Investors Stay Cautious

While the Asian equities are mildly soft on poor economic data, the forex markets are pretty steady so far. Investors remained cautious ahead of two major events this week, today's ECB meeting and tomorrow's EU summit. It's widely expected that President Draghi will announce a rate cut of at least -25 bps together with a set of stimulus measures. Besides rate cut, the central bank is expected to announce additional 12-month LTROs for 1Q12 and possibly 2Q12. It is also expected that the ECB would widen collateral acceptable for borrowing money from the central bank. The BOE will have meeting today but it's expected that no change will be announced.

There were mixed opinions on whether the EU summit would be a fruitful one. Germany poured cold water ahead of the awaited EU summit as an official told the media that he had 'the impression that a number of actors have not yet understood the seriousness of the situation'. Several issues are on the agenda of the Friday meeting. Some members suggested doubling the firepower of the EFSF, allowing it to function temporary with the ESM which is expected to begin mid -2012 and will eventually replace the EFSF. However, the idea was opposed by Germany. Other alternatives are to morph the ESM into a bank or to funnel EU funds to the IMF.

The RBNZ left the OCR at 2.5% earlier today and policymakers delivered a more downbeat tone in the accompanying statement. The overhang in the sovereign debt crisis in the Eurozone and the weaker-than-expected domestic data in recent month signaled that risks are on the downside for the economic outlook New Zealand. While the chance of a rate hike is unlikely at least until the second half of next year, a rate in increasingly possible in coming months. More in RBNZ On Hold. Growth Forecasts Down Amid Highly Uncertain Outlook.

Swiss Franc is the notably weaker one this week on SNB speculation, in particular after data released earlier this week showed November inflation had the largest drop since October 2009. Swiss Finance Minister Eveline Widmer-Schlumpf said a committee is considering ways to counter Franc's strength, including negative interest rates and capital controls. There are speculations that SNB would raise the EUR/CHF 1.2 floor next week on it's December 15 meeting. While EUR/CHF strengthened mildly recently, it's still kept well in range below 1.2472 resistance. That is, it's still in consolidation. We'd maintain that, unless, SNB does act, 1.25 should be strong resistance to overcome.

Data from Australia saw unemployment rate climbed back to this year's high of 5.3% in November, versus consensus of 5.2%. Employment dropped -6.3k, much worse than expectation of 10k growth even though prior month's figure was revised up from 10.1k to 16.8k. Total job growth from January to November was at 44.7k only, on course for the smallest annual gain since 1996, and much weaker than the 362.3k record expansion in 2010. There are some speculations that RBA would extend the policy easing cycle into 2012. But Aussie remains steady in the markets so far.

Looking ahead, other that ECB and BoE announcement, Canadian housing starts and new housing price index, US initial jobless claims and wholesale inventories would be released.