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Monday, 7 Nov 2011
EUR Resilient in Face of Greek and Italian Worries
The major currencies continue to trade in defined ranges as markets look for direction. Headline events last week such as the US jobs report and interest rate decisions by the ECB and the Fed provided sharp price movements at times though the existing price levels were not broken as markets were driven by events in Europe. This week will lack the big name data releases on the economic calendar though headlines stemming from Greece and Italy will keep traders busy throughout the week.
USD - Mixed US Non-Farm Jobs Report Shows Recovering US Economy
Last Friday's Non-farm payrolls added 80K jobs in the month of October with a revised 158K jobs added in September. Consensus forecasts for the report were for 95K. The revised September numbers helped to give the report a positive release, offsetting the disappointing headline number. The report shows that while the US economy continues to recover and discredits any double dip recession talks, the pace the US economy is adding jobs is likely disappointing to members of the Fed's FOMC.
Federal Reserve Chairmen Bernanke has commented on multiple occasions, most recently expressing his displeasure with sluggish unemployment levels at the FOMC press conference last week. This leads to speculation of additional quantitative easing (QE3) to be taken up by the Fed. The Fed meets on December 13th and gives market players plenty of time to position for this event.
USD weakness is the most likely outcome should the Fed proceed with QE3. However, as the most recent round of quantitative easing by the BoE shows, the reaction from the FX market to quantitative easing does not always follow the textbooks. The GBP/USD has risen 3.8% since the BoE announced it would begin purchasing an additional GBP 75 bn worth of bonds. The GBP/USD has resistance just above its 200-day moving average at 1.6165. Initial support comes in at last week's low of 1.5875.
EUR - EUR Firm Despite Events in Greece and Italy
Greek PM George Papandreou survived last Friday's vote of confidence in parliament though he has agreed to form a coalition government to implement the European bailout plan. Papandreou will step down from his role as PM to allow a new leader in an accepted government. Only after the plan's implementation will Greece go to the polls to elect a new government.
Last week's dramatic announcement of a public referendum to decide Greece's fate within the EMU rolled financial markets and the EUR/USD suffered a sharp 500 pip drop before recovering in the 2nd half of the week.
Combine this with events in Italy as doubts over the Italian government's instability and unwillingness to implement real economic reforms has the Italian 10-year BTP yielding close to 6.5%. This level is seen as unstable my many fixed income analysts.
Events in Greece and Italy have captured market headlines, but the resilience of the EUR in light of the situation is quite remarkable. The EUR recovered in the latter part of last week despite further signs that the European economy is sliding towards a recession and a 25 bp interest rate cut by the ECB. Could this be attributed to the market's unwillingness to hold excess USDs? The EUR/USD has initial resistance at Friday's high of 1.3865 and support at 1.3700 off of the rising trend line from Monday's low on the 1-hr chart.
JPY - No Follow-up Intervention by MOF
Last Monday's intervention in the foreign exchange markets by the Japanese Ministry of Finance (MOF) seems like a distant memory as events in Greece and Italy have overshadowed the unilateral intervention. Rumors were heard of additional intervention on Tuesday but those rumors proved to be false. It is speculated that the most recent G20 meeting would keep Japanese officials from further moves though the G20 meeting proved to be underwhelming with no change in the official statement regarding currency levels.
It should be noted that following the latest round of intervention, movement in the USD/JPY has dropped considerably when compared to the August intervention. This may be due to a number of factors; a reduced spread between US and Japanese bond interest rate differentials, exporters were given the opportunity to change USD to JPY at a more attractive price during Monday's intervention and has thus reduced demand, and worries over additional intervention by the MOF to weaken the JPY. As such the USD/JPY has support at the post intervention low of 77.75 and resistance at the post intervention high of 79.50.
CHF - Important CPI Data due Today
Swiss CPI data highlights today's economic calendar. Consensus expectations are for a slight increase of 0.2% m/m, down from 0.3% in September. While the drop in CPI is minute, it is a positive when compared to the August (-0.3%) and July data (-0.8%). A strong CHF vs. the EUR is one reason for the deflationary pressures in Switzerland and the move by the SNB to place a floor at the rate of 1.20 for the EUR/CHF is to ward off the harmful effects of a deflationary environment. Rumors of additional moves by the SNB to move the floor to 1.25 are a weekly event but the SNB may be more conservative and not rock the boat given its success at keeping the EUR/CHF rate stable without expending too much of its reserves. This is unlike the Japanese and their unsuccessful attempts to weaken the JPY.
Looking at the price action, the EUR/CHF traded as low as 1.2130 this past week but the pair is back up to 1.2300. Its long term trend line off of the May 2010 high comes in at 1.2400. For the USD/CHF a cross of the 50-day moving average above the 200-day moving average will likely take place within the next few days, a bullish technical move. Initial resistance is found from the October 20th high of 0.9080 followed by the October high of 0.9310.
After the pair recovered to its long term trend line from the June low the EUR/USD failed to move above the previously broken trend line which turned into a resistance level. Weekly stochastisc have rolled lower and point to additional declines in the pair. Initial Support is found at last week's low of 1.3600 and a break here could have the pair testing the October low of 1.3145. Resistance is located at the 200-week moving average at 1.3980 followed by the October high of 1.4250.
The GBP/USD continues to be buoyant with the pair forming a base at its 55-day moving average at 1.5860 though weekly stochastics are beginning to cross which hints at a decline in the price. A break below last week's low of 1.5875 could have scope to 1.5630 from the October 18th low, a level that is close to the 61% Fibonacci retracement from the October bullish move. Resistance is capped at the pair's 200-day moving average near 1.6140, followed by 1.6530 off of the trend line from the April and the August highs.
The MOF intervened in the market when the USD/JPY was at a new all-time low and ensured that both the weekly and monthly candlesticks would make an outside day up, a bullish candlestick. However, the failure of the pair to break above the falling trend line off of the 2007 and 2010 highs show the long term downtrend remains intact. Initial support is found at 77.80 from the September high followed by 77.50. The resistive trend line comes in at 79.50.
A cross of the 50-day moving average above the 200-day moving average will likely take place within the next few days and is a bullish technical move. Initial resistance is found from the October 20th high of 0.9080 followed by the October high of 0.9310. Support is back at Thursday/Friday's low of 0.8760 followed by the October low of 0.8565.
The Wild Card
The weekly chart for the USD/CAD is telling. After the pair broke its long tern downtrend from the May and August 2010 highs the pair fell back to the trend line and bounced higher in textbook fashion. Resistance for the pair is found at the October 18th high of 1.0260. Forex traders should note that a break here could have scope back to the October high of1.0650. The previously broken trend line comes in at 0.9850.