The big fish in the market seas today will obviously be the European Central Bank, announcing their rates decision on 12:45 GMT and then seeing Mario Draghi having a press conference at 13:30 GMT to explain the policy. As he went out with more stimulus as late as the last meeting, traders don’t seem to be expecting a further actionable policy easing (these developments need time to filter through the economy) but he is seen as likely to use extremely dove-ish language to keep markets on track to build steam. This is particularly interesting since Draghi has announced policies to get private funding sources to multiply the public servings of cash, and thus needs a) liquidity, b) increased prospects of growth, and c) lowered perceived risks, to convince the market to provide capital as his policies succeeding are now more or less directly measurable on liquidity. Him saying anything later today to the effect of “I’ll print the EUR/USD to parity if I have to, and buy JGBs if Germany won’t let me buy European sovereign debt!” is probably unlikely, but probably closer to the truth than complete inaction.
He could of course pull a Kuroda, and despite claims of wanting to wait and see what the effects are on the economy, decide that the financial conditions from the uptake of Targeted Long-Term Refinancing Operations (TLTRO, I pronounce it as “tilt-row”) being absolutely lackluster, and bad recent economic data, is enough to force a higher degree of policy easing from the ECB. It would blindside all the analysts that Bloomberg have been talking to, but really give the markets a shot in the arm which could prove crucial for Draghi in getting the TLTRO off the ground and other ECB-cash-multiplying operations so it does have second-order effects on the positive side.
Just for recap’s sake, the TLTRO is a program to lend long term cash (LT-refinancing op.), Targeted to just places where an at least equivalent amount of cash will be lent out by the receiving institution, thus doing what the ECB has been taking about for the last 4-5 years: multiplying money through the fractional reserve banking system as this money is spent or used to pay back loans, going through the economic circle. Great in theory… until you consider velocity of money indicators…
The markets seem to be positioned for a lot of verbal expanded commitments to easing and specific outlines of when that will occur, as given by Draghi later today at the very least. Currency markets are generally up, and the EUR/USD pair traded below 1.23 for the first time since August of 2012! Wowzers! It is currently trading around 1.2315, but the selling pressure has been rather relentless on the euro this week since we started Monday trading at 1.247!
I expect a direct road-map for more stimulus being indicated today might send the EUR/USD down to 1.22 potentially today or tomorrow, while added stimulus today could, at least for a brief moment this week or next, cause a swing that will test 1.20. It will probably be very risk positive if Draghi does/says anything as outlined before, and lead to further momentum on the Asian exchanges, increases in the US dollar that will enforce this further, and quite a bit of volatility. It will be another Thursday evening here (using Asian time zones) worthy of preparing popcorn and soda to last me long into the night!