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Toxic rush in Eurozone bonds , Canada's CPI

The European Central Bank’s President Mario Draghi triggered a toxic rush into Eurozone sovereign bonds as he hinted at ECB’s plans to speed up its bond purchases in December. He also mentioned that the possibility of deeper negative deposit rates have been discussed. There is the feeling that Bundesbank may have let down its hawkish guard on deteriorating German trade terms. German manufacturing PMI is expected to ease to 51.6 in October and slowing manufacturing activity is becoming a real concern for investors. The Volkswagen scandal has been the cherry on top. 

Now that all Eurozone countries are on the same page, the ECB is ready to use all available instruments in order to foster the economic recovery in the Eurozone. Even though the rising risks from slowing emerging markets and cheaper oil prices justify a looser monetary policy, the distortion in the market is clearly unhealthy. Higher volatility is unavoidable.

As knee-jerk reaction to Draghi’s speech, the Eurozone sovereign yields tumbled, German yields out to 6-years maturity turned negative and all yields out to 4 years slipped below -0.2%, off limits for the ECB QE.

The voracious crowd of investors are now rushing into peripheral bonds, the Italian and Spanish 2-year yields are negative for the first time in history.

EURUSD slid to 1.1072 in Asia, this could well be the beginning of fresh bearish consolidation toward 1.1000 before 1.0810 (Aug support).

Despite a weak PMI read, the DAX gapped higher to 10610 at the open. German car makers are leading the gains in Frankfurt, BMW (+2%), Volkswagen (1.83%) and Daimler (+1.83%) trade north on hopes that a softer euro will improve German cars’ competitive advantage across the globe.

Stronger inflation could revive BoC hawks

The Canadian inflation is important today. The core inflation (monitored by the BoC) could have advanced to 2.2%y/y from 2.1%.

In fact, after Trudeau’s victory on Monday, the expectation of an additional stimulus seems to be a closed chapter.

Trudeau’s plan on larger spending and cheapening oil are expected to weigh on the Loonie, hence the inflation. Overheating inflation in Canada, above the BoC’s 2% target, will soon bring in the idea that the BoC could tighten the monetary policy sooner than previously anticipated.

From a technical perspective, the US dollar is set to gain against the Loonie as long as it holds support above 1.2873 level (Fib 38.2% retrace on May Sep rise). An advance to 1.3460 (Sep high) then 1.3500/96 (psychological level / Fib 50% extension from Oct dip) is envisioned.