European Central Bank (ECB) is waiting no time in letting the market know that it is going to extend its current bond buying program and, on top of that, it will cut interest rates further into the negative territory. These are clearly being viewed as more stimulus measures and the whole market is pricing in the announced measures with a lower Euro all over the dashboard and a higher Tax in Germany as the European equities are extending an earlier rally. It is well known how the equities are reacting when a central bank is increasing the stimulus.
The funny thing is that the announced intention is coming after the PMI’s (Purchasing Manager Index) in Eurozone came at a four years high showing that the Economy is already improving. In still extending the bond-buying program, the ECB may want not to be left behind of the curve and from this point of view the move is seeing to be proactive. Today we also saw the money growth and lending to financial and non-financial corporations in the Eurozone and the outcome was simply spectacular. It is implying that the actual growth in 2016 will be way bigger than the market is currently expecting, with positive surprises most likely to occur.
Inflation Still an Issue in Eurozone
Inflation is still an issue in the Eurozone as deflationary threats are still there and this is the main driver behind the ECB intentions. Negative inflation, or deflation, is far worse to deal with than with classical inflation as the postponing of a purchase is having enormous consequences on any economy. Buying bonds may trigger inflation in the long run, but I would say that the current measures will affect mainly credit and job creation than inflation. After all, we only need to look at the United States to see what the quantitative easing programs brought there and should look for nothing else in Europe as well. A problem in Europe when compared with the United States is that the ECB is not having that many bonds to be bought in the sense that it has to deal with bonds issued by different states and not a single one like it is in the United States of America.
Super Busy Economic Calendar Next Week
Next week it is going to be probably the most busiest week for the rest of the 2015 trading calendar in the sense that each and every single day we have important economic releases. It all starts with end of month flows as the month of December is beginning on Tuesday and from that moment on, three central banks are scheduled to release their interest rate decisions and monetary policy: RBA (Reserve Bank of Australia), BOC (Bank of Canada) and ECB (European Central Bank). Therefore, Tuesday, Wednesday and Thursday are packed with top-tier economic releases, and on Friday the all-important Non-Farm Payrolls is going to hit the wires as well.
Taking into account what we’ve discussed at the start of this article and considering the fact that the ECB is going to have its decision before the NFP and Fed, I would say that the fate of the US dollar is going to be decided right before Christmas holidays. It will be only normal for the Euro to trade with a bearish tone but I used the opportunity given by the lower Euro to trade call options on the Euro related pairs against the Australian dollar, the US dollar, Great Britain pound and the Japanese Yen.
The idea behind is that the ECB staff projections for the EURUSD pair go somewhere around the 1.10 level and now price is far below, so more is needed to be done. Moreover, assuming the ECB is still delivering, it may be that until that moment of time market is already pricing in the outcome and the NFP in the next day may turn the EURUSD pair in the opposite direction. End of month expiration date should see if the options will expire in the money or not but even with start of December I am still favoring a bounce higher for the Euro into end of year trading.
Oil Still Not Able To Bounce Meaningfully
Oil is still suffering despite the Saudi Arabia calling for the willingness to discuss with OPEC (Organization of Petroleum Exporting Countries) in order to stabilize prices. The Saudis have most to suffer from lower prices as they are the biggest exporters in the world but with current inventory levels so high, basically at record levels, it is very difficult to see how price should bounce anytime soon. As a consequence, the USDCAD pair is still holding at extremely elevated levels in the sense that it is hanging on the 1.33 area and heading into next week’s trading I would say it will keep these levels all the way into Bank of Canada interest rate decision and press conference. From my end, I traded put options on the USDCAD pair with various expiration dates, but mostly end of month.