Research Team at Goldman Sachs, suggests that as a consequence of the renewed weakness of inflation and its potential impact on long-term inflation expectations, we expect the ECB to announce a number of additional easing measures at its 10 March meeting.

Key Quotes

“We are less confident in predicting the precise form that further monetary easing will take. However, as the date of the meeting has approached (and as global economic and financial market sentiment has deteriorated) the rhetoric of ECB Council members has turned increasingly dovish. In response, we have adjusted our ECB forecast and have increased the number and degree of measures that we think likely.

In our central case, we now expect the ECB to announce the following actions: (1) a 10bp cut in the deposit rate, from -0.3% to -0.4%; (2) the introduction of a tiered deposit system, opening the possibility of further deposit rate cuts in the future; (3) a €10bn increase in the pace of monthly purchases under the Asset Purchase Programme (APP), from €60bn to €70bn per month; and (4) a six-month extension in the duration of the APP, from March 2017 to September 2017.”

Research Team at Goldman Sachs, suggests that as a consequence of the renewed weakness of inflation and its potential impact on long-term inflation expectations, we expect the ECB to announce a number of additional easing measures at its 10 March meeting.

(Market News Provided by FXstreet)

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Olivier Korber, Research Analyst at Societe Generale, suggests that the ECB meets on 10 March, and the bar is quite high to deliver convincing actions that can keep the ongoing euro correction on track.

Key Quotes

“We are approaching the effective limit of the ECB’s tools.

Main risk – a timid rate cut: Near-term EUR/USD moves are still mostly driven by relative interest rates, so rate cuts are the channel with the largest FX impact. Our in-house scenario is a 20bp cut in the deposit rate. The market is pricing a 10bp cut fully, and a 15bp cut with nearly 50% probability.

Brexit risk means ECB should probably retain its arsenal: The ECB is not out of ammunition. Besides rate cuts, it can accelerate asset purchases and extend liquidity operations. Extreme situations could involve the use of outright monetary transactions (OMT) or helicopter money. Actions perceived as significant by the market are likely to be undertaken cautiously. The risk of a Brexit scenario in H2 suggests that the ECB should refrain from a decisive increase in monthly purchases so that it would be in a better position to address this kind of external shock. Our economists do not expect asset purchases to be accelerated in March.

Negative flash CPI raises disappointment risk: The February flash CPI printed below expectations, returning to deflation territory (-0.2% mom),increasing the pressure on the ECB to dampen the downward spiralling inflation expectations. This means that disappointment risk prompting a euro bounce is now somewhat heightened.

The euro’s recent fall implies asymmetric risk and gives the ECB some time: The recent economic dataflow highlights the contrast between slowing growth in Europe and recovering momentum in the US. This widened the negative 10y rates differential and pressured the euro retracement towards the 1.08 support area. Given the 1.05-1.15 range prevailing since the start of 2015, the risk is currently asymmetric with more room upwards than downwards. Moreover, with the EUR/USD only 3-4 cents above the 1.05 low, the ECB is unlikely to be preoccupied by currency strength. If the market is disappointed by the ECB, a bounce from 1.08 and a target of 1.13-1.14 is a likely scenario.”

Olivier Korber, Research Analyst at Societe Generale, suggests that the ECB meets on 10 March, and the bar is quite high to deliver convincing actions that can keep the ongoing euro correction on track.

(Market News Provided by FXstreet)

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Imre Speizer, Research Analyst at Westpac, expects the RBNZ to keep the OCR on hold at 2.50% at Thursday’s OCR Review, but to explicitly signal further easing is likely.

Key Quotes

“NZ swap rates and the NZD shouldn’t be too ruffled given what’s priced in.

The key elements of the Monetary Policy Statement (MPS) for markets will be the policy paragraph in the press release and the 90-day interest rate forecast. We expect the latter to be lowered significantly (our modelling estimates by -55bp), and the policy paragraph to read something like: “The Reserve Bank will monitor economic and financial developments closely, but at this stage some further reduction in the OCR seems likely in order to ensure that future average CPI inflation settles near the middle of the target range.”

Our rationale for expecting such an outcome is mainly that inflation remains very low and the exchange rate high.

We assign a 60% probability to this scenario, which should leave the 2yr swap rate and NZD/USD little changed – mainly because the markets have fully priced in one cut by June.

The risks to this scenario are:

(a) a dovish surprise, which would be the delivery of a 25bp OCR reduction to 2.25%. While we expect the next rate cut to be in June, we regard March as live and assign a 30% chance to this scenario. The 2yr would fall by 19bp, NZD/USD by 2c.

(b) a hawkish surprise, which would retain the tone of January’s press release – namely that further easing is possible (but not probable). We see a 10% chance of this outcome, which would push the 2yr 15bp higher and NZD/USD 1.5c higher.”

Imre Speizer, Research Analyst at Westpac, expects the RBNZ to keep the OCR on hold at 2.50% at Thursday’s OCR Review, but to explicitly signal further easing is likely.

(Market News Provided by FXstreet)

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USD/JPY halted its downslide and bounced-off daily S2 as the bulls found respite from the recovery seen in the Asian equities, particularly Nikkei.

USD/JPY retakes 20-DMA at 113.32?

The major clung to the key support at 112.75 region and embarked upon the recovery mode thereon amid a minor rebound seen in the Asian equities as dust settles over China’s trade data At the time of writing, USD/JPY trims losses to trade at 113.16, still down -0.26%

The traders appear to have moved past a tad better Japanese final Q4 GDP data as the focus now remains on the sentiment persisting in the markets. Earlier today, Japan’s Q4 GDP revision revealed that the economy contracted 0.3% in Q4 2015 as compared to the previous estimate of -0.4%.

Meanwhile, the upside may find some resistance as awful Chinese trade numbers will continue to weigh on investors’ mind and keep the demand for the yen underpinned as we progress towards a fairly light macro calendar this Tuesday.

USD/JPY Technical levels to watch

In terms of technicals, the immediate resistance is located at 114 (round number). A break above the last, the major could test 114.28/58 (Mar 3 & 2 High). While to the downside, the immediate support is seen at 112.75/71 (daily low & S2) and below that at 112.54/50 (Feb 26 Low/ psychological levels).

USD/JPY halted its downslide and bounced-off daily S2 as the bulls found respite from the recovery seen in the Asian equities, particularly Nikkei.

(Market News Provided by FXstreet)

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Research Team at NAB, are not expecting any acceleration in global growth in 2016 – with another year of growth a touch below 3% (very sub-trend).

Key Quotes

“We have modestly cut our 2016 growth numbers to take account of a deeper than expected recession in Brazil. A combination of the winding down of the current phase of market instability – which should limit the scale of the damage caused to household wealth, business appetites for investment and hiring and bank willingness to lend – central bank willingness to support demand, together with lower commodity prices and data that shows the world economy is still growing (modestly) underpin our view that we will see downbeat but continuing growth.

However there remains the real risk of further periods of market volatility and hence downside risks to our forecasts. To achieve sustainably faster growth would require serious reforms (for which there appears little appetite). In the near term Australian MTP growth is likely to remain around 4 ¼%.

In Australia, the recovery across the non-mining economy remains on track despite elevated risks. Q4 GDP figures revealed an economy running at 3% y/y, and our estimates suggest non-mining GDP was growing at near 4% y/y. Meanwhile, business conditions are resilient in the face of an uncertain global backdrop and weak commodity prices, although the divergence between mining and non-mining states is becoming more pronounced. The rotation towards services activity continues, and is supporting the labour market. National income growth however will remain weak as the terms of trade declines and low wages growth will cap household consumption growth.

Overall, real GDP forecasts are largely unchanged with a pick up from an average 2.5% in 2015 to 2.7% in 2016 and 2.9% in 2017, although our newly-extended forecasts imply some loss of momentum in 2018 to 2.5%. The unemployment rate will ease gradually to just above 5½% by end-16 and then remain broadly steady. Domestic conditions suggest the RBA is very much on hold but retains an easing bias amidst global risks. Key focus will be on whether the non- mining sector maintains momentum and on the future path of the unemployment rate.”

Research Team at NAB, are not expecting any acceleration in global growth in 2016 – with another year of growth a touch below 3% (very sub-trend).

(Market News Provided by FXstreet)

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Research Team at BBH, argue that the dollar is in its third significant rally since the end of Bretton Woods in 1971.

Key Quotes

“The Reagan dollar rally was driven by the policy mix of tight monetary policy and loose fiscal policy. The G7 effort to stop the dollar’s appreciation at the Plaza Hotel in September 1985 marked the end of the Reagan dollar rally.

After a nearly ten-year bear market for the dollar, that included the collapse of the Soviet Union, the fall of the Berlin Wall and the ERM crisis, there was a second dollar rally. The Clinton dollar rally was driven by the tech bubble. It too ended with G7 intervention (October 2000).

Both the Reagan and Clinton dollar rallies were preceded by rate hikes. This is not to say that all Fed hikes spur dollar rallies, but the two significant dollar rallies before the present were proceeded by the tightening of US monetary policy. The Clinton dollar rally also saw a fundamental change in the US approach to the dollar.

US Treasury officials, like Baker on the Republican side and Bentsen on the Democrat side, has threatened to devalue the dollar if a US trade partner, like Germany or Japan, did not acquiesce to US demands. Rubin’s appointment to head of the Treasury Department changed this. The strong dollar policy meant that the US would no longer use the dollar’s exchange rate as a lever to secure concessions. And indeed, since then, this has largely been the case.

In our analysis, the Obama dollar rally is being driven by the divergence between the US and most of the rest of the world. The US responded earlier and more aggressively to the end of the credit cycle than the eurozone or Japan. This is producing diverging economic outcomes a few years later.

One metric of this divergence is the premium the US government pays over Germany and Japan. The US 2-year premium over Germany, today it is reaching its best level in almost a decade (~145 bp).

US 2-year premium over Japan, it reached 110 bp today, the most since 2008.

The divergence is being driven by both components of the spread. Over the past month, the US 2-year yield has risen by 16 bp, while the German yield has fallen by six bp and Japan’s 2-year yield as eased two bp. Over the past week, the US 2-year yield is up 11 bp, while the German and Japanese yields have edged about two bp higher.

There are many considerations that impact currency prices, but the interest rate differential often tracks the movement. To be sure, it is not as if a particular interest rate differential corresponds with a particular exchange rate. Rather we find the change in the interest rate differential often points to the direction of the currency movement.

Our work finds that typically the dollar-yen rate enjoys a higher correlation with 10-year interest differential than the two-year differential. Over the past 60-days, for example, the percentage change in the two-year spread has a 0.27 correlation with percentage change dollar-yen, while ten-year spread correlation is 0.43. The former is at the lower end of its range (half of what it was in early December) while the latter is at the upper end of the recent range). Typically, we find the US two-year premium over Germany is more closely correlated with the euro-dollar exchange rate though presently the correlations are almost identical.”

Research Team at BBH, argue that the dollar is in its third significant rally since the end of Bretton Woods in 1971.

(Market News Provided by FXstreet)

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Research Team at NAB, suggests that the Australian economy appears to be performing better than many had expected, and this month’s business survey gives no signs that this is wavering.

Key Quotes

“The NAB Business Survey showed a notable improvement in business conditions during February, jumping to +8 points, more than unwinding the decline from last month, which was primarily driven by Australia’s mining states. Conditions remain particularly robust in service based industries, which are leading the way in what has proven to be a resilient recovery in the non-mining economy.

All three components of conditions (trade, profit and employment) improved during the month, and it was particularly encouraging to see employment move back into positive territory after showing mild signs of faltering recently – although it still suggests softer employment growth than the official labour market statistics.
Forward indicat
ors were more positive as well. Capacity utilisation, which provides a useful measure of the underlying health of the economy, jumped to 81.5% in February – its highest level since early 2012, and is above long-run average levels. This is consistent with a pick up in the capex index, which hit its highest reading in nine months. Forward orders were also stronger, lifting to well above average levels, suggesting a pick up in growth momentum in the near term.

Despite the lift in conditions and some apparent respite in financial markets, business confidence simply held steady at the subdued – albeit positive – levels seen in recent months. Across industries confidence remains quite mixed, although all but two (mining and wholesale) were positive .

Solid outcomes in the NAB Business Survey in late 2015 (and industry differences) were confirmed by the Q4 National Accounts – and hence their strength was not a surprise to us. The latest Survey confirms continuing non-mining momentum in early 2016. The service sectors have very much stepped up and are now driving an impressive rebound in non-mining domestic demand.

In contrast, the outlook for the global economy remains downbeat and there is still much fear of contagion. Against that the key drivers of local strength remain intact (especially low rates and a more competitive currency) and hence we have not changed our view of the Australian economy outlook – and especially continuing non-mining strength. That means monetary policy should remain on hold for an extended period (rather than the market expectation for another cut by year end). However, much depends on global uncertainties and whether global contagion ultimately weakens momentum in the domestic non-mining sector – and hence unemployment. AUD strength is another risk.”

Research Team at NAB, suggests that the Australian economy appears to be performing better than many had expected, and this month’s business survey gives no signs that this is wavering.

(Market News Provided by FXstreet)

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