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Friday, 18 Nov 2011
Central Banks Ramp up Gold Buying
A report released from the World Gold Council showed central banks more than doubled their gold purchases in Q3. With increasing expectations of QE3 coming from the Fed this quantity of gold buying may continue to support the long term uptrend in gold prices.
USD - Why the EUR/USD is Trading Above 1.30 and Not 1.10
The European debt crisis continues to drag on and has now fully engulfed both Spain and Italy. Spanish 10-year bonds are quickly approaching a dangerous 7% yield while the Italian 10-year continues to trade above this threshold. It is at this level that the nations of Greece, Portugal, and Ireland sought a financial bailout from the EU/IMF.
So how is it that the EUR/USD continues to trade above the 1.30 level and not closer to 1.10? The EUR continues to be supported by rising expectations of additional quantitative easing by the Fed. Inflation data for the month of October showed that US prices actually fell. Fed forecasts continue to call for a decline in inflation pressures. Thus when the European debt crisis is eventually solved the US dollar may be weakened by another round of bond buying the Fed (QE3).
EUR - ECB Continues to Buy European Bonds
Right now there is an interesting game of cat and mouse being played out in the bond markets. Investors are selling their holdings of Spanish and Italian bonds. The ECB will then step into the market to take the other side of the transaction. At the same time the EUR/USD will rise some 20-30 pips. This action by the ECB may only increase the amount of speculators participating in the European bond markets. A game of back and forth continues between investors/speculators and the ECB while the EUR is caught in the middle.
Yesterday Spain sold EUR 3.56 bn of 10-year bonds with a yield of almost 7%. This is the highest rate Spain has paid since entering the EMU and highlights the pressures building in European financial markets. The reason for the increased interest charge may be due to the lack of a political solution in Italy. There is much debate over the role the ECB should play, whether or not it is the lender of last resort. This is a role the ECB and Germany have both resisted. Until a political solution is found to the debt crisis European bond yields will likely continue to rise and the EUR could come under pressure.
The downside may beckon for the EUR/USD which has made new lows for the past three trading sessions. Support for the pair may be found at the late September low of 1.3360. A break here would open the door to test the October low of 1.3150. The upside could be capped at the top of the early November consolidation pattern at 1.3850.
JPY - Yen is Still a Safe Haven Currency
The Japanese economy has continued to recovery in the face of the earthquake and tsunami that struck the nation in the spring. Q3 GDP rose by 1.5% though the revised Q2 data shows the economy contracted -0.5%. Now the island economy will likely face headwinds from both flooding in Thailand and a gloomy outlook for the euro zone. This negative forecast was highlighted in the recent BoJ Monetary Policy Statement.
Despite the gloomy outlook the JPY continues to see inflows from investors seeking to park funds in times of high market stress. Investors choose the JPY because the country has a current account surplus and Japanese government bonds (JGB) have a large and liquid market. Japanese bonds also offer investors the potential opportunity to gain from JPY appreciation. Keep in mind that 10-year JGB only returns a tiny 0.96%. Thus traders have the ability to safeguard their funds and make a forex play at the same time during periods of low risk sentiment.
Traders should also remember that once the SNB put a floor underneath the exchange rate of the EUR/CHF it took away one of the market's primary safe haven currencies. Also the potential for QE3 from the Fed makes holding the USD undesirable. Given a lack of safe haven currencies decent economic fundamentals, and a strong bond market the JPY may make for an attractive play in the markets.
Gold - Central Banks Increase Gold Buying
According to a World Gold Council report in Q3 central banks reported more than double their previously reported holdings from Q2. The data shows central banks are holding over seven times their holdings on a year-over year basis and purchased 148.4 metric tons of gold.
Yesterday's report is a surprise to some analysts as the sheer quantity of gold purchased shocked market followers. It was known that central bankers have been diversifying out of the USD and into other assets. This could be a result of the Fed's dovish monetary policies and QE programs. Expectations for QE3 may have the same effect on the USD as previous programs, thereby driving more central banks to buy gold rather than USDs.
The resilience of the EUR has led many traders to adopt the strategy of selling the EUR/USD on rallies. The key resistance level is 1.3860 from the early November consolidation pattern. This is also the 50% retracement from the late October to early November downtrend (1.4246-1.3483). Approaches to this key level and the pair may run into selling pressure. Both monthly and weekly stochastics continue to move lower and initial support may be found at 1.3650, followed by last week's low of 1.3480. A break here could open the door to 1.3145 from the October low. Additional resistance is located at the 200-day moving average at 1.4105.
Sterling has been met with selling pressure on approaches to its 200-day moving average which comes in at 1.6140. This moving average comes in just above a bull flag pattern located on the daily chart. The support line of the chart pattern falls from the October 26th low and has a potential measured move of 480 pips which makes the August high at 1.6615 a convenient target. Should the pair fail to break out of the consolidation pattern, support may be located at 1.5850 as well as 1.5680.
Yen strength has reemerged after a period of little movement. The USD/JPY may find support at its 55-day moving average at 76.95 though the one way movement in the price action hints at additional declines in the pair. Additional support may be located at 76.10 from the bottom of the September consolidation with a final destination at least the all-time low at 75.63. Resistance may be found off of the September high of 77.85 while the long term downtrend from the 2007 high is located at 79.30.
The USD/CHF made a breach but failed to make a significant move above the 0.9080 resistance from the October 20th high. An additional push higher will likely target the October high of 0.9310. Traders should also have their eye on the 20-month moving average which comes in at 0.9450. Initial support is located near 0.8950 followed by the November low of 0.8760.
The Wild Card
The Aussie dollar is struggling to maintain a bid in this risk off environment. Yesterday the pair held at the support level from Thursday's low of 1.0050. Falling daily and weekly stochastics point to additional declines and a break here could trigger stop loss selling. Forex traders may see a break of the initial support test the August low of 0.9925. Resistance is found at the top of the consolidation pattern from the November high which comes in at 1.0350.
|11:00||EUR||German ZEW Economic Sentiment||54.8||56.0||-|
|11:00||EUR||ZEW Economic Sentiment||62.4||63.7||-|
|11:01||GBP||30-y Bond Auction||2.36|1.6||-||-|
|22:00||CAD||Annual Budget Release||-||-||-|
|02:30||AUD||MI Leading Index||m/m||0.3%||-||-|
|03:30||AUD||Trimmed Mean CPI||q/q||0.7%||0.6%|
|10:30||GBP||MPC Official Bank Rate Votes||0-0-9||0-0-9||-|
|10:30||GBP||MPC Asset Purchase Facility Votes||0-0-9||0-0-9||-|