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Friday, 4 Nov 2011
Markets Focus on Non-Farm Payrolls and Events in Europe
The beginning of the month is typically highlighted by the release of the non-farm payrolls report though market participants are focused on the events in Europe. Yesterday ECB President Mario Draghi offered some relief with a surprise 25 bp interest rate cut.
USD - Non-Farm Payrolls - One Key to QE3
Some analysts have shrugged off Wednesday's FOMC statement/press conference as a non-event with the Fed lowering forecasts for growth and increasing unemployment predictions. But there are two key takeaways from the Fed's latest meeting; there were no hawkish dissents from FOMC members and during the press conference Bernanke offered his commitment to support the economy with additional stimulus should it prove necessary.
This makes today's non-farm payrolls report that much more important. Given the bleak Fed unemployment forecast the likelihood of an additional round of Fed asset purchases is increasing (QE3). Markets expect an increase of 98K new jobs during the month of October. A disappointing payrolls number may initially be a USD positive and short term support for the EUR/USD is found at Tuesday's low of 1.3607. However, looking further out on the time horizon, QE3 may result in USD weakness.
EUR - ECB Cuts Interest Rates by 0.25%
The ECB lowered its benchmark refinancing rate by 25 bp to 1.25%. The move came as a surprise to many market participants who expected the ECB to cut rates next month. This was the first ECB meeting chaired by the Italian Mario Draghi and the move to ease euro zone monetary policy will not come without its critics. However, as regular readers of this commentary may be aware, declining European PMI surveys and weak GDP numbers hint at a slowdown in euro zone growth. Yesterday's rate cut may be an appropriate step for the European economy which has noticeable signs of slowing growth.
The ECB interest rate still remains relatively high when compared to other developed economies' central banks (Fed, BoE, SNB). Traders may remember the ECB raised interest rates twice this year. Therefore, the ECB may have room to further loosen monetary policy given the economic uncertainty the euro zone faces.
CAD - CAD at the Mercy of External Forces
An absence of Canadian data releases has left the CAD at the mercy of market forces outside of Canada. The USD/CAD has found itself being bought when traders become risk averse. The pair is then sold during times when traders are buying risky assets such as equities and the AUD. Yesterday the USD/CAD was bid in the early part of the London trading session but the pair quickly came under pressure with the ECB rate cut.
Today Canada will have data releases on the economic calendar with monthly building permits and the Ivey PMI survey. Most likely these data points will be overshadowed by the release of the US non-farm payrolls report. The USD/CAD has support at yesterday's low of 1.0050 and the October low of 0.9890.
Crude Oil - Crude Settles in $6 Price Range
Spot crude oil prices seem content to maintain the current trading range as markets look for some type of catalyst to emerge. Crude oil prices have been trading between $89-$95.Yesterday's ECB rate cut was not the event crude oil bulls were looking for as ECB President Mario Draghi suggested the euro zone could slip into recession. The Fed also lowered market sentiment with its downgrade of the US economic forecasts. Perhaps today's NFP jobs report will be the catalyst crude oil bulls are looking for?
An impressive run higher over the month of October took the EUR/USD as high as 1.4250, the 61% retracement from the May to October move. However, a failure of the pair to overcome this key technical mark does not bode well for the EUR in the near term. Also worth noting is the failure of the pair to move above its previously broken trend line from the June 2010 and the January 2011 lows. Falling stochastics on the daily and weekly chart also point to declines in the value EUR/USD. Support is located at 1.3915 from the October 17th high followed by 1.3650 off of the October 18th low and the October low at 1.3145. The 61% retracement level will serve as initial resistance with additional selling perhaps at 1.4450 from the trend line off of the May and July highs.
Cable has failed to climb above both its 200-day moving average and stopped short of its 61% Fibonacci retracement target from the April to October move which at 1.6150 should serve as initial resistance. A move higher could go on to test the 1.6450 resistance off of the August high though daily stochastics have crossed and the weekly stochastics are beginning to roll lower as well. As such, a move lower could find support at 1.5890 from the October 26th low as well as the October 18th low of 1.5630.
Another round of intervention has lifted the USD/JPY 400 pips for a 5.29% gain. However, the pair's sharp move higher was unable to break a key falling trend line from the 2007 high which comes in this week at 79.70. With the long term downtrend still intact a move lower may once again test the all-time lows the pair will first encounter support at 77.85 from the September high as well as 77.50 from the mid-October high. Should the intervention continue the Japanese Ministry of Finance may find willing offers waiting at 80.20 which was the peak of the last round of intervention in August.
The Swiss franc has once again resumed its downtrend versus the USD after moving as low as 0.8550, a level that has previously served as both support and resistance. A bounce from here could find an offer at 0.8900 from the resistance line off of the October peak. Should the downtrend from October extend into November a break of 0.8550 may have scope to 0.8240 from the August high.
The Wild Card
This currency pair has disappeared from the spotlight following the 1.20 floor the SNB put under its value but forex traders should watch more closely as the EUR/CHF drifts lower. The EUR/CHF as traded as low as 1.2140, the pair's lowest level since early October. This is not far from the 1.20 limit the SNB has vowed to defend. It should be noted that the peak in the EUR/CHF failed to break the long term trend line that falls off of the May 2010 high and now comes in at 1.2410. Could an escalation of the European debt crisis bring the market to test the limits the SNB is willing to go to defend the floor?
|01:00||EUR||German Prelim CPI||m/m||0.9%||-||-|
|01:00||EUR||Italian 10-y Bond Auction||1.36|1.5||-||-|
|01:50||JPY||Prelim Industrial Production||m/m||3.7%||-||-|
|09:00||CHF||KOF Economic Barometer||90.1||-||-|
|09:00||EUR||Spanish Flash CPI||y/y||-1.1%||-||-|
|10:30||GBP||Net Lending to Individuals m/m||m/m||2.4B||-||-|
|10:30||GBP||M4 Money Supply||-0.8%||-||-|
|14:30||USD||Core PCE Price Index||m/m||0.1%||-||-|
|16:00||USD||Pending Home Sales||m/m||1.7%||-||-|