Holiday markets the quiet before the storm?

Thursday 26th November 2015

Holiday markets the quiet before the storm?

Ref : "Any Euro Respite Before ECB Meeting, US Payrolls May Be Brief" , Bloomberg Online

It's Thanksgiving Day in the States, which means quieter markets today and maybe tomorrow too. Probably just as well, as traders may want to take advantage of the relatively calm conditions to consider their strategies in advance of the start of a period that promises to be anything but quiet.

On Dec 3rd the European Central Bank may well announce further monetary stimulus. Fed Chair Janet Yellen also testifies to Congress that day, and Dec 4th sees the release of Nov US employment data that is expected to confirm that conditions are right for the Fed to start raising rates on Dec 16th. This divergence in the direction of interest rates in the US and the Eurozone has been what everyone's been the biggest game in town for some time and manifests itself most obviously in the US$ / Euro rate.

The Euro has fallen 7.4% against the dollar in 30 days, dipping below 1.06 and currently holding around that price. The 2015 low of 1.0460 seen in March is obviously in range and will be an important psychological barrier to be breached. At the same time, the Dollar Index (the measure of the US$ against a basket of major currencies) has been poking its nose above 100 and has the old high of 100.34 firmly in its sights. Any convincing break through these important levels now in touching distance would theoretically encourage further momentum, but given the length of time that the Long US$ / Short Euro divergence trade has been in play it's legitimate to wonder if an ECB easing and a Fed hike are already priced into the market . If everything then pans out as expected, are we liable to see a prime example of the "buy the rumour, sell the fact" phenomenon that might actually see the dollar fall. Much may depend on how heavily speculative dollar longs outweigh speculative dollar shorts.

Heavily for sure, but not as heavily as they did in March according to data in the Bloomberg report....... and talking of things being "priced in", one might argue that Fed Funds futures market still only point to a probability of a December 16th rate rise by the Fed of just over 70%, so that at least is not priced in. Mmmm .... not sure how convincing that is and the long dollar mood music sounds all a bit one-way to us but who are we to argue when we hear there are big orders just waiting to sell any euro rally at  1.08 and above ?

Ultimately it will all come down to fundamentals, as it always does given enough time. The ECB has been sounding increasingly doveish and is expected to ease, but how aggressively ? Will they cut the deposit rate (currently at minus 0.2%) ? Will they introduce a two-tier rate to differentiate between wholesale and retail banks? Now that would be quite aggressive, especially if accompanied by an extensive expansion of the QE programme.

For what it's worth, one school of thought doing the rounds has it that he ECB will ease, aggressively enough for the Euro to resume its downward path and may break down through key levels which will encourage further technical selling, BUT ...... whatever Fed Fund futures say, the market will definitely be expecting a Fed hike on Dec 16th, which will of course happen (surely?) , but the rhetoric before, during and after will be all about how gradual and shallow any further rises might be. Never mind "sell the fact" , profit-taking and book-squaring (i.e. selling long dollar positions, buying back euros) could start even before the Fed announcement.

It's a view that makes as much sense as any other, but the truth is that anything is possible. Happy Thanksgiving!