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Thursday, 1 Dec 2011
Central Banks Buy the Euro Zone Some Time
The world's central banks have bought euro zone leaders additional time to come to a political solution after 6 central banks offered increased sources of liquidity. This sparked a rally in equities and the EUR while the USD was down across the board.
USD - US Economic Data Shines
A swoon of US economic data releases helped to improve market sentiment yesterday. Initially the market was boosted by the coordinated move by the world's central banks. This was followed by strong private payrolls as the ADP report showed an increase of 206K jobs on consensus forecasts of 131K. Upward historical revisions contributed to the bullish tone of the report. Pending home sales were considerably higher, rising 10.4% on forecasts of only 1.4%, The Chicago PMI was stronger than expected at 62.6 on expectations of 58.5. This hints at continued momentum for Q4 growth. Today's ISM manufacturing PMI is important as it is also expected to show an improvement in the manufacturing sector which should support the theory of a recovering US economy. And of course, tomorrow's NFP jobs report will round out what has already been an exciting week.
Yesterday the USD was down initially from the Chinese decision to lower the reserve requirement banks must hold at the PBOC by 50 bp. The USD later sold off broadly following the announcement of the coordinated liquidity moves by the leading central banks while US equity markets rallied by more than 3.5%. All of this comes at the end of the month which may help to extend the 3-day risk on rally going into the year end.
EUR - Central Banks Buy the Euro Zone Some Time
In a surprise announcement today six central banks agreed to provide additional liquidity and lower the rate at which they charge for swaps arrangements. This sparked a bout of EUR short covering and the EUR/USD rallied as high as 1.3530.
Going forward the ECB will do all it can to support the euro zone economy which is already showing signs of a slowdown. In December the central bank will likely cut interest rates by at least 25 bp, fully unwinding the 50 bp of tightening that Trichet implemented in the first half of the year. Perhaps Mario Draghi will surprise markets with a bold move by cutting interest rates below 1.0% with a 50 bp reduction.
The world's central bankers have helped to support markets but it will eventually come down to the Europeans to find a viable solution to the debt crisis. Yesterday's move by the central banks will likely buy the euro zone some time but ultimately a political solution will need to be hashed out between Germany, France, and the rest of the euro zone members. Until then investors will find opportunities to sell into EUR rallies, similar to that of yesterday.
JPY - Chinese Reserve Requirement Cut Overshadowed by Central Bank Liquidity Move
The JPY resumed its appreciation versus the USD yesterday after 6 central banks agreed to new swap lines. With the pair largely at the whim of larger global forces yesterday the USD/JPY fell as low as 77.34 before pulling higher. Support is seen at the November 18th low of 76.60.
What has become lost in yesterday's coordinated move was the 50 bp cut in the Chinese reserve requirement. This is the first step in the easing of Chinese monetary policy and a preparation by the Peoples Bank of China for an expected slowdown in both Chinese and global economic growth. The policy change is a 180 degree turn for China as less than 3-months ago the Chinese were concerned with ways to tackle rising inflation and a property market that is said to be a housing bubble on par with US housing market in 2007.
Gold - Spot Gold Up on USD Weakness
The move by the world's leading central banks to provide increased liquidity helped to fuel gains in the price of spot gold. The new swap lines had investors selling USDs and buying the metal on expected USD weakness. Spot gold prices jumped to a high of $1,750 and are approaching some technical resistance. There is a downward sloping trend line off of the September and November highs which comes in at $1,763. A breach here would likely find resistance at the November high of $1,803. A failure at the trend line and the commodity could fall back to a rising support line from the September 28th low at $1,655.
The EUR closed last week below the psychologically important 1.35 level and a close below it on the monthly chart will carry an even greater significance. Both monthly and weekly stochastics continue to fall and a break of 1.3210 will likely test the October low of 1.3145. Below here at 1.3040 there is the 61% Fibonacci retracement of the move from June 2010 to May2011 though this may only prove to be a mile marker in the new downtrend for the pair. Support is located at the January low of 1.2870. The November 18th high of 1.3610 stands out as resistance.
Falling monthly and weekly stochastics may have the GBP/USD testing the October low of 1.5270 as the pair is pulling within striking distance of its long term uptrend from the 2009 low which comes in at 1.5050. Any move higher will likely encounter heavy selling from the July pivot at 1.5780.
The downtrend for the USD/JPY remains firmly intact and only a break above 78.95 from the falling trend line from the 2007 high may reverse the pair's bearish technical sentiment. A break above this line may have the pair testing the most recent post-intervention high of 79.50, a level that coincides with the pair's 200-day moving average. To the downside the November 18th low of 76.55 is the initial support, followed by the all-time low of 75.56.
The USD/CHF is testing its October high at 0.9310 and a break here will likely open the door to the pair's 20-month moving average at 0.9460 and the February high of 0.9775. Initial support is located at the November 18th low of 0.9080 with a deeper move perhaps taking the pair to the November low of 0.8760.
The Wild Card
Yesterday spot gold prices jumped to a high of $1,750 and are approaching some technical resistance. Forex traders may notice the downward sloping trend line off of the September and November highs which comes in at $1,763. A breach here would likely find resistance at the November high of $1,803. A failure at the trend line and the commodity could fall back to a rising support line from the September 28th low at $1,655.