Euro squeeze over with ahead of Trichet’s last stand?

Tomorrow is Trichet’s last press conference as head of the ECB. While an interest rate cut is likely not in the cards and might be seen as a reason for a further squeeze on Euro bears, other factors may weigh more heavily.

UK Data and BoE pre-preview for tomorrow
The UK PMI Services data was rather strong today – at 52.0 vs. 50.5 estimated and an improvement from 51.1 in August. This did very little to help the sterling’s case, however, as the general focus on Euro-relief (or at least a Euro-squeeze) saw EURGBP remaining rather buoyant and GBPUSD was in no hurry to tack onto yesterday’s bounce. The GDP and consumption data from Q2 were a downer (increased government spending obviously accounting for all of the GDP growth), meanwhile, and confidence surveys have been very poor lately, so there may be little bearing on the timing of the BoE’s additional asset purchase expansion. Odds are perhaps 50/50 heading into tomorrow’s BoE meeting on an expansion of the target, with a consensus of 50B for those who think an expansion is on the way and a smattering looking for 100B.

Odds and ends
A fine example of how the AUD is more a product of volatility in risk in the shortest of short terms rather than from moves on fundamental indicators like rate expectation. Tuesday’s 17-tick jump in Sep 2012 STIRs saw the AUDUSD  fall a further 100 pips or so (to be fair, the pair had been selling off steeply), but then a sharp wall street rally late yesterday, and mixed Aussie data (great retail sales, weak services survey) saw the same STIR off about 3 ticks, but AUDUSD rallying as much as 200 pips.

The US ADP employment change number was more or less in-line with expectations and with last month’s data (91k vs. 89k last month) and vs. last month’s Verizon strike-affected +17k US private payrolls number. In the meantime, some of the weekly jobless claims numbers ticked much higher before last week’s apparently calendar-affected low claims number. A bit more worrisome was the Challenger job cut survey that showed mass firing plans were the largest in more than two years, with Army and Bank of America cuts accounting for 70% of the total.  It all adds up to a yawn or slightly negative surprise this Friday, barring any dramatic evidence from the ISM non-manufacturing employment sub-index out a bit later today.

A great FTAlphaville article discusses the difficulties in addressing the Euro-debt situation, as it quickly becomes clear that anything short of a blanket guarantee will mean continued uncertainty, even if it is theoretically possibly to construct a credible haircut on Greece and some of the other peripheral countries and recapitalize banks. Meanwhile, Italy suffered the massive downgrade overnight and Merkel is not playing ball with the pro-EuroBond contingent, so the situation isn’t going much of anywhere at the moment as we await the ECB's next moves.

Chart: EURUSD
EURUSD reached its first major resistance area just below 1.3400 as we await tomorrow’s ECB outcome. (more on that below.) Above that, and we have 1.35 to contend with as the next resistance area of note.



Looking ahead – ECB pre-preview
Remember that tomorrow is Trichet’s last press conference at regular ECB meetings as Draghi is scheduled to take over at the end of this month. While many are predicting a rate cut from the ECB, it is hard to believe that Mr. Vigilance Trichet would want to leave the bank with a rate cut after having hiked as recently as July of this year. Leave it for the following meeting… More important will be further signals on the ECB’s plans to relieve the pressure on European bank funding as the general expectation is that Mr. Trichet will announce the reintroduction of unlimited 12-month funding but perhaps most importantly, will the ECB announce a new covered bond purchase program? Odds are perhaps even on the latter. And if it does launch such a program, will the move be seen as Euro positive because of the immediate relief. After all, is not a bond purchase program (despite vague possible claims that any purchases would somehow be sterilized) the same as the BoE expanding its asset purchase target. Very intriguing to see how the market will judge the ECB’s actions in addition to what the ECB does. Eventually, the only thing that keeps the banks liquid is effectively QE.