One of the largest themes we had been following came to a head on January 22 when the European Central Bank announced its massive quantitative easing programme.
With the ECB president Mario Draghi committing €60 billion in government bond purchases from March onwards, the ECB’s balance sheet is set to expand more than €1 trillion through September 2016.
As the markets digested the news, European stocks rallied to multi-year highs while the euro slid to a more than 11-year low against the US dollar at the 1.110 levels.
The other theme of the Greek elections, which shortly followed the ECB announcement, put initial pressure on the euro. But judging by the movement in the cross in the days prior, euro long positions can breathe a sigh of relief as we seem to have finally established a floor in euro-dollar.
Although the US Commodity Futures Trading Commission’s commitment of traders report still shows markets skewed heavily to the sell side in euro-dollar, the most important takeaway from the report is the lack of growth in that number. With the QE cat out of the bag, euro pricing action will be dictated in the upcoming weeks not so much by the weekly European data docket, but by the developing headline announcements from Greece and Germany. As a result, euro-dollar pricing action will remain volatile with 1.110 as a strong support throughout this month.
The dollar recorded its seventh straight month of gains – the longest streak since 1971 when the currency was floated from the Gold Standard. The dollar lost some steam in the final days of January as the release of a rather directionless US Federal Open Market Committee statement coupled with a weaker than expected US GDP reading (Q4 at 2.6 per cent versus 3 per cent expectation / 5 per cent in Q3) resulted in the dollar index paring some its recent gains.
Dollar sentiment will continue to be driven by Fed policy expectations in the weeks ahead – and an improving US data docket will continue to benefit dollar long positions and vice versa. Next up on the US calendar is the monthly non-farm payrolls report, which is expected at 235,000.
The overall unemployment rate is expected at 5.6 per cent after improving and beating estimates last month. But this was on the back of a reducing participation rate, and as a result the figure can be misleading. In the longer term, we would need to see a dropping unemployment rate amid an increasing labour force participation rate to truly see a sustained recovery in the US labour market.
However in the short term, we are slightly more bullish and expect a stronger monthly reading on Friday with 275,000 new jobs added in January and this will benefit the dollar in the initial weeks of February.
The FOMC is set to reconvene in March and markets can expect a clearer, more directed statement as compared to what was delivered last month.
Trading conditions in the Indian rupee are expected to remain volatile through the month ahead – and we expect some downsides in the rupee through February.
With a stacked data docket promising rather anaemic figures, we focus on Indian GDP data due out next Monday, which is expected to slow to 4.75 per cent from a previous reading of 5.3 per cent. Industrial and manufacturing production figures, due out on February 12 are also expected to slow.
The headline inflation number is expected to show a slowdown to 4.37 per cent in January from 5 per cent n December. As a result, we expect the Dubai Gold and Commodities Exchange March Indian rupee contract to trade within a range of 157.00 and 164.00 in the month ahead.
Gaurav Kashyap is the head of futures at Alpari Middle East
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