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Thursday, 22 Dec 2011

ECB LTRO; a Back Door to QE?

The 1.5 day EUR rally ended after the first round of the new long term refinancing operation (LTRO) showed 523 banks took more than EUR 489 bn worth loans from the ECB. The amount taken was at the high end of analyst expectations and shows the liquidity shortage European banks face. One question that needs to be asked, is this a back door solution to ECB QE?

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Economic News

GBP - MPC Meeting Minutes Show Willingness for more QE

Yesterday's release of the BoE monetary policy committee meeting minutes show the committee may be open to additional QE. Inflation remains above the 2% target but is likely due to temporary factors such as the VAT increase and elevated crude oil prices. The BoE forecasts inflation to fall back and the risk for deflation may become more evident. Thus there is the potential for additional asset purchases (QE) in the future. Market expectations are for further action to be carried out in February but traders should remember the BoE surprised the markets in October with more bond buying.

Sterling was bid up until the LTRO numbers were released with the GBP/USD touching the November 30th high of 1.5775 before reversing. Support is back at the November/December low of 1.5410-20.

EUR - The ECB LTRO: A Back Door to QE?

The 1.5 day EUR rally ended after the first round of the new long term refinancing operation (LTRO) showed 523 banks took more than EUR 489 bn worth loans from the ECB. The amount taken was at the high end of analyst expectations and shows the liquidity shortage European banks face. One question that needs to be asked, is this a back door solution to ECB QE?

The numbers from the LTRO are impressive. 523 banks participated in the borrowing. The previously mentioned numbers to don't include lending in a 1-week and 2-week auction which total an additional EUR 38 bn. The ECB has succeeded in backstopping the liquidity needs of European banks though the funding needs of the sovereigns remain unsecured. There has been significant chatter of European banks reinvesting the proceeds from today's LTRO back into EU bonds though this remains to be seen as banks continue to de-leverage prior to Basel III rules taking effect.

The question that investors should be asking is if the LTRO is a back door to QE? While the ECB is prohibited from funding a nation's deficits, the ECB continues to supply banks with extra liquidity which may lead to further declines in the EUR.

Following the initial spike up to 1.3200 the EUR/USD came off sharply and now has support at the yearly low of 1.2870. Resistance is found at 1.3200 from the trend line off of the October high

JPY - BoJ Hold Rates Steady

The BoJ left its unsecured overnight call loan rate steady at 0.0%-0.1%. The decision was unanimous as was the decision to keep the amount of the bank's asset purchase fund unchanged at JPY 55 trn. In the BoJ monetary policy statement the central bank highlighted a slowdown in the Japanese economy, “Due to the effects of a slowdown in overseas economies and of the appreciation of the JPY.” The BoJ also noted lower business sentiment despite increased domestic demand. Yesterday's trade deficit numbers for the month of November showed an increase to JPY 684 bn which is a new record the month. The data hints at a potential current account deficit for Q4 which is typically a negative for a currency.

Dow Jones reported that the Japanese government is ready to lower this year's GDP forecast down to -0.1% from the previous 0.5%. For 2012 GDP could be revised lower to 2.2% from 2.7%.

Gold - Gold and EUR/USD Correlation Strengthening

Traders should note the high correlation between the EUR/USD the CRB spot commodities index. According to Reuters, the two assets have a 90-day rolling correlation of 0.55, and this trend looks to push higher. Thus, as the EUR/USD goes, so does the price of spot gold, or rather traders should think of the gold/EUR relationship in terms of the USD. Traditionally, gold has not performed well in periods of robust USD strength. As the European debt crisis continues to drag on, those who believe the debt crisis will take a turn for the worst may become less positive for the outlook on gold.

Technical News


On a weekly basis the EUR/USD broke some important technical barriers, closing below the rising trend line from the January and October lows. The weekly close 1.3045 was also in-line with the 61% Fibonacci retracement from the 2010-2011 bullish trend. While weekly stochastics are currently oversold the monthly stochastics may have room to run lower. The January low of 1.2870 is the near-term support with additional support coming in at 1.2665 from the monthly chart off of the 2008 and 2010 lows. Resistance is back at 1.3140 and the 20-day moving average of 1.3275, followed by the December high of 1.3550.


Sterling has consistently been sold at previous resistance levels and with falling weekly and monthly stochastics this strategy could remain intact. Initial support is found at Friday's high of 1.5560 and the pair may have scope back to the range between the 55-day moving average at 1.5740 and the late November high of 1.5775. Any rally could be capped at 1.5890 from the falling trend line off of the August and October highs. The test for sterling shorts will come at the October low of 1.5270. A break here may find support at the trend line stemming from the January 2009 low which is found at 1.5100.


The USD/JPY is encroaching on its trend line from the 2007 high which comes in at 78.30. Weekly and monthly stocahstics are both moving higher and a break above the trend would expose the post-intervention high of 79.50 and the August high of 80.20. A failure to make a significant close above the trend line could have the USD/JPY testing the December low of 77.50 and the November low of 76.55.


Last week's break above the 0.9330 resistance opens the door to this year's high of 0.9782 as well as the December high of 1.0065. The falling trend line from the 2003 trend line comes in at 1.1165 and makes for a long term resistance level. To the downside 0.9330 will now act as a support followed by the late November low of 0.9065 and the 200-day moving average at 0.8925.

The Wild Card


The EUR/JPY is a textbook example of how broken support levels turn into resistance. The November low of 102.50 was breached by a swift move lower though the EUR/JPY slowly retraced back to this level. Yesterday the pair ran into selling pressure at the same price. Forex traders should now look to the supports at 100.75 and the 2010 low of 99.90.

Current Time: 11/29 22:43 GMT
# Time $€£¥ Event Per. Prev. Fore. Act. Imp.
22:45NZD+ Building Consents m/m-5.7%--1
EUR+ German Prelim CPI m/m0.0%--3
00:30AUD+ MI Inflation Gauge m/m0.0%--1
00:50JPY+ Retail Sales y/y-0.2%--3
00:50JPY+ Prelim Industrial Production m/m1.1%--1
01:00AUD+ HIA New Home Salesm/m-4.0%--1
01:00NZD+ ANZ Business Confidence10.5--5
01:30AUD+ Company Operating Profits q/q-1.9%--3
01:30AUD+ Private Sector Credit m/m0.8%--1
06:00JPY+ Housing Startsy/y2.6%--1
09:00CHF+ KOF Economic Barometer99.8--3
10:30GBP+ Net Lending to Individualsm/m4.9B--3
10:30GBP+ M4 Money Supplym/m-1.0%--1
10:30GBP+ Mortgage Approvals69K--1
11:00EUR+ Italian Prelim CPI m/m0.2%--1
14:30CAD+ Current Account-17.4B--3
15:45USD+ Chicago PMI56.2--3
16:00USD+ Pending Home Salesm/m-2.3%--3
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