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    The Daily Fix - 16/2/2016

    Posted on: 16 February 2016, by: Pepperstone Support, category: Market Review

    The key focus in Europe has been the Draghi hearing at EU Parliament.
    Apart from the standard line that the “ECB is ready to do its part” and “the Governing Council will review and possibly reconsider the monetary policy stance in early March,” Draghi seems to be including financial volatility and banking weakness as a trigger for policy expansion.


    Here’s the key paragraph from the introductory statement:
    The focus of our deliberations will be twofold.


    First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices.


    Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks.
    If either of these two factors entail downward risks to price stability, we will not hesitate to act.


    Some seems to view the renewed focus on the transmission mechanism and the banking sector in Draghi’s introductory statement as a setup for a tiered depo rate.
    EURUSD sold off from ~1.1180 to a low of 1.1128 during the Q&A session, even though there was nothing especially dovish from Draghi’s remarks.


    On Brexit, Draghi said the ECB is not a party to these negotiations, but there are two aspects they should protect, namely the single market and the monetary union. He added EU and Britain should both draw benefits from it.
    On scrapping of the EUR500 note, Draghi said they are considering action on that front but will proceed carefully. He stressed this is not about reducing cash.


    On ECB in talks with Italy over purchase of bad loans, Draghi denied the report outright but then added there is no differential treatment on NFP, as in under existing rules, having NPLs in ABS would not disqualifying using the ABS as collateral as long as it meets the credit rating threshold.


    Earlier in Europe, Eurozone trade surplus narrowed to EUR21.0bn in December on a seasonally adjusted basis, falling slightly short of the forecasted EUR22.0bn surplus. For Q4 2015 as a whole, exports rose by 0.3% QoQ, while imports were 0.1% lower than in Q3.
    The German Bundesbank cut their inflation forecasts (HICP) sharply on the back of lower oil prices: from 1.1% to 0.3% for 2016 and from 2.0% to 1.7% for 2017. The new forecasts are based on oil price of ~USD36
    Cable continues to drift lower despite the risk recovery elsewhere. We got a few dovish comments from BoE’s McCafferty, who up until the January MPC had been voting for a 25bps hike:


    BOE'S MCCAFFERTY SAYS IMMEDIATE RATE RISE NOT NECESSARY: WSJ
    BOE'S MCCAFFERTY: BOE HAS SCOPE TO CUT RATES, REVIVE QE IF ECONOMY SLOWS
    MCCAFFERTY SAYS BOE IS NOT OUT OF AMMUNITION


    The main driver for GBP this week is the EU summit on February 18-19 and the agreement on EU renegotiation:


    On Thursday, Cameron will begin his final negotiations in Brussels with European leaders, with a deal expected to be reached over the evening's dinner although the discussion will go “down to the wire” and there could be delays, reports the Telegraph.
    Cameron is also poised to lift a gag on Cabinet ministers talking about the EU referendum as early as Friday.
    EU Commission President Juncker says EU’s Brexit proposals are fair deal for Britain. German Chancellor Merkel gave her supports to many of Cameron’s EU reforms last Friday and reiterated she wants the UK to stay as an engaged EU member.


    It’s been a bullish day for equities, with the Nikkei 225 index closing over 7% higher. The Shcomp opened down 3% after a week-long holiday but then rallied steadily over the course of the day and closed down only 0.6%. European indices and US equities futures are also in the green.


    As for the Nikkei, they note it has bounced off the 200 week moving average (14845) and additional long term supports are between 13,885 and 14,600. A weekly close below these levels would be a bearish development if seen.
    Crude oil has held onto last Friday’s pullback and WTI rallied back to trade on a USD30 handle in the European morning. There was no obvious headline behind the uptick, likely just short covering. Our commodities desk also notes liquidity is pretty thin with the US holiday today.


    WTI has bounced from support on the USD26 handle and may be forming a short term double bottom pattern with a potential target of more than USD43.
    Unsurprisingly, RUB has been the main beneficiary of this oil recovering, gaining over 1% on the day.


    Nevertheless, technically speaking, USDRUB should revisit the 50d MA (~74.97) but there is a lot of wood to chop before we get closer to that level given the environment. He would recommend looking at option structures to express medium term views.
    Looking ahead, the RBA is due to release it February meeting minutes, which is unlikely to shift market expectations that the RBA is going to hold pat for the time being.


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