ECB on Hold, EUR Pressured

Takeaway: ECB rates unchanged on Thursday and EUR/USD continued downside pressure alongside Italian election uncertainty.

Positions in Europe: Short France (EWQ)


ECB on Hold


On Thursday the ECB’s governing council convenes; we expect no change to the main interest rates. Our rate position is largely in agreement with consensus -- 44 of 48 economists polled by Bloomberg expect no change.

 

This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down over recent months and is resting steady at 2.0% Y/Y in FEB, exactly at the ECB’s targeted level. PMIs across the core fell in FEB vs JAN, but beat initial expectations. While the Eurozone unemployment rate ticked 10bps higher to 11.9% in the month, the rate has historically been higher than the U.S.’s and is tame compared to peripheral figures.  In February Eurozone confidence figured improved, as did retail sales to -1.3% JAN Y/Y (exp. -2.9%) vs -3.0% DEC and industrial production improved to -2.4% DEC Y/Y vs -4.0% NOV.

 

Further, Draghi’s positioning has the added support from the conclusions of the Eurozone finance ministers meeting (on Tuesday), which was dovish, promoting a willingness to extend country deficit reduction targets due to the “pains” associated with austerity.

  • Specifically, EU Economic and Monetary Commissioner Olli Rehn had this to say: “the economic strains may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits.”
  • Of mention is that France’s deficit target of 3% looks to be pushed from 2013 to 2014.

While we think that investor sentiment is lower on the region currently due to concerns over Italy – as compared to the optimism in the back half of 2012 following the announcement of Draghi’s OMT –– we expect Draghi to keep his policy powder stowed on Thursday until there is a more meaningful flair-up in risk or greater change to the underlying data the bank tracks.

 

ECB on Hold, EUR Pressured - z. ecb rates

 

 

EUR/USD


Broadly we think the uncertainty around the next Italian government will put downside pressure on the EUR/USD. Further, we think that given the power of social media and the strong popular support for Beppe Grillo’s Five Star Movement, his call for an online referendum on Italy’s membership in the EUR could put further downside pressure on the cross. 

 

Our critical quantitative lines on the EUR/USD (which can be played via the etf FXE) are outlined in the chart below:

 

ECB on Hold, EUR Pressured - zz. eur usd

 

The most recent weekly CFTC data (from 2/26) shows a decided swing into a net bearish position on the EUR/USD, with a steady decline since a recent bullish peak on February 5th, which we think primarily reflects the uncertainty coming into the Italian election on February 24-25. We expect a long runway of uncertainty on the next Italian government, with the first semi catalyst not coming until March 15th when the presidents of the lower and upper houses are expected to be elected. 

 

ECB on Hold, EUR Pressured - z. cftc

 

Matthew Hedrick

Senior Analyst


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more