Euro Broadly High as ECB is Preparing to Scale Back Asset Purchases

Euro trades broadly higher as lifted by comments from ECB officials that affirm the expectation of some sort of tapering in asset purchases next year. Catalonia remains a risk to the common currency but the case for independence seem to be fading. The risk is taking a back seat for the moment. Meanwhile, Sterling also recovers together with Euro as Prime Minister Theresa May seems to be safe from being ousted for now. Dollar, on the other hand, is trading generally lower together with the Japanese Yen.

ECB Lautenschlaeger: We should begin reducing bond purchases

ECB Executive Board Member Sabine Lautenschlaeger, a known hawk, urged that "we should begin reducing our bond purchases next year". And, "this should be done gradually, until we are no longer purchasing additional bonds". She emphasized that "it is important that we really move towards the exit – step by step, but steadily and in a clear direction". Meanwhile, she also noted that "it is clear which sequence the exit will follow". That is, "bond purchases will come to an end, while interest rates will remain low, well past the horizon of net asset purchases".

ECB Knot: The time has come to phase out stimulus

ECB Governing Council member Klaas Knot warned that the financial markets could be underpricing global risks. He noted that "markets seem resilient at the moment, but the low level of volatility and the overvaluation in a range of investments make me feel uneasy." And, to prevent further build-up of risks, the time has come to phase out monetary stimulus. And, "economic growth has been above potential for months and the threat of deflation is gone." He also echoed Lautenschlaeger’s view that "interest rates will stay very low for a very long time, even if we decide to phase out our bond buying program at our next meeting. Nobody at the ECB is talking about raising interest rates yet."

51 banks needs intense discussions on interest rate risks

In a report released yesterday, ECB noted that "interest rate risk is well managed by most European banks." But 51 of them may need "intense discussions" to make sure they have enough capital if things go wrong. A hypothetical interest rate shock with 2% hike is put in a stress test. That would like to a rise in net interest income of 4.1% in 2017 and 10.5% by 2019 for the banks tested. Net value of assets and liabilities of banks will change with interest rate movements. ECB found that bank’s equity would decrease on aggregate by 2.7%.

Catalan leader Puigdemont to address regional parliament

Catalan President Carles Puigdemont will address the regional Parliament today. It’s unknown whether Puigdemont will declare independence considering that there was a mass pro-unity rally in Barcelona on Sunday. And Puigdemont clearly didn’t get much support from European leaders. German Chancellor Angela Merkel talked to Spanish Prime Minister Mariano Rajoy over the weekend, and "affirmed her support for the unity of Spain", according to a German government spokesman. French European Affairs Minister Nathalie Loiseau said "if there was a declaration of independence, it would not be recognized." And Loiseau warned that "the first consequence would be its exit from the European Union."

UK May laid out steps to minimise disruption on Brexit day

In UK, Prime Minister Theresa May told the parliament that "real and tangible progress " had been made in Brexit negotiations with EU. However, she emphasized the need to prepare for "every eventuality". And May set out detailed "steps to minimise disruption" on Brexit day in 2019. May has been calling for a so called "implementation period" as transition. And she said that a transition deal "may mean we will start off with European court of justice still governing rules we’re part of for that period". That drew heavy criticism from Tories MPs. Conservative Jacob Rees-Mogg argued that "if the ECJ still has jurisdiction, we will not have left the EU. It is perhaps the most important red line in ensuring the leave vote is honoured."

BoJ governor Kuroda repeated economy expanding moderately

BoJ Governor Haruhiko Kuroda reiterated that "Japan’s economy is expected to continue expanding moderately in the future." And, after three years of massive quantitative easing, inflation is still struggling to come up. Kuroda noted that the central bank will maintain the stimulus program and he’s optimistic that inflation will gradually pick up towards the 2% target, thanks to closure of output gap and improvements in inflation expectations.

Japanese Prime Minister Shinzo Abe begins his election campaign by attacking the opposition for creating new parties. He said that "what creates our future is not a boom or slogan. It is policy that creates our future." Based on recent polls, Abe’s Liberal Democratic Party-led coalition is predicted to repeat the past landslide victories in this snap election on October 22.

Released from Japan, current account surplus widened to JPY 2.27T in August. Eco Watchers sentiment rose to 51.3 in September.

Business sector in Australia is doing very well

Australia NAB business confidence rose to 7 in September, up from 5. Business conditions remained at 14, close to triple of the historical average. NAB Chief Economist Alan Oster noted that "business conditions at these levels tell us that the business sector in Australia is doing very well." However, he pointed out that "the sustained weakness in retail conditions should justifiably be raising doubts around expectations for any imminent, and sustained rebound in consumer spending, although tough competition and other margin pressures are likely behind the result as well." Also, "elevated underemployment, an elevated Australian dollar, household debt and peaks in LNG exports and housing construction are all potential hurdles that will ensure that the Reserve Bank of Australia proceeds with caution."

On the data front

UK productions will be the main focus in European session, and trade balance will also be released. Germany will also release trade balance while Swiss will release unemployment rate. Later in the day, Canadian housing data will be featured.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.1721; (P) 1.1738 (R1) 1.1758; More…

EUR/USD’s recovery from 1.1669 continues today. But for the moment, it’s staying below 1.1832 resistance and intraday bias stays neutral. Another fall is still in favor as long as 1.1832 resistance holds. . Break of 1.1669 temporary low will extend the fall from 1.2091 to 38.2% retracement of 1.0569 to 1.2091 at 1.1510. As such decline is viewed as a correction to rise from 1.5069, we’d expect strong support from 1.1510 to bring rebound. Meanwhile, break of 1.1832 resistance will argue that the correction is already completed and turn bias back to the upside for retesting 1.2091 high.

In the bigger picture, rise from medium term bottom at 1.0339 is not finished yet. It’s expected to continue after pull back from 1.2091 completes. And, next target will be 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall from 1.6039 (2008 high) could resume. Hence, we’d be cautious on strong resistance from 1.2516 to limit upside.

Economic Indicators Update