Draghi to keep its ammo for March meeting
With all the noise created by Trump’s visit in Davos, the first ECB meeting of the year will almost go unnoticed. The single currency printed another multi-year high earlier this morning as EUR/USD reached 1.2459 before consolidating at around 1.2415. In spite of the apparent calm prevailing in the FX market, the option market tells a different story.
Indeed, the 1-week implied volatility on EUR/USD surged to 10.73% compared to around 7% a week ago. Looking at the 25-delta risk reversal, we notice that calls are slightly more expensive than puts – implied volatility difference between calls and puts stands at 0.435% – which suggests that the market is rather bullish EUR/USD.
Even though there is nothing major to expect from today’s ECB meeting as rates and the rate of asset purchase will be most likely maintained at current levels, investors are looking to get further information regarding the monetary policy outlook. In other words, many believe that it is time to adjust the central bank’s forward guidance against the backdrop of accelerating economic growth and improving inflationary outlook.
We believe the ECB is in no hurry to update its monetary policy, especially against the backdrop of surging single currency. Mario Draghi will set aside any big announcement for the March meeting. The ECB President may however give some positive comments about the EU economy and/or avoid complaining about the EUR strength. So an upside reaction in EUR crosses cannot be exclude.
Trans-Pacific Partnership (TPP): towards an alternative of NAFTA agreements?
Monday’s fruitless negotiations between the United States and its Canadian – Mexican counterparts has brought many uncertainties to the question if the trilateral ‘American’ arrangement might hold. During its sixth meeting with regard to NAFTAS’s terms of trade among partners, the Trump administration brought to the table conditions that the two others can hardly endure: 1) the NAFTA agreements should be repealed by any of the members within a five year time period; 2) rescind article 19 of the NAFTA treaty which stipulates that the right to appeal for the ‘Binational Panel’ declaratory opinion with regards to antidumping or countervailing statutes (suggesting that members could make unilateral trade-related decisions without consulting their partners); 3) access to public USA market must be restrained for foreign counterparts; 4) ‘origin rules’ need to be reinforced for the automotive industry by imposing a 85% provenance of automotive components (currently 65%) within the member countries and adding that 50% of the constituents have to be USA-based; 5) Canadian agricultural Supply Management System has to be abolished.
Out of these lengthy negotiations (supposed to end up next Tuesday), there is talk of advancing TPP agreements between its 11 members excluding the USA since its withdrawal decision of the project in January 2017 (Trump naming it a ‘job killer’). The parties have the willingness to accelerate the project by solving contentions among them and come up with a final accord as early as March 2018.
We maintain our stance that NAFTA agreement will be maintained, as they remain a big contributor for the New World (NAFTA countries representing 34% of total US exports). Furthermore, since the arrival of Trump’s provocative and isolating political behavior, we remain subdued as whether the US could develop new cross-country trade agreements for now, thus forcing US negotiators to remain flexible with NAFTA stakeholders.
