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FXPRIMUS Market Brief of the Week: Where Is Euro Heading To In the Next 30 days?

SINGAPORE, SINGAPORE -- (Marketwired) -- 05/13/14 -- In FXPRIMUS' Market Brief of The Week for 12 May, the brokerage firm's Senior Economist, Jimmy Zhu, questions the state of Euro in the near future.

Economic Insights

Euro lower on ECB's pledge, Chinese stocks rallied on government to defend domestic equities expectation

Mario Draghi successfully talked down the euro in its monthly meeting, buy giving the strong signal that the central bank will act within the next 30 days. On the other hand, the 1-month ATM volatilities rose by 10% to 5.8625. The ECB welcomes the rising volatilities as it indicates the latest rebound since early April may be over.

EURUSD (white) vs. EURUSD 1-month ATM (green)

To view the figure accompanying this press release, please visit the following link:

http://media3.marketwire.com/docs/945040.jpg

As you can see the chart above, the euro-dollar hasn't ended the uptrend since the July last year. The recent rally was mainly due to the limited options the ECB can exercise to improve the subdued inflation. Even now, we do not expect much different after the Draghi's pledge last week. We mentioned a few possibility on the outcome of the next ECB meeting within 30 days last week, and it shows the "bazookas effect" was extremely low.

95% possibility of the coming ECB move next month - Cutting the benchmark lending rate to zero. But this is the least effective way to lift the inflation higher. The current lending rate at 0.25% has nearly no difference to zero, meaning another 25 bps cut will be a very symbolic move. Criticism will emerge again to argue the effectiveness of its objective, euro may go higher again.

40% possibility of the coming ECB move next month - Cutting the deposit rate to minus 0.25%. The possibility is higher now since Germany starts to backup more easing from the central bank. Increasing the defiance on those lenders could be one of the ways to discourage the institutions parking excess liquidity with the central bank. The single currency could test the 1.37 if this option is exercised.

10% possibility of the coming ECB move next month - Another round of Long-Term Refinancing Operation (LTRO). Previous LTROs aims to solve the liquidity problem and that isn't an issue now. Moreover, the effects of those previous LTROs have been less translated into the households and corporations; it will be the same again this time around.

Less than 5% possibility of the coming ECB move next month - Quantitative Easing. This is the most welcomed option but the chances for it to happen could be less than 5% based on the current environment. The main challenges are not from Germany at this moment, but it's the targeted market and feasibility. Asset-backed securities (ABS) and Mortgage-Backed Security (MBS) market are relatively small compared to the United States. Buying sovereigns in Core or Peripheral isn't the solution here as those bonds' yield spread has been widening to United States Treasury (UST). Besides that, what type of assets to buy and which countries to buy will be the next challenge.

EUR-USD 25 Delta 1-month reverse ratio currently stands at -0.5375, the level of -0.58 formed some support since Sep last year. It indicates the downside space might be capped at 1.3690. Before further action released by the ECB, euro-dollar could be reluctant to penetrate below this level.

China stocks rallied today, despite the momentum didn't transfer into the Aussie, led by commodity producers and financial companies, on speculation the government will take steps to bolster equities. Global policymakers' accommodative measure will encourage the investors to stay away with safe haven in the near term, USD-JPY might be benefited.

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