From the FXWW Chatroom – Our view:
This week is all about the ECB, not data. Macro trading is on hold until it is clear how far the ECB is willing to go and for how long. The recent positive data out of Europe (or better PMIs) does not change the pressure on the Bank to meet, and potentially exceed, market expectations. Since October 22nd, EURUSD has fallen 6.6% and 1m & 3m rates have price in around 15 bps of cuts.
We are not naïve that the EUR position is crowded price action highlights expectations are sufficiently high but we have good reason to expect the ECB to deliver on Thursday. Our flow report has continuously highlighted that the Real Money community has room to sell EUR. The CFTC s IMM report highlights CTAs remain $8.4bn above their maximum short EUR position.
Additionally, we would point to how EURUSD traded in 2014/2015 is a good guide. On announcement of much anticipated QE, EURUSD continued to fall an additional 3.5% over the next two trading sessions. The combination of investors with room to position & historical responses hold our confidence intact.
Although this is a weekly position, for longer-term investors we would note that if the ECB remains credible, there should be room for additional EUR weakness on Real Money adjusting benchmarks, renewed corporate issuance and further investor displacement all of which are EUR negative.
Since we doubt that this week s BoJ speakers will signal imminent easing, JPY is likely to benefit from the anticipation on ECB action. Citi expects the BoJ to take action at the late January meeting, but it should be premature for investors to position ahead of this, particularly before the publication of the Tankan report in mid-December. While investor risk appetite seems to be improving, coming Fed lift-off may govern further gains, which would be supportive for JPY.