Market Analyzes ECB's Move, U.K. And Germany Disappoint

The ECB's decision yesterday to no longer accept Greek government bonds or state- guaranteed paper, but approving Emergency Lending Assistance (ELA) by the national central bank remains a key talking point today. The timing of the decision is particularly intriguing following the meeting between new Greek Finance Minister Varoufakis and Draghi, before Varoufakis met with German Finance Minister Schaeuble.

There is much speculation of who said what and how the vote at the ECB went (recall that in February, under the new voting regime, Greece, Cyprus, Ireland and France could not vote). However, as often is the case, the simpler solution (Occam's Razor). Taking the ECB's statement at face value makes sense. Getting the Greek position from the horse's mouth so-to-speak, made it clear that Greece was persisting down a path of confrontation with the official creditors. The ECB's statement said in effect that one could not be confident that a deal will be struck. This was also the read from Schaeuble's meeting with Varoufakis. There appeared to have been an exchange of views, but without either side moving. This is what brinkmanship is all about. If this is true, we would be surprised with a deal before the last possible moment.

Separately, the latest IMF reserve data gives some sense of the SNB's activity last month. Reserves rose by about CHF 3.3 bln to CHF 498.4 bln. This understates the magnitude of the intervention because of the appreciation of the franc. The franc appreciated sharply following the mid-month decision to abandon the cap. The franc appreciated by 16% against the euro, which accounts about half of the SNB's reserves. It rose 8% against the dollar and 12% against sterling.

It is difficult to ascertain the precise amount of intervention, but it could be between CHF 50-60 bln. A SNB member suggested last month that it may have cost the SNB CHF100 bln if it would have continued to defend the cap. The take away is confirmation that the abandonment of the cap did not mean that the SNB's balance sheet had reached some limit or that it has embraced a free-float of the franc. Some had speculated that the ownership structure of the SNB was the basis for the change. We suspect the SNB's decision about the conduct of monetary policy, this includes the initial buying of foreign bonds, the cap and now the dirty float can be explained independently of the peculiar ownership structure (cantons and individuals). Meanwhile, Denmark cut interest rates again yesterday (now -75 bp the same as the SNB) to defend its narrow 1% band against the euro.

The UK's trade balance continued to disappoint. The shortfall (merchandise or "visibles") in December was GBP10.2 bln, which was about 10% larger than expected. The deterioration can be accounted for by non-EU trade. That deficit increased to almost GBP 3.8 bln from nearly GBP 2.8 bln. The impact on sterling was partly neutralized by demand vs the euro and reports that US Ball Corp was offering GBP 4.3 bln cash for the UK's Rexam.

Following the strong industrial orders data yesterday, Germany reported disappointing industrial output figures for December today. The 0.1% gain contrasts with the 0.4% consensus expectation. Spain also reported disappointing industrial output figures. Rather than increase 0.3% as the consensus expected, it fell 0.9% year-over-year. It might have provided another excuse to pare the euro's gains ahead of US employment data. Norway, on the other hand, reported a 1.3% increase in December's manufacturing output. The consensus had expected a 0.3% decline. It is a particularly volatile time series, but that coupled with the continued recovery in oil prices helped the krone.

The focus ahead of the weekend is on the US and Canadian jobs report. The key in the US, barring a significant surprise on the headline or revisions, is the hourly earnings data. We suspect that the December decline was a bit of a fluke, but if they do not bounce back, expectations for a mid-year Fed hike will be further undermined, and this would be dollar negative.

Canada reported a net job loss in December of 4.3k. This masked a huge jump in full-time positions (53.5k) and drop in part-time jobs (-57.7k). The market, as oil was offered, focused more on the headline figure than the details. For today's report, the consensus expects a net gain of 5k jobs. While oil prices are firm, the near-term technicals for the Canadian dollar remain weak.

Later today, the Baker-Hughes oil and gas rig count will be released. Even though the rig count is not closely correlated with output, it will be interesting to see if the stabilization of oil prices slowed the cuts in the rig count.