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Tuesday, 27 Dec 2011
Increasing Expectations for Weaker ECB Monetary Policy
Investors have long been pricing in additional QE from the Fed and the BoE. Now it appear the ECB is managing expectations for a looser monetary policy.
USD - US Data and Europe Drive Markets to the Year End Close
During this shortened week liquidity may remain tight as many market players stay on the sidelines. However, US data releases and events in Europe may keep volatility higher than normal. Today we get releases of US consumer confidence and housing prices. On Thursday the Chicago PMI and pending home sales will be the final US data release of 2011. Last week equity markets rallied into the weekend and strong US data may help to continue that trend, though the S&P 500 is running into technical resistance near the 1,260 level from the October and November highs. The USD would likely weaken in the face of additional equity gains.
Events in Europe may support a risk-on finish to the year. A lack of European sovereign debt auctions may help though the threat of a credit downgrade of France continues to loom. While this may already be priced into bond markets the loss of France's AAA credit rating might be the straw that pushes the EUR/USD below the 1.30 level.
EUR - Increasing Expectations for Weaker ECB Monetary Policy
In an interview over the long weekend European Central Bank Governing Council Member and governor of the bank of Italy Ignazio Visco said European monetary policy will be “attentive to the economic cycle.” The comments hint that the ECB is prepared to loosen monetary policy further should the European economy require support. Visco's remarks also build on last week's comments from ECB member Lorenzo Bini Smaghi who struck out at inflationary hawks who dismiss the value of quantitative easing (QE) as a tool to support an economy.
In all fairness Mario Draghi has hit the ground running. Since taking over at the helm of the ECB he has reversed this year's 50 bp interest rate hikes by his predecessor Jean-Claude Trichet, offering significant liquidity provisions for European banks. Last week's 3-year EUR 489 Bn loans to 523 banks are a staggering number. While the liquidity operations support European banks the reversal of the rate increases will only have a limited effect on the real economy given the lower levels of market sentiment due to the debt crisis.
With rates now at their lowest levels since the 2008 at 1.00%, the ECB may look to further loosen monetary policy below this rate. Given the willingness of Mario Draghi to act decisively as he has done in his first 2-months as ECB President, if the threat of deflation begins to creep into ECB inflation forecasts then the central bank may look to further rate cuts and possibly QE as a way to stave off the damaging effects of deflation.
What does this mean for the EUR? While QE does not always translate into a weaker currency (please see GBP/USD since October 6th) the EUR would likely suffer further declines if EU interest rates were to fall further. Today's FOREXYARD technical analysis offers some price levels for this very situation.
AUD - AUD Gets a Lift
The AUD got a lift this past week as a pickup in market sentiment has helped the high yielding currency. Moody's also reaffirmed Australia's AAA credit rating, noting the government's fiscal policy, financial strength, and low levels of debt. The top credit rating should not be overlooked these days as S&P is likely to downgrade some of Europe's largest nations in the month of January. France is the most likely candidate for a reduction.
While the AUD may receive a boost due to additional real money inflows from the country's AAA credit rating, the AUD will ultimately be driven by an improvement in the risk on trade. This will likely come from a solution to the European debt crisis which appears none too close. The AUD/USD has resistance at the November 30th high of 1.0330, while support is found at the mid-December low of 0.9860.
Oil - Iranian Tensions Translate into $100 Oil
Oil prices have jumped on increased talk of an attack on Iranian nuclear facilities. Additionally Iranian war games in the Strait of Hormuz have increased market tensions as the world's 3rd largest exporter threatens to close the strait should the nation be attacked. As such, spot crude oil prices are now testing the $100 level. Spot crude is trading in a channel pattern from the October high and is encroaching on its upper boundary at $101.50. The next resistance is found at $103.30, while support comes in at $92.00.
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.
|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%||*||-|
|23:50||USD||BSI Manufacturing Index||9.7||11.3||-|
|23:50||JPY||Tertiary Industry Activity||m/m||-0.4%||0.7%||-|
|05:00||JPY||BoJ Monthly Report||*||*||*|