Volatility is the name of the game for today, and yesterday when it covered all the billboards in town and traders have been extremely cautious, but yet not afraid to follow the trend, for which they have their weak spot. Short the euro and buy the dollar, is probably the most crowded trade for the last year, and yet till this day, investors are not afraid to put more chips on the table. This is causing a tremendous amount of pressure for the EZ currency, which is brutally punished.
On the other hand, what traders do surely love is buying the European indices and their never ending compassion for the European stocks. If history tells us anything in this era of QE, is this, when the central bank says they are turning up the heat on their monetary policy, it is surely the time to sail your boat in that direction and if you try to fight this trend, you may be crushed.
Yesterday was the evidence of this argument when, despite all unknown known, the euro took a plunge towards 11 years low and the equity market roar like a hurricane Lamborghini. You may think that European indices are trading towards to their all time highs may make traders a little cautious. So what traders do then is look for other safe place to invest- the U.S., but the idea how far the valuations are stretched and how cheap European stocks are in comparison to them, make them to take another stab at the European markets.
Traders are mindful about all the positive aspects of Draghi’s speech yesterday, especially his optimistic growth upgrade forecast and also lifting the inflation number for the coming year, not to mention their sheer determination to include government bonds in their buying program up to a limit of negative yield of -0.2%, which broke the backbone of the euro.
Given that other central banks around the world are running the school of easing monetary policy, this makes matters certainly difficult for Janet Yellen to fight the corner of increasing the interest rate. The economic data released most recently have also shown some signs of rust and if the jobs recovery is the strongest argument the Fed can make to support their view, then certainly those legs are also becoming shaky. What will be really important in today’s data is the wage growth number which printed a stellar performance last time, but the forecast for y/y number is slightly lower this time. The wage growth expectations are for 2.1%, while m/m could inflate by 0.2%. If we do get a strong reading overall today, you can say good luck to the Eurodollar pair as this may very well crucify the single currency of the EZ block.
Banks could particularly be very active today and may see more volume with huge interest on the back of the news that all major US banks have passed their stress test and their numbers are much stronger as compared to the last time.