Who saw the 25bp interest rate cut coming this morning? We didn’t! In fact, what puzzles us is that we saw no need to use monetary “powder” this month given improving economic data across the region supporting our call for #GrowthAccelerating. Interestingly, Mario Draghi’s economic and inflation assessment of the Eurozone also didn’t change much today – while he underlined a forecast of a “prolonged period of low inflation”, his subdued inflation outlook (below the 2% target) had been well communicated over the last two meetings, including forecasts for low levels of inflation to extend late into 2014. So why then the cut today, especially if, as Draghi says, the level of the EUR/USD does not factory into the policy rate consideration? ... You got us!
Alas, we have to play the game that is front of us.
If you’ve been following our research, you’d know one of our Q4 macro themes is #EuroBulls, which included a bullish call on the EUR/USD and German and UK equities.
Today’s decision certainly moved markets: The EUR/USD is down as much as -1.2% intraday, and European equities are shooting to the upside. From here we’re going to re-access our positioning around the #EuroBulls theme. However, this morning Keith made some changes to our Real-Time Alerts:
- We sold our long EUR/USD position (via the etf FXE)
- We sold our long Germany equity position (EWG)
- We sold our long Swiss equity position (EWL)
On the currency front, the signal from the central bank currency wars between the USD and EUR is a lot less clear this morning, whereas before this morning we expected the Bernanke/Yellen no taper call (likely out to March 2014) to weaken the Greenback vs the EUR. Of note, we think a relative winner in all of this is the British Pound, which we’re currently long of in our Real-Time Alerts via the eft FXB.
On the equities front, before today’s meeting we were seeing a strong correlation between the EUR/USD and the DAX. That’s obviously inflected today. Today’s decision could well facilitate more liquidity in the system, or at least a positive psychological response, which could be bullish for equities. On this front we’re still going to let the dust settle on today’s decision.
To read a copy of Draghi’s prepared remarks click here.
Here’s a look at our EUR/USD levels going into today’s decision: