From Credit Suisse on Thursday’s ECB meeting; the research piece is titled: ECB faced with fundamental EUR strength
CS outlines what they think will happen at the ECB meeting and provide FX trading recommendations (below)
They say:
- The macro backdrop for this week’s ECB meeting is one of improving growth dynamics, falling long-dated US yields and the approach of what our technical analysts see as important support levels for the dollar
- The basic balance of payments for the euro area is very robust
- Not only is the current account in surplus, but net equity portfolio inflows – encouraged by the improvement in growth in the periphery – provide an important bulwark
- Although yield spreads are now less favourable for the euro area than at any point since the crisis, investors still give up yield in selling market cap -weighted EUR bonds to buy Treasuries
- Considering our economists’ view of no policy change this week and without a rise in US yields, we think the risks are still skewed towards a EUR upside breakout
- We have previously recommended upside exposure in GBPUSD as a way to express a view of euro area recovery. With vol cheap and our technical analysts focused on a possible acceleration on a break of 1.4015 in EURUSD, we would also consider direct exposure in EURUSD calls as a way to express this view
CS goes on to say that there is limited potential for ECB policy innovation and they don’t expect the ECB to make any policy changes on 8 May, despite inflation looking set to continue undershooting the ECB’s near-term inflation forecast for the next couple of months:
- Our economists see April’s small bounce back as a blip, with inflation stabilizing in Q3 before rising back
- But insufficient to trigger a cut in the key end-2016 inflation forecast, and hence introduce a genuine prospect of QE, especially given the countervailing recent upside activity surprises
- The euro has also probably not yet reached levels which would trigger a rate cut, although the recent rises will be taking it closer to the ECB’s pain threshold
- One of the best chances for ECB action is that they internalize the likely further upward pressure on the euro should they stand pat, and instead aim to get ahead of the market
- But for now Draghi et al seem likely continue using dovish language and the threat of rate cuts as the first line of defence
- But we believe that some form of action is required to prevent the de facto EURUSD ceiling being more seriously tested – above 1.40 does not seem unrealistic should the ECB disappoint, especially if this disappointment stretches to June
This is the CS take on how to trade the meeting:
