Don't say we didn't warn you...

Over Promised and Under -Delivered

Sometimes our crystal ball is a little less murky. In last week's blog post, we essentially laid it all out for you. We stated: "One has to wonder if this week's ECB meeting will be the catalyst for the change in trend. With the market currently priced for perfection, i.e. an ECB move, there is scope for disappointment. "That is exactly what transpired - in the lead up to the ECB policy meeting ECB President, Mario Draghi, went out of his way to express his sense of urgency to do something big. Trial balloons were even launched about a two-tier deposit rate scheme, but it was not to be. Draghi simply overpromised and under-delivered, causing a massive short squeeze in the Euro. Was this his intention? Probably not. According to a Reuters article, Draghi's public stance of urgency ahead of the meeting was his way of trying to pressure the more conservative members of Governing Council to take bigger action. In the end, he was rebuffed. Hence, you see the under-delivery.

 In last weeks blog we stated: "our Spidey senses tingle when everything seems to be a foregone conclusion... with the majority of the market leaning the same way, it is entirely possible for a correction to ensue resulting from either disappointing ECB action or Fed hike uncertainty due to Friday's U.S. jobs report" And what a correction it induced! The Euro squeezed higher by 4 big figures moving from around the 1.0550 level ahead of the ECB announcement to over the 1.0950 level by the end of the trading day. That was the biggest gain in the Euro in more than six years.

Please don't mistake the market's reaction to the ECB move - the move was a reaction due to market positioning  not to the ECB move itself. The bottom line is that the ECB did make a move to ease monetary policy once more. Specifically, they made four moves. First, they cut the deposit rate by 10 basis points from -.0.20 to -0.30. Second, they extended by six months the end date of the current QE program from September 2016 to March 2017. Next, they broadened the range of securities that can be bought to include regional bonds. Finally, they stated that they intended to reinvest maturing bonds similar to the Bank of England and the Fed. Needless to say, policy divergence between the ECB and the rest of the central banks is alive and well.

The market was so convinced of an ECB move that the Swiss franc ended up the big loser in pre-ECB trading. CHF was sold aggressively in anticipation of matching move by the Swiss National Bank (SNB), whose next meeting is scheduled for December 10. Since the ECB didn't go full throttle, the pressure is off the SNB at this week's policy meeting. This has allowed the CHF to be last week's best performing currency with a gain of 3.37%. Meanwhile, the yen squeaked by the USD to finish in last place last week as the ECB disappointment led to a correction as market players shed the safety of the USD and yen. With the holiday season upon us and a light calendar for the U.S. in the week ahead, we suspect the correction will endure at least until the Fed meeting on December 16th.

IMF Adds China’s Yuan to World’s Top Currencies

In our blog post from November 16, we discussed the possibility of the IMF including the Chinese Yuan into the IMF's Special Drawing Rights (SDR) basket of currencies, which includes the USD, GBP, EUR and JOY. On November 30th, the IMF made their decision and the CNY is officially in.

Mover over euro! The CNY is mainly replacing part of the euro's role in the SDR. This is an important milestone in the integration of the Chinese economy into the global financial system. With this, China becomes more exposed to the risks associated with capital flows - particularly those flows associated with money leaving the country, but the following benefits will remain:

1. Increase in trade settlement in Chinese Yuan
2. Global Central Bank will increase their exposure in Yuan.
3. Reconfirm the importance of Chinese economy in context to world trade.
4. Strengthening the political prowess of China on world stage.