FRX: Euro May Fall as Risk Appetite Firms on Dovish ECB
The Euro may decline as risk appetite firms – boosting the Aussie Dollar while punishing the Yen – if ECB President Draghi hints at stimulus expansion ahead.
A late-day recovery on Wall Street inspired a chipper mood in early Asian trade, with the sentiment-linked Australian, Canadian and New Zealand Dollars trading higher alongside share prices while the anti-risk Japanese Yen underperformed. The upbeat tone appears to be fading however. Shares have started to retreat and currencies are following suit, with the commodity bloc trimming gains and the Yen recovering to trade barely changed on the session having been down as much as 0.5 percent.
The turn in sentiment appears to have followed news that China injected CNY400 billion (US$60 billion) into the market via reverse repo operations. That amounts to the largest liquidity outlay in three years. In recent months, Chinese monetary stimulus efforts have been frequently met with a risk-averse response. Rather than bolstering optimism, investors appear to be interpreting Beijing’s efforts as a sign that officials are becoming increasingly worried and resorting to ever more dramatic countermeasures.
Furthermore, greater easing is compounding downside pressure on the Yuan and compounding the threat of further devaluation. That has been a driver of negativity in its own right. Currency weakness undermines Chinese consumers’ purchasing power of imported goods, encouraging the short-term oriented and speculatively-minded investors in Chinese shares to reallocate capital from “play money” to more mundane expenditures. This has made for a seemingly counter-intuitive inverse relationship between measures of liquidity supply and the benchmark CSI 300 stock index.
Looking ahead, the ECB monetary policy announcement is in the spotlight. The central bank is expected to stay the course for now. December’s disappointing CPI figures are likely to mean that President Mario Draghi will have to field questions about stimulus expansion at the press conference following officials’ meeting. Comments suggesting greater easing is likely in the near term may breathe new life into risky assets, sending the higher-yielding currencies upward while weighing on the Euro. Rhetoric signaling a lack of urgency in offering further accommodation is likely to trigger the opposite dynamic.
