ECB Cuts Rates only 25 bps as Focus Shifts to Non-Traditional Measures

G20 hopes spark extension of risk appetite - is this sustainable?

USDJPY knocking on the door to 100.00. House price uptick in UK opens the floodgates for GBP appreciation.

MAJOR HEADLINES - PREVIOUS SESSION

• Australia Feb. Trade Balance out at +2109M vs. +700M expected
• UK Mar. Nationwide House Prices rose 0.9% MoM vs. -1.5% expected
• Norway Mar. PMI out at 38.0 vs. 37.3 expected and 36.3 in Feb.
• Norway Mar. Unemployment Rate rose to 2.8% as expected vs. 2.7% in Feb.
• UK Mar. Construction PMI out at 30.9 vs. 27.8 expected
• EuroZone ECB cuts rates 25 bps to 1.25% vs. the 50-bp cut expected

THEMES TO WATCH - UPCOMING SESSION

• US Weekly Initial Jobless Claims (1330)
• US Feb. Factory Orders (1400)
• US Fed's Hoenig to Speak (1430)
• Australia Mar. AiG Performance of Service Index (2230)

Market Comment:

With G20 talks still underway, various officials are out leaking details of the scale of support to the IMF, which could receive as much as a trillion US dollars according to one official. This is about three times the original support expected. In any case, the general noise emerging from the negotiations is that the meeting will end in a very strong declaration of cooperation and markets are trying to find hope in this with a. The effects in the currency market are as one would expect - commodity currencies performing very strongly and the USD and JPY vying for weakest spot in the G10. EM currencies are of course going ballistic on the rumors of the intended scale of the IMF support (a side note: seems like SEK would be strengthening more than it has thus far with the risk appetite and especially the EM strength, to which it has been tightly correlated in recent months). GBP got an added boost on the news not only from the risk appetite evident everywhere, but also from the news that house prices actually ticked up slightly in January.

So what is the future of this move? It is clear that the rate of deceleration in many of the US numbers may be declining due to the tremendous influx of liquidity and money printing from the Fed. A similar temporary stabilization may occur in some of the hardest hit EM economies with an infusion of IMF liquidity. But we hardly think that the life support on offer here from the world's central banks and the IMF offers a longer term structural solution to the excesses from the credit bubble. The challenge, therefore, is deciding the duration of the rally in the short to medium term: a reversal already by next week or do we have enough fuel for a month's rally? We suspect the highest odds for a reversal lie somewhere between those two time frames, but will gauge the situation as it unfolds.

The ECB shocked the market by only trimming the interest rates 25 bps rather than the 50 bps that was overwhelmingly expected. This remarkable feat of gradualism as the EuroZone economy slips into a black hole was met with a knee-jerk round of EUR appreciation as the focus now shifts. Before we interpret this as extraordinarily hawkish, however, we have to consider the recent rhetoric from various ECB officials on potential further efforts into more non-traditional easing measures, something that they like to call credit-easing rather than quantitative easing. There are numerous options available, the most likely of which relate to the pressing issue of the rolling of endless short term corporate debt in the coming 18+ months and whether the ECB will purchase some of that debt. Also, it is widely anticipated that the ECB could extend the duration of its existing lending facilities. So be prepared for a Trichet that expresses distaste for lowering rates much more (seems that such a move indicates that the ECB would prefer to stop the rate cuts at 1.00%) but that offers significant new QE-like measures that could take the steam out of a broader EUR rally here.

The SNB's Hildebrand was out with stark verbal intervention today, which carries far more weight than one would normally expect considering the real intervention they performed in the recent past that took EURCHF back above 1.5000. "A renewed appreciation of the franc contains the risk of a sustained deflationary dynamic in Switzerland" and added that this should be prevented "by all means". The market got the message loud and clear and we could be seeing a new highs in EURCHF soon, particularly if the risk appetite extends here.

Day's comic relief: One of the more humorous headlines crossing the wires this morning was AIG former CEO Greenberg's statement that the "AIG Debacle Not My Fault" and later in the article his declaration that he feels "{no] responsibility at all" for what happened. Hey, he was only the CEO, right?

Chart: EURGBP

EURGBP is at a very important inflection point here just after the ECB announcement and ahead of the ECB press conference, having broken initial 0.9150 support and now taking aim at the 55-day moving average and the rising trendline, not to mention the key 0.9000 pivot area. A move through there could help set up a structural top and a new down trend. Stay tuned.

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