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Daily Commentary 04/12/14

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ECB to take center stage The highlight of the day will be the European Central Bank policy meeting, the final rate-setting of 2014. Many Governing Council members speaking recently, signaled that the Bank will probably take time to assess the impact of stimulus measures announced in the recent months before considering new policies. At the press conference following the decision, the ECB President Draghi will probably maintain his dovish stance in order to keep the markets confident that the ECB will do what it takes to raise inflation and inflation expectations as fast as possible. The two contingencies in which the ECB will act, is the deterioration of the inflation outlook and the inability to reach the balance sheet expansion towards 2012 level, assumed the current measures. Another interesting point of this meeting will be the ECB staff forecasts, which will include the first inflation estimates for 2017. If those are still below target, it will be hard for the ECB to avoid taking more steps (although they did not move immediately even when the first 2016 forecasts came out at 1.5%).With this in mind, we are not expecting any new measures at today’s meeting and we believe the Council would wait until after the second TLTRO results are available on 11th of December, before considering on new policies.

Overnight, Australia’s trade deficit narrowed in October, while retail sales decelerated for the same month. Although both data exceeded expectations, they were not enough to reverse the negative sentiment towards the Australian dollar. AUDUSD jumped at these economic releases, but the bears found a renewed selling opportunity and pushed the rate below 0.8400 line. I expect weakening fundamentals following the soft GDP figures on Wednesday, to weigh on the currency and if the bears prove strong enough, we could see the pair testing the 0.8300 level in the near future.

On Wednesday, once again the US ADP report indicated job growth over 200k and the US ISM non-manufacturing index moved further into its expansionary territory, staying marginally below it’s almost 9 year peak in June. The ADP report suggests that Friday’s non-farm payroll figure may come in over 200k for the 10th consecutive month, although there is a lot of variation between the ADP and the NFP reports. The strong data suggest that the US recovery is on a stable path.

The Bank of Canada kept its main interest rate unchanged at its final rate decision of 2014. The policy statement showed a bit more optimistic stance about the country’s recovery suggesting that the output gap, a key measure of the spare capacity in the economy, is smaller than it was estimated two months ago. This raised the prospect of a rate hike in the next year. On the other hand, the lower oil prices are an additional downside risk to the longer-term outlook for economic growth and inflation, and could leave CAD vulnerable.

As for today’s events, besides the ECB, the Bank of England meets to decide on its policy rate. The BoE is unlikely to change policy and therefore the impact on the market should be minimal as usual. The minutes of the meeting however should make interesting reading when they are released on 17th of December.

In the US, we get the initial jobless claims for the week ended Nov. 29.

In Canada, the Ivey PMI for November is forecast to increase from the previous month adding to the positive data coming out from the country. Despite the string of positive data coming out from Canada, I will repeat that the loonie remains exposed, mainly due to the falling oil prices.

As for the speakers, in addition to the ECB President Draghi, we have three more speakers on Thursday’s agenda. Riksbank Governor Stefan Ingves, Cleveland Fed President Loretta Mester and Fed Governor Lael Brainard speak.

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