result is likely to create volatility over the weekend and a market gap. Traders should be aware that market movements could be substantial and to take precautions accordingly.
Pepperstone has released an exciting new commodity pair for all traders: Natural Gas – symbol XNG/USD
Natural Gas is an energy commodity that is affected by factors such as unexpected weather related demand, fossil fuel prices as well as supply issues. Not as readily portable as Oil, gas markets are fragmented and localized economic factors can cause diverging prices in different regions. XNG/USD is based on US Natural Gas, and is driven by global factors as well as those that affect only the US market.
In recent years US natural gas has been fairly volatile, tripling from $2 to over $6 per MMBTU between 2012 and 2014, before crashing spectacularly back down to below $3 early this year. An unusually cold winter in early 2014 showed the effect that weather can have on this commodity as demand squeezed prices higher; with falling oil prices and a mild winter this year, the price has fallen to the lower end of its recent trading range.
To start trading Natural Gas now in your MT4 Platform, simply right-click on Market Watch panel and select ‘Show All’ – look for the XNG/USD to begin.
Please be advised that our bank liquidity providers have informed us that they are no longer able to provide liquidity on pegged currency pairs (DKK and HKD). This is due to the volatility from the SNB announcement on the 15th of January, and is to avoid any issues in the event of a change in policy.
As a result we are no longer able to offer trading on these pairs for the time being.
We sincerely apologise if this has negatively effected you. Please contact firstname.lastname@example.org if you have any further questions.
The ECB is widely expected to use its press conference today to announce a European version of Quantitative Easing. The ECB will firstly announce their interest rate decisions, which are set for 14:45 server time; following on at 15:30, Mario Draghi will read a prepared statement of the ECB’s monetary policy decisions and then answer questions about any policy measures that are announced. Volatility is expected during this 1-2 hour period as the market digests the changes.
The need for a QE program, or any additional stimulus measures, has been growing rapidly as Europe has descended in to deflation. It wasn’t long ago that legislation within the union was thought to make sovereign QE impossible, however in the last 6 months there has been significant warming towards the possibility – with most analysts now expecting an announcement is more likely than not at this meeting. Expectations have been further bolstered by the ECJ (European Court of Justice) announcing last Wednesday that Draghi’s promised OMT would not necessarily contravene any rules, provided some particular guidelines were adhered to.
Expectations have been seen in the 500 billion to 1 trillion EUR range for a possible program size, with ECB sources supposedly leaking the program size at 50 billion per month in purchases. The ultimate scale of the program would need to depend on how long the program runs for. Market expectations are for:
- Main Refinancing Rate 0.05%
- Deposit Facility Rate -0.20%
- Marginal Lending Facility 0.30%
- QE Program: Expected to fall within 500-1000 billion EUR
Should the bank not announce a new easing program, it is likely that the market would react violently. Similarly, with the market pricing in at least some form of QE, the program might need to be very large in size to actually catch the market by surprise.
There are other potential points to consider, such as whether the ECB would need to remove the negative deposit rate on excess liquidity; US QE showed that when a central bank performs QE excess reserves build up as deposits at the central bank. There is a possibility that the negative deposit rate is removed, providing incentive for banks to intermediate the QE purchases – this way they would not swap a yield bearing asset for a yield charging asset. If such a change were to occur, EUR pairs may whip-saw dramatically until the press conference. Also of interest, and very much of importance to the different member countries, will be how the risk sharing is to be handled. Much of the hesitation involved in beginning QE in Europe surrounds strong member countries taking on risk of holding weak member country debt. Details of any risk sharing plan will be discussed in Draghi’s Q&A.
The Bank of Japan will meet today to announce their Monetary Policy Statement, followed sometime later by a press conference – the timing for both is tentative. The BoJ is currently running the most substantial form of unconventional monetary policy in the developed world – at about 80 trillion Yen per year of monetary base expansion, which includes:
- 80 trillion Yen per year in purchases of Japanese Government Bonds with an average maturity of 7-10 years
- 3 trillion Yen per year in ETF’s
- 90 billion Yen per year in J-REIT’s
- 2 trillion Yen per year in Corporate Paper
- 2 trillion Yen per year in Corporate Bonds
The Bank of Japan is expected to hold these purchases at the constant rate today – consensus expectations are for another month at the current rate of 80 Trillion, though the volatility may be in the details. Possible changes could include:
- A downward revision to inflation expectations, in large part due to the fall in energy prices. As a heavy importer of energy products, this should temporarily weigh on price inflation in Japan.
- The outlook to Japanese growth and the BoJ’s guidance on expectations for the economy as it wades through another recession.
- Discussion of an extension to the BoJ’s current low interest rate loan program, which offers loans to financial institutions at a rate of 0.1%. Discussion may not come out until the meeting minutes if an extension is not announced today.
Other factors may influence the BoJ’s action, including the recent Swiss Franc cap removal and the expected upcoming easing by the ECB on Thursday. Whether these will give cause for any direct change to BoJ policy will be closely monitored; the Yen has been falling this week ahead of the meeting, with the market likely pricing in another dovish statement.
Commodity traders will be focusing Chinese data today with the NBS to release Chinese GDP growth for Q4 2014 (04:00 server time); Fixed Asset Investment and Industrial Production will also be important for the materials sector and resource exporting countries such as Australia, who rely heavily on Chinese resource demand. Economists expect further softness in the Chinese figures as the economy both rebalances and slows:
- GDP growth (quarter/year) is expected to slow to 7.2% from 7.3% previously, with the lowest estimate falling below 7% and the highest above 7.5%.
- Fixed Asset Investment is forecast to slow to 15.7%, only down slightly from 15.8%.
- Industrial Production is expected to rise from 7.2% to 7.4%.
- Retail Sales are currently expected to hold steady at 11.7%.
The fall in commodity prices in recent times – along with the AUD – can be partly explained by China’s slowing growth in demand for resources relative to optimistic assumptions and supply. While this has been viewed negatively, the low oil price ‘dividend’ is one that should benefit a relatively energy intensive economy such as China, at least in some areas outside of their own resource production. Due to the timing of the decline however, the effects of the Oil decline may not filter through in this data point, but may help in the coming quarters.
Chinese growth has been on a steady downwards trend since 2010 and is not expected to show any signs of stopping just yet, however, even despite this decline the growth rate would be the envy of most developed economies at over 7% in real terms:
After this month’s stronger than expected Australian employment figures, the decline in the Australian dollar has abated along with certain commodity prices. With a base in place, there is potential for a short term turnaround in sentiment – though this is very much dependent on the data coming out of China and continued stabilisation in commodity prices.
Over the last 24 hours the currency markets have seen extreme volatility due to the Swiss National Bank’s abandonment of its EURCHF floor. This extreme volatility has rocked the markets with many brokers reporting major losses.
At Pepperstone, our strong financial profile and risk management systems mean that the business is operating as usual and has been largely unaffected by these events.
Pepperstone continues to hold well in excess of our ASIC regulatory capital requirements.
While we have experienced a high volume of support related inquiries around the recent market volatility, our trading and support hours remain normal. Feel free to contact us should you have any questions.
The ABS is scheduled to release December’s Australian employment data today at 02:30 server time. Analysts are expecting another weak result for the economy, which has been hit in recent times by the commodity price collapse and reduction in mining cap-ex spending; despite this environment the employment situation is not expected to worsen significantly:
- Economists expect the Unemployment Rate to remain steady at 6.3%, which is a respite from a persistent uptrend. The range of estimates is from 6.2% to 6.4%.
- The Employment Change is expected to be an increase of 5,300, with the low side estimate being -20,000 and the high side estimate at +25,000.
(Source: RBA, ABS)
However, while the participation rate has been trending higher for the past few years along with the unemployment rate, there are signs of stabilisation in leading indicators such as Job Advertisements and Vacancies – while by no means a silver bullet for economic conditions, the data at least provide some hope that RBA rate cuts and a declining Australian dollar are going some way to stabilising the mild recession-like conditions (Source: RBA, ABS):
After declining sharply from around 0.9500 to 0.8000 over the past 6-12 months, AUD/USD has put in a temporary base just above the 80 cent level over the past month. If the employment data confirms a stabilisation in deteriorating economic conditions, if only temporary, the AUD may find some relief from rebounding yields and sentiment. With the market still anticipating further rate cuts, signs of improvement will be crucial for turning these expectations around.
With a wave of disinflationary and deflationary pressures washing over the world, talk of economies such as the UK raising interest rates has died down to a whisper. UK inflation has fallen in recent months to levels which are more usually associated with easing of monetary policy, rather than tightening, with the real interest rate dangerously close to moving back in to positive territory, after 6 years as a negative real interest rate:
With the fall in inflation being heavily influenced by the decline in oil and commodity prices since mid-2014, economists are viewing the disinflationary trend with mixed feelings. While central banks have fought hard to keep inflation near targets of 2-3 percent, a decline driven by sinking oil prices could be stimulative for consumers, rather than seen as a negative in the same light as disinflation driven by a lack of aggregate demand.
Central banks also typically look-through volatile food and energy inflation, keeping a focus on core inflation measures – which are more firmly anchored over time. Because of this focus, the current round of falling inflation is not necessarily an indication that further easing is on the way, even if it does delay the current plans for policy tightening.
When the Office for National Statistics reports its inflation measures today, analysts are forecasting a further decline as oil price falls filter through with a lag effect:
- CPI (y/y) is expected to decline to 0.7% from 1.0%
- Core CPI (y/y) is expected to increase from 1.2% to 1.4%
- HPI (y/y) – House Prices – are expected to have increased at 10.1%, which is down from 10.4% previously.
The announcement is due at 11:30 server time today.
The US recovery is expected to continue to gather pace with the release of today’s employment figures, due at 15:30 server time. A strong Non-Farm Payrolls figure today could see the US Dollar’s dream run continue, aided by the Euro Area falling in to a deflationary environment and calls for stimulus from the ECB this month.
Economists are expecting a reasonable employment gain of 240,000 jobs, which is a slight moderation from last month’s 321,000 blowout, but still very much on trend for a gradually improving employment market. Likewise, the Unemployment Rate is forecast to move lower to 5.7% from 5.8% previously – which is the lowest since June 2008. Employment growth has been flat for some time but is showing signs of strengthening, which could lead to wage pressures:
With some of the largest countries in the US Dollar Index unleashing stimulus packages, the US Dollar has been a major beneficiary as it finally emerges from the trauma of the GFC and looks to tighten policy. The Euro and Yen combined make up around 70% of the indexes weighting, while the Swedish Krona and Swiss Franc also contribute over 5% – all countries who are experimenting with unconventional monetary policy in some form or holding rates at zero.
Naturally the US dollar has gained as the only major currency considering a policy tightening – a trend which may continue with another strong jobs report; however there are some risks which are yet to fully be bypassed, such as the effect on employment of the fall in oil prices. The Shale Oil boom has contributed strongly to the US recovery, so it will be of interest to watch whether the net effect of falling prices is positive – for consumers – or negative for due to slowed drilling in unconventional oil plays. The extent of the effect has caused debate amongst economists and will take some time to filter through to employment.← Older posts