rahul.khanna's picture

Trending Economic: Afternoon Brief [23 October 15]

ECB’s Mario Draghi didn’t disappoint the Euro bears and delivered a more dovish message than the one given in September. As a result, EUR-Index has dipped by around 1.8% and German yields have also dipped across the board following Draghi’s speech with 2-year yield down by 6bp to a negative 31bp, and 10-year yield also down 6bp to 51bp. Interest rate markets now expects ECB to cut its deposit rates by 10bp in 2016. However, we think a rate cut may be delivered in the December meeting along with an additional stimulus of EUR 10bn by expanding the asset purchase programme. As for today, Markit manufacturing and services PMI (flash) data from Europe has come out positive, with German & Euro area composite PMI both coming in above expected at 54.5and 54.0 respectively. 

The commodity bloc currencies such as AUD & NZD are the beneficiary of the ECB policy announcement on Thursday as risk sentiment improved. Equity markets in Europe and US have also rallied, given this improved risk sentiment, we remain bullish AUD & NZD vs. EUR. Elsewhere, Canada inflation rate comes in at 1230 GMT

GBPUSD has also dipped as a result of ECB actions as a weak EUR is likely to hurt exports. However, we think balance of trade may not to be affected dramatically as portfolio flows will come in to the UK as a result of the ECB added stimulus. We see further downside in EURGBP over coming days as GBP fundamentals remain strong as represented by low unemployment rate and recent retail sales data.