Central Banks Stay the Course

Daily Analysis - 16/04/2015

European Central Bank and Bank of Canada Keep Interest Rates Accommodative

Interest Rate Decisions from the ECB and BoC maintained present policy measures while increasing optimism of an economic recovery in the second half of 2015. Extraordinary measures have paid off with both Central Banks forecasting higher inflation in the second half of the year on the back of strengthening energy prices.

Monetary Policy on Hold

Yesterday’s monetary policy decisions from the European Central Bank and Bank of Canada saw Central Bankers maintain their “wait and see” attitude as they continue to be data driven. The ECB left the benchmark rate on hold at 0.05% and maintained asset purchases despite the fact that available supply of securities remains low and scarcity of sovereign debt will prove problematic. The ECB press conference was briefly interrupted by a protestor showering Mario Draghi in confetti before being removed from the premises. Across the Atlantic, Bank of Canada Governor Poloz also maintained interest rate policy, keeping the benchmark at 0.75% as core inflation managed to stay at the 2% target. The Central Bank in its statement cited that the economy likely stalled in the first quarter as the impact of energy prices and slack in the economy hampered growth. USDCAD tumbled outside the multi-month range, breaking lower to the downside after the announcement.

Central Bank Doublespeak

Conflicting commentary from two prominent Fed members coupled with the Federal Reserve’s Beige Book released yesterday provided nothing but confusion to investors trying to nail down a rate timeline. St. Louis Fed President James Bullard noted that even if the Fed raises rates, it could still cut rates if the economy responds negatively. Later in the session, Richmond Fed President Jeffrey Lacker confirmed that indicators point to a need to raise rates and that the FOMC remains unconcerned by recent weakness in macroeconomic indicators. However, he does not expect volatility in response to higher rates, unlike Bullard who is willing to cut rates if volatility necessitates further accommodation. The Beige Book noted that economic expansion remains intact despite the weakness in fundamental data with the second half of the first quarter seeing wage and price pressure, stable labor data, and improved retail sales. Dollar momentum higher withered after a squeeze higher in the Euro.

IMF Warns on Liquidity

According to the latest IMF warnings, margin-debt trading is at the highest levels since the late 1990s. The IMF is cautioning that another liquidity crisis might be around the corner as leverage in the US financial system could propagate the risk of sharp corrections in financial assets. Then again, taking the IMF at face value is fairly difficult especially after its latest report on the outlook for Europe showed Greece outperforming all regional peers. Volatility is increasingly evident in crude oil with prices very sensitive to inventory announcements and Middle East hostilities. The weakest inventory growth in 14 weeks sent WTI crude oil to the highest level in 5-months even though diminished storage capacity could lead to a price retreat. Meanwhile, the spread between Brent and WTI has narrowed further at just over $4.00, giving added value to the prominent pair trade betting on the spread widening to historical levels.

Silver Head & Shoulders Technical Pattern

Although precious metals have gotten a boost from softness in the dollar owing to a squeeze higher in the Euro, the prevailing dollar uptrend is likely to resume with the Federal Reserve increasingly approaching an interest rate hike. The longer-term head and shoulders technical pattern that has been setting up for approximately 5-months in silver has a predominantly bearish bias. The right shoulder that would complete the pattern is presently in the formation stages with major support at $15.52. Any break above resistance at $17.11 could signify a reversal in the prevailing downtrend. A move below $15.52 would pave the way for further weakness in silver prices going forward. Prices will likely respond to fundamental shifts in the dollar over the near-to-medium term as the main driver of risk sentiment.