With only a short period of time until European Central Bank President Mario Draghi takes the stage, markets remained transfixed on possible outcomes overnight in what’s expected to be a key inflection point in the long running European debt crises. According to reports, the European Central Bank will not enter a quantitative easing style intervention program, with capital injected into peripheral bond markets likely to be sterilized, which requires the bank to take the equivalent amount of funds out of the financial system in an effort to avoid stoking inflation. The prospect of the ECB setting yield caps appears to be off the table, which is considered untenable in the context of the potentially unlimited funds the bank will need to throw at the market to maintain pre-determined yield caps or spreads. Nevertheless, it’s expected the ECB will not place any explicit cap or budget on how debt they could buy.
The plan, which is expected to be unveiled at tonight’s policy meeting, has put markets in high expectancy mode, suggesting a strong of disappointment should the plan fail to appease. These high expectations continue to provide a solid foundation for the Euro, which returned to solid form overnight against major counterparts after an earlier dip. The EURAUD pair continued its unwavering path higher with the pair forging near 10-week highs, and bounced back against the greenback to return above $US1.26 after earlier lows of 1.25-figure.
Meanwhile, the Aussie dollar continued to grind lower overnight making a move to the downside of 102 US cents to near 2-month lows against the greenback. The local unit maintained an easing bias in yesterday‘s domestic session after the release of Q2 Gross Domestic Product came in just shy of consensus estimates. The Australian economy grew 0.6 percent in the second-quarter, slightly lower than estimates of 0.8 percent. In annual terms the economy grew 3.7 percent from the second-quarter last year – in line with estimates. Although healthy, the latest GDP print is the latest of a growing list of local macro data points suggesting the pace of growth is slowing, amid further signs China’s economy is coming off the boil. The day ahead may reinforce the downside for the Aussie dollar with employment data on tap. The Australian economy is expected to have created 5,000 jobs in August, against 14,000 in July with the official unemployment rate expected to edge higher from 5.2 to 5.3 percent. Should we any significant deviation to the downside of estimates, bids around 101.5 US cents may slow the downside, but ultimately the July lows at 101 US cents may provide the support in domestic trade. At the time of writing the Australian dollar is buying 101.9 US cents.