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Wednesday, 21 Dec 2011

SEK Strengthens Despite Interest Rate Cut

The SEK was up after the Riksbank lowered interest rates to 1.75% from 2.00%. There are two explanations for this counterintuitive move in the SEK. Firstly, the Swedish central bank delivered on the expected 25 bp of monetary policy easing while refraining from a larger policy change. Secondly, risk sentiment improved following a strong Ifo survey and a successful Spanish bond auction.

EUR/USDGBP/USDUSD/JPYUSD/CHFAUD/USDEUR/GBP
Daily Trenddowndowndownupnodown
Weekly Trenddowndowndownupdowndown
Resistance1.35501.616580.200.97401.05500.8670
1.32301.586079.50 0.95501.04500.8450
1.31401.577578.300.93401.03400.8400
Support1.30001.555077.50 0.91801.00500.8350
1.28701.542076.550.9065 0.98600.8280
1.26651.527075.560.87600.98000.8140

Economic News

SEK - SEK Strengthens Despite Interest Rate Cut

The SEK was up after the Riksbank lowered interest rates to 1.75% from 2.00%. There are two explanations for this counterintuitive move in the SEK. Firstly, the Swedish central bank delivered on the expected 25 bp of monetary policy easing while refraining from a larger policy change. Secondly, risk sentiment improved following a strong Ifo survey and a successful Spanish bond auction.

The Riksbank also signaled its intention of additional monetary policy easing as it revised lower its repo-rate path. The Swedish central bank now expects to lower interest rates again in the beginning of next near. 2011 GDP estimates were moved up while 2012 forecasted GDP was revised lower to 1.3% from 1.5%. Inflation forecasts were also lower for 2012, down to 1.5% from 1.9%.

As the SEK is a high beta currency, the Swedish krona rises when risk sentiment improves and falls when risk comes off the table. Yesterday's better than expected German Ifo confidence survey supported the risk on trade, as did a successful Spanish T-bill auction.

While the Riksbank delivered on the 25 bp, we did not appreciate the market may have been pricing in 50 bp of rate cuts which was carried out last week by the Norges Bank. Thus traders were quick to capitalize on the “less-dovish” Riksbank. Also the USD/SEK failure at the 7.00 level and the subsequent formation of the double top reversal pattern may have been the giveaway. Support is now found at the December low of 6.70.

EUR - EUR Jumps Following Successful Spanish Debt Auction

Higher yielding currencies such as the EUR, GBP, and AUD began to recover after a better than expected German Ifo confidence survey supported risk sentiment. A Spanish T-bill auction that was oversubscribed also had traders hitting the bid for the EUR. This was Spain's last debt auction of the year and comes on the heels of last week's successful auction. Spanish 10-year yields are down sharply from one week ago.

There is talk surrounding today's Long Term Refinancing Operations (LTRO) from the ECB which explains the pick-up in demand for EU sovereign debt. Analysts are increasingly optimistic for the amount banks will draw from the LTRO tool which was announced during the last ECB meeting. The wave of ECB liquidity could help to relieve the USD funding pressures that have plagued European banks for the past 3-months. Banks will be allowed to borrow as much as they want from the ECB for 3-years using enhanced collateral rules. There is talk of a potential draw between EUR 300-500 bn. The greater the draw and the EUR could see additional support. EUR/USD resistance is found at the October 4th low of 1.3140. The rising support line comes in at 1.3015 followed by the yearly low of 1.2870.

JPY - BoJ Interest Rate Decision

The USD/JPY continues to trade in a tight range prior to the BoJ interest rate decision. Today the BoJ is not expected to adjust rates or expand its balance sheet.

Japanese Finance Minister Azumi confirmed the government will increase its currency market intervention capabilities by JPY 30 trn to JPY 195 trn. This shows the Japanese have not become complacent to a strong JPY and will likely continue to intervene in the FX markets as the need arises. There is resistance for the USD/JPY at 78.30 from the 2007 downtrend. Support comes in at the December 8th low of 77.15.

Copper - Copper Prices Push Lower

Copper prices have struggled to recover from their lows and are once again testing the rising support line from the October and December lows. The risk off environment has continued as the European debt crisis drags on. Also weighing on the price of copper has been a slowdown in China. Recent PMI surveys have hinted at declining growth in the economic juggernaut which would likely dampen demand for the metal. According to the most recent CFTC Commitment of Traders report speculators are betting on a continued decline in copper prices. A break of the previously mentioned support line and copper prices could find support at $3.00.

Technical News

EUR/USD

On a weekly basis the EUR/USD broke some important technical barriers, closing below the rising trend line from the January and October lows. The weekly close 1.3045 was also in-line with the 61% Fibonacci retracement from the 2010-2011 bullish trend. While weekly stochastics are currently oversold the monthly stochastics may have room to run lower. The January low of 1.2870 is the near-term support with additional support coming in at 1.2665 from the monthly chart off of the 2008 and 2010 lows. Resistance is back at 1.3140 and the 20-day moving average of 1.3275, followed by the December high of 1.3550.

GBP/USD

Sterling has consistently been sold at previous resistance levels and with falling weekly and monthly stochastics this strategy could remain intact. Initial support is found at Friday's high of 1.5560 and the pair may have scope back to the range between the 55-day moving average at 1.5740 and the late November high of 1.5775. Any rally could be capped at 1.5890 from the falling trend line off of the August and October highs. The test for sterling shorts will come at the October low of 1.5270. A break here may find support at the trend line stemming from the January 2009 low which is found at 1.5100.

USD/JPY

The USD/JPY is encroaching on its trend line from the 2007 high which comes in at 78.30. Weekly and monthly stocahstics are both moving higher and a break above the trend would expose the post-intervention high of 79.50 and the August high of 80.20. A failure to make a significant close above the trend line could have the USD/JPY testing the December low of 77.50 and the November low of 76.55.

USD/CHF

Last week's break above the 0.9330 resistance opens the door to this year's high of 0.9782 as well as the December high of 1.0065. The falling trend line from the 2003 trend line comes in at 1.1165 and makes for a long term resistance level. To the downside 0.9330 will now act as a support followed by the late November low of 0.9065 and the 200-day moving average at 0.8925.

The Wild Card

EUR/CHF

The EUR/CHF is slowly slipping below its 200-day moving average at 1.2190. A close below this technical level and forex traders should eye the November low of 1.2230. Resistance comes in at the November 30th low of 1.2225.

Current Time: 07/29 04:12 GMT
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