Forex News and Events:
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The markets are off to a roaring start as strong numbers from China have helped buying in risk correlated assets. Risk appetite continues to be the main theme, equity markets in Asia and Europe resuming their rebound. China Purchasing Manager's Index (PMI), a major indicator of the manufacturing sector, climbed for the fifth consecutive month to 53.5% in April. With equity markets having had their best month in 22 years and swine flu exhibiting fatigue, markets seem to be fading the impending risk associated with the US Bank Stress tests and automotive sector by buying risky FX trades such as carry and EMs against the USD. We think this week will be critical test of risk sentiment and corresponding conviction of the traders.
The two main events will be the ECB meeting and then the US stress test result which both fall on Thursday. At the ECB rate decision, the central bank is universally expected to cut the refinancing rate by 25 basis points to 1.00%. However, it will be the potential package of unconventional measures that will hold the markets attention. Official’s comments surrounding this strategy had deviated considerable, with some ECB Governing Council members expressing complete misgivings on the scheme. As a result, there is no market consensus on the size, scope, framework or timing of the package. We are in the corner that the ECB will outline a framework for QE involving outright asset purchases although the execution will start flexible. As a result, we believe the knee jerk reaction will be EUR weakness. The second key event will be the expected release of the individual results of the stress tests conducted on the 19 largest US banks. This capital assessment exercise was designed to evaluate expected revenue and loss under a base line and extreme scenario of macroeconomic forecasts for GDP, unemployment and house prices. A bank which “failed” (unspecified capital adequacy level) the test would have 6 months to raise additional capital. If the “leaked” reports are correct, up to 6 of the 19 banks will be found to have a probable capital short-fall, including Citibank and BofA.
Taking a back seat this week will be the BoE and RBA rate decisions. At the BoE rate announcement markets expect the central bank to hold its base rate, although there is a chance that the BoE will increasing the size of potential asset purchases, especially given the recent budget announcement. And the RBA is expected to keep the cash rate on hold at 3.0% while downgrading its forecasts in its quarterly Statement on Monetary Policy on Friday. Non-farm payrolls will close out the week.
