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Thursday, 10 Nov 2011
Risk Sentiment Goes Out the Window with Italian Bonds
The trigger for yesterday's slide in the EUR was when LCH Clearnet raised its margin requirements for Italian bonds, forcing some banks to put up additional capital or sell their positions. Most chose the latter and thus pushed up the yield on 10-year Italian BTPs above 7% to a new EMU record. The EUR collapsed with Italian bond prices, ending the period of consolidation that the FX markets have seen since early last week.
EUR - Italian 10-year Bonds Yielding 7%
The EUR received a small bounce following Berlusconi's resignation though the gains in the EUR only provided EUR bears an opportunity to enter at a more attractive price. Concerns over the political situation in Italy have not supported risk sentiment with European bourses shedding more than 2% on average. The eventual departure of Berlusconi masks the reality on the ground in Italy which does not immediately change without the implementation of both fiscal and economic reforms which may prove difficult to implement given the political situation.
Traders sent the EUR lower across the board, ending the period of consolidation with the major FX pairs. Key resistance remains at the 1.3850 level from Tuesday's high. For the EUR/USD a decisive break below 1.3500 could spur additional declines to 1.3190 from the October low.
It is difficult not to see similarities between yesterday's collapse in the value of Italian bonds and the decline in gold prices from late August. Both sharp price moves followed an increase in margin requirements. In August the Shanghai Gold Exchange raised margin requirements by 26% and the CME followed suit with a 22% increase. Yesterday LCH Clearnet raised its margin requirements by more than 11%. Forex traders should be aware of events such as these which can spark a selloff in assets as traders reduce their leverage used.
GBP - BoE to Meet Following Disappointing Trade Deficit Data
Today the Bank of England will meet in the shadow of the European debt crisis and a disastrous UK trade deficit report. The data for the month of September showed the trade deficit rose to its highest level as exports gained slightly while imports soared. The bearish tone of the report was increased as the August deficit was also revised higher. This offsets the surpassingly positive August report that showed a sharp increase in exports. The data is troubling for the UK economy as the euro zone is the UK's largest export market and the currency bloc looks to slip into a mild recession.
The BoE will meet today and is not expected to adjust interest rates. Nor is the BoE forecasted to increase the level of bonds it is currently purchasing to support the UK economy. Inflation continues to run above 5% though market inflation expectations are beginning to move lower as rising prices have not resulted in rising UK wages.
The EUR/GBP has moved below its long term rising trend line from the June 2010. A significant close below 0.8550 would increase bearish technical sentiment. A lack of support is apparent on the charts and the EUR/GBP could eventually slip to the 2011 low at 0.8280.
SEK - Riksbank to Hold Interest Rates Steady
The release of the Riksbank meeting minutes from the last monetary policy meeting showed the Executive Board of the Swedish central bank decided to hold interest rates at the current 2% level until at least next year.
Swedish interest rates currently stand at 2% and the Riksbank said in light of the fiscal difficulties in the US and Europe the bank will pause in its rate hiking cycle until 2012. Citing a lower level of consumer confidence the Swedish economy will likely grow at a more moderate pace, reducing the need for additional rate hikes. One member of the Executive Board was in favor of a 25 bp rate cut.
CPI was in-line with forecasts at 3.2%. The Riksbank expects inflation will decrease to 2.6% in 2014 with the repo rate to be increased to 3.5% towards the end of 2014.
The Swedish krona initially reacted positively to the release of the monetary minutes but the USD/SEK failed at Tuesday's low of 6.5215 and turned higher as the USD gained on Italian debt concerns. Resistance for the USD/SEK is found at the November high of 6.6665 followed by the October 18th high of 6.7177.
Crude Oil - Crude Falls with Risk Sentiment
Yesterday's drop in risk sentiment helped to slow the rally spot crude oil prices have seen since the beginning of October. After falling to a low of $75 the price of crude oil has added $20 in just over one month. Most recently spot crude oil prices bounced higher as it became apparent that Iran has been attempting to develop nuclear weapons according to the UN nuclear watchdog. With the release of the UN's report sharp rhetoric from Tehran has increased with talk of war which is typically a positive for crude oil prices. Should the period of uncertainty in financial markets subside crude oil prices could test the psychological $100 level.
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 stochastiscs 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
Like many of the EUR crosses the EUR/JPY collapsed below its recent consolidation pattern. Forex traders should eye the 104.75 level from the October low. A break here would open the door to the 100.75 low of September. Resistance is found back at the previously broken support line from the consolidation at 106.70.
|03:45||JPY||30-y Bond Auction||1.62|4.4||*||-|
|06:00||JPY||Prelim Machine Tool Orders||y/y||8.4%||-||-|
|07:45||EUR||French Industrial Production||m/m||-0.5%||0.2%||-|
|09:00||EUR||Italian Industrial Production||m/m||0.2%||0.3%||-|
|15:00||GBP||NIESR GDP Estimate||0.7%||*||-|
|23:30||AUD||Westpac Consumer Sentiment||1.9%||*||-|
|23:50||JPY||Core Machinery Orders||m/m||-2.1%||0.9%||-|