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Thursday, 24 Nov 2011
An Argument for QE3
The argument for the Fed to begin another round of quantitative easing (QE3) is beginning to form.
USD - Why the Fed will Start QE3
The release of the Fed's meeting minutes from their previous FOMC meeting on November 2nd show that “A few members indicated that they believed the economic outlook might warrant additional policy accommodation,” The meeting minutes also noted that any announcement would be more effective in a future communications initiative.
Past comments from Fed Chairman Ben Bernanke have been supportive of additional monetary policy moves. On September 29th in Cleveland, Ohio, Bernanke said, “If inflation itself falls too low or inflation expectations fall too low, that would be something we'd have to respond to because we don't want deflation.” Given last week's headline CPI that showed a -0.1% contraction in m/m inflation during October it appears that inflation pressures have already begun to decline in the US economy. It is also important to note the downward revision to Q3 GDP to 2.0% from 2.5% and a stubborn unemployment rate stuck at 9.0%.
With the European debt crisis appearing to intensify, it is possible then that Bernanke and the Fed will act to support the US economy with another round of quantitative easing (QE3) which in all likelihood will be a negative for the USD.
EUR - Weak German Bund Auction Sinks EUR
The EUR came under renewed selling pressure following one of the worst German bund auctions. The powerhouse of the EU economy failed to sell the full EUR 6 bn of new 10-year bunds that were offered to the market. Investors were quick to sell the EUR after the disappointing auction and the currency slipped to its lowest level in 6-weeks.
Prior to the failed bund auction the EUR was pressured by weak PMI numbers which continue to show a deterioration of European fundamentals. The EU flash PMI was under the 50 boom/bust level for the third consecutive month with the manufacturing survey falling to 46.4. The services sector was slightly better at 47.8 but still far below the 50 level.
The weak PMI surveys support the theory of a euro zone economy that is slipping into recession just as the European debt crisis is coming to a head. Investors will likely remain bearish on the 17-nation currency with most traders eyeing the October low at 1.3145. The 1.3580 level from the top of this week's consolidation pattern will likely cap any short-term rally.
AUD - Weak Chinese PMI Hurts AUD
Yesterday's release of the Chinese PMI manufacturing survey showed a sharp drop in the November numbers, falling to 48 from 51 to a 32 month low and far below the 50 boom/bust level. The disappointing data release is another sign of the cooling Chinese economy.
The weak survey numbers have put pressure on the AUD which is off sharply versus the USD. The potential restructuring of the Dexia bailout and a disappointing German bund auction did little to support the high yielding Australian dollar. With the USD continuing to strengthen and the situation in Europe intensifying the October low of 0.9385 looks more vulnerable. A decisive breach below the Q3 low of 0.9700 will support additional AUD selling.
Crude Oil - Crude Oil Declining in Risk Off Environment
Spot crude oil prices continue to struggle after peaking in mid-November. The commodity has been unable to regain its footing after peaking at $103 on improved US economic data and tensions in the Middle East. With an intensification of the European debt crisis and PMI surveys that show slowing economies in both Europe and China it will be difficult for the crude oil prices to bounce back. The approaching US holiday will keep volumes light and an absence of economic data may have crude oil trading within a range between $103 and $94.
There is a bullish wedge pattern that has formed on the EUR/USD daily chart. The falling resistance line is off of the October high and the support line falls off the November 1st low. Resistance is found at 1.3615. A break here and the EUR/USD could test the November highs near 1.3850. Should the pair continue its trend lower the pair could encounter support at the rising trend line from the January 2010 and October 2011 lows at 1.3270. Traders may be eyeing the October low of 1.3145 followed by a deeper move to the 2011 low of 1.2875.
After breaking lower from the late October-mid November consolidation pattern the GBP/USD rose back to the previous support line at 1.5850 only to turn lower once again. This is a textbook retracement to a previously known support that has now turned into resistance. Support may be found at the October 18th low of 1.5630 followed by the October low of 1.5270. Resistance comes in at the top of the previous consolidation pattern at 1.6075.
The slow decline of the USD/JPY back to its all-time low at 79.60 continues while the charts show very little support to prevent the move. Any attempt to bid the pair higher may encounter selling pressure at the November 15th high of 77.50 followed by the long term downtrend from the June 2007 high which comes in at 79.10.
The rally from the late October low continues to gain steam as the pair approaches the October high of 0.9310. Both weekly and monthly stochastics continue to move higher. A break of 0.9310 will expose the 20-month moving average at 0.9450 followed by the February high of 0.9770. Support is off of the November 3rd low of 0.8760 which coincides with the 100-day moving average. While perhaps a bit extreme the pair may eventually target the falling trend line off of the 2003, 2008, and 2010 highs which comes in at 1.1200.
The Wild Card
A false breakout from the post October 25th consolidation pattern has sent the pair lower after the EUR/CAD made three failed attempts to close above the top of the chart pattern at 1.4030. With daily stochastics beginning to turn over the pair could test the bottom support of the consolidation pattern which comes in at 1.3730 off of the October and November lows. Forex traders should note that a move above the October high of 1.4170 would indicate bullish sentiment.
|02:00||AUD||HIA New Home Sales||m/m||-1.8%||-||-|
|02:01||JPY||Monetary Policy Statement||-||-||-|
|08:00||EUR||German Industrial Production||m/m||0.7%||-||-|
|08:01||JPY||BoJ Press Conference||-||-||-|
|08:45||EUR||French Trade Balance||-3.3B||-||-|
|09:00||CHF||Foreign Currency Reserves||540B||-||-|
|10:30||GBP||Manufacturing Production m/m||m/m||-0.8%||-||-|
|10:31||EUR||German 10-y Bond Auction||0.69|1.2||-||-|
|16:00||GBP||NIESR GDP Estimate||0.5%||-||-|
|16:30||USD||Crude Oil Inventories||4.0M||-||-|
|19:01||USD||10-y Bond Auction||2.24|2.7||-||-|
|01:01||GBP||RICS House Price Balance||53%||-||-|
|01:50||JPY||Core Machinery Orders||m/m||-3.6%||-||-|