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Monday, 26 Dec 2011
ECB Sounds More Open to the Idea of QE
Comments by Lorenzo Bini Smaghi is the first sign of the ECB's willingness to consider quantitative easing (QE) should the need arise.
EUR - ECB Sounds More Open to the Idea of QE
In an interview with the Financial Times ECB executive board member Lorenzo Bini Smaghi suggests more goes on behind the closed doors during an ECB meeting than we have imagined. Smaghi said, “I do not understand the quasi-religious discussions about quantitative easing.” At this time the ECB does not forecast deflation, “But if conditions changed … I would see no reason why such an instrument, tailor-made for the specific characteristics of the euro area, should not be used.”
At the previous ECB press conference Mario Draghi suggested the ECB did not consider an additional easing of monetary policy beyond the 25 bp cut that was delivered. However, Smaghi's comments suggests the ECB has discussed a range of tools to support the euro zone economy with further policy moves at the central bank's disposal should the need arise.
Last week's LTRO has provided European banks with sufficient amounts of capital for 3-years. This may be one of the steps the ECB is taking to support both European financials as well as the economy. The base case is for further deterioration of the euro zone economy and lower growth in 2012. This could be met with additional easing by the ECB, a negative for the EUR.
It is interesting to note that while the EUR/USD remains relatively supported at the 1.30 level, the EUR/GBP, EUR/AUD, and EUR/CAD are all making new lows.
GBP - New Record Low for 10-year Gilt Yield
The yield for the UK 10-year gilt reached a new low on Friday with the bonds yielding just below 2%. The strength of UK gilts are not a testament to UK growth prospects, rather the nation's prized AAA credit rating is attractive at a time when France is facing a potential credit rating downgrade. Most recently UK Q3 GDP was revised higher to 0.6%, up from 0.5%. Gilt rates could fall further should the BoE enact another round of bond purchases (QE) next year. Market expectations are for the BoE to announce additional QE in February. The tepid growth and potential for UK bond yields to fall further are all headwinds for sterling.
JPY - Government Lowers GDP Forecasts
The Japanese government lowered its current year GDP forecasts to -0.1% from +0.5%. For 2012 the estimates are more positive but the forecast was also lowered to +2.2%, down from 2.7-.2.9%. Japan will be one of the only major financial markets open today but liquidity is expected to be thin nonetheless.
Currently the USD/JPY has been pressing its trend line from the June 2007 high which comes in this week at 78.30. A close above here could find resistance at the post intervention high of 79.50.
Gold - Key Gold Support and Resistance Levels
Gold prices have climbed back off of their lows from last week in light holiday trading. In the meanwhile, spot gold is running into some key support and resistance levels. The falling resistance line from the all-time high comes in at $1,720. To the downside, the trend line from 2008 is found at $1,533, a price level that coincides with the September low. A break below here may find support at the June low of $1,476.
The weekly chart is telling. After a break of the support line from the January and October lows the pair rose back to this line where it turned into resistance at 1.3200 as often occurs with previously broken trend lines. Weekly stochastics are oversold though the monthlies may still have room to run. 1.2670 will be an important support level as the triangle pattern from the 2008 and 2010 lows on the monthly chart is found here. Below this support there is the 2008 low of 1.2520. Resistance is located back at the 20-day moving average of 1.3215, and the December 9th high of 1.3430, which coincides with the 38% Fibonacci retracement from the October high to the December low.
In a similar fashion cable has weekly stochastics which are oversold while the monthlies continue to decline. Over the course of December sterling has failed multiple times to establish a beachhead above the 1.5770 resistance. The October low of 1.5270 is the initial support though market participants will likely eye the rising trend line from 2009 which is found at 1.5110. A break of the 1.5770 resistance could spur a bout of short covering where the bears may regroup near the November 18th high of 1.5890. This level coincides with the 61% retracement of the October to December move. Only a break of the October high at 1.6165 would turn the technical sentiment from bearish to bullish.
The USD/JPY is testing the downward sloping trend line from the 2007 high which comes in this week at 78.30. A break here and the USD/JPY would most likely encounter selling pressure at the October high of 79.50 and the July high of 81.50. The 100-week moving average at 83.30 is an additional level that long-term players will be watching for confirmation of a bullish technical move. That being said the long term trend remains to the downside and the pair has support at the December low of 77.15, and the November low of 76.50, before the pair's all-time low.
A monthly close above the 20-month moving average at 0.9385 would confirm USD strength. This will put in play the 2011 yearly high of 0.9780, and the December 2010 high of 1.0065. The technical level that stands out the most is 1.1140, off of the long-term downtrend line from the 2003 high. Initial support is back at 0.9065, with the potential for a deeper move back to the pivot from October at 0.8565.
The Wild Card
The EUR/CAD has breached the significant support level at 1.3400 which has served as support multiple times this year. Forex traders should note only the February low of 1.3265 stands in the way of 1.2775 from the January low.
|23:50||JPY||M2 Money Stock||y/y||4.4%||4.4%||-|
|00:00||JPY||Monetary Policy Statement||*||*||*|
|00:00||JPY||BoJ Press Conference||*||*||*|
|00:00||GBP||10-y Bond Auction||2.73|1.8||*||-|
|00:01||GBP||BRC Retail Sales Monitor||y/y||3.9%||*||-|
|00:30||AUD||NAB Business Confidence||8||*||-|
|06:00||JPY||Prelim Machine Tool Orders||y/y||40.3%||*||-|
|07:00||EUR||German Trade Balance||18.5B||19.3B||-|
|10:00||GBP||Inflation Report Hearings||*||*||*|
|15:00||GBP||NIESR GDP Estimate||0.8%||*||-|
|23:30||AUD||Westpac Consumer Sentiment||-3.0%||*||-|