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Thursday, 8 Dec 2011
Waiting for the ECB Bazooka
ECB President Mario Draghi has hinted at his willingness to support European nations with additional bond purchases if European governments will move to restore investor confidence in the euro zone. But this announcement will likely only come following Friday's EU economic summit and a concrete commitment by European nations to reign in their debt and budget deficits.
USD - USD Driven by European Headlines
The USD is mixed as stress in Europe comes to a head over the next 2-days. There has been a lack of US economic data and therefore much of the movement in the G10 currencies have been coming on headlines from Europe. This scenario has played out over before with risky assets rising leading up to a European summit and the euphoria wearing off after the weekend. For examples of this type of price action investors may want to go back to July 21st and October 26th. Today we'll get weekly unemployment data but the numbers will likely be overlooked as the ECB press conference coincides with the data release.
The USD DXY index may be telling of what's to come. There appears to be a double top reversal pattern at 79.70 from the October 4th high and the November 25th high. The latest CFCT IMM data shows the USD DXY is at its longest positioning since the summer 2010. Therefore, the USD may be set for a reversal should Europe surprise the markets with some positive moves to shore up investor confidence by the end of this week.
EUR - An ECB Bazooka
EUR has been essentially trading on headlines and rumors for the past week. Yesterday was no exception with the Financial times story of a potential double bailout plan. The proposal to keep the EFSF when the ESM becomes active in mid-2012 was squashed by Germany. This combined with a larger turnout from banks for the ECB's euro swap from EUR to USD kept the EUR on its back foot during yesterday's trading. The swap is the first following last week's coordinated central bank move to increase USD liquidity.
Today's ECB meeting has a lot of expectations built into to it. A 25 bp cut in the ECB interest rate is anticipated as are additional liquidity measures. Volatility will likely taper off prior to Draghi's press conference. ECB President Mario Draghi has hinted at his willingness to support European nations with additional bond purchases if European governments will move to restore investor confidence in the euro zone. But this announcement will likely only come following Friday's EU economic summit. Only once Germany has secured an agreement to enforceable budget limits and suitable reforms from EU member nations would the ECB agree to unlimited bond purchases. The risk for the EUR is for Draghi not to support additional ECB moves to support the euro zone.
Then again, if the ECB saw a risk of deflation in the EU economy the ECB could step in with a form of quantitative easing (QE), affectively sidestepping the whole debate of blurring monetary policy and fiscal policy.
GBP - BoE Still Dovish but no Change Expected
The BoE meets today though this has gone largely unnoticed by many observers given the headlines coming from Europe. The BoE is expected to hold interest rates steady and in all likelihood will not increase its asset purchase facility. Yesterday manufacturing production was shown to have plummeted -0.7% during the month of October. Consensus forecasts were for a decline of only -0.1%. However, Monday's UK services PMI unexpectedly rose to 52.1 from 50.6. The contrasting data will most likely not stop the BoE from loosening monetary policy in the near term as the central bank forecasts a sharp drop in inflationary pressures. The EUR/GBP has support at 0.8515 from the mid-November consolidation followed by the November 10th low of 0.8485. Resistance is located at the November 22nd high of 0.8660 and 0.8750 at the 200-day moving average.
Crude Oil - Crude Oil Inventories Soar
The weekly crude oil inventories report from the US Energy Information Administration saw a sharp rise in the level of crude on hold. This did not stop crude oil prices from moving lower with US equities. Like most other commodities crude oil prices will likely be subject to events in Europe for its direction. Should Europe come to an agreement to shore up the fiscally strapped nations crude oil will likely move higher in-line with higher yielding assets such as equities and the AUD.
Looking at the charts the price of spot crude oil tested the rising trend line from the October and November lows which comes in today at $100. While the angle of the trend line is too sharp to maintain a dip to $95 would not jeopardize the bullish technical picture.
The weekly chart shows the pair is trading in a symmetrical triangle pattern with the resistance line falling from the May high and support line rising from the yearly low. The first support from this chart pattern comes in this week at 1.3200. A break here will likely open the door to not only the October low of 1.3145 but also1.3050 from the 61.8% Fibonacci retracement of the bullish move spanning 2010 to 2011. The January low of 1.2875 could contain the near-term price action. To the upside the November 18th high of 1.3610 is the initial resistance followed by the mid-November consolidation at 1.3860 where the 100-day moving average also lies. The top of the triangle pattern would likely contain any move higher near 1.4230-1.2350.
Last week cable found resistance at 1.5780, a level that has proven to be resistive in the past. Additional resistance is found at the October high of 1.6165. Monthly and weekly stochastics continue to move lower and as such the November low of 1.5435 is the initial support followed by the October low of 1.5270. The last bastion of support for the GBP/USD is found off of the rising trend line from the 2009 and 2010 lows which comes in at 1.0590.
The USD/JPY is encroaching on its long term trend line off of the 2007 high and comes in at 78.70. A break above this level is needed to confirm the recent price appreciation. Both weekly and monthly stochastics are moving higher so traders may look for additional resistance at 79.50 from the post intervention high. The 200-day moving average is also lurking just below this price. Should the pair fail at the long-term trend line the congestion between 77.50-77.60 may prove to be supportive while the all-time low near 75.60 stands out as the last support.
As weekly stochasttics have already turned lower the monthly stochastics are beginning to roll over. This is occurring after the pair looks to have failed to break above the 0.9330 resistance level. As such the pair has support at last week's low of 0.9065 followed by the November low of 0.8760 and the October low of 0.8565. A break above the 0.9330 resistance could spur gains towards this year's high of 0.9780.
The Wild Card
The technical picture for the AUD/NZD shows a triangle consolidation pattern from the November 18th high and the November 25th low. The initial resistance from the pattern is 1.3210 followed by 1.3380 off of the trend line from the yearly high. Forex traders should be aware that the breakout from this chart pattern typically goes in the direction of the trend but rule is not set in stone. Support is located at 1.3080 from the rising support line off of the November 25th low followed by the November 1st low of 1.2930.
|08:00||EUR||German Retail Sales||m/m||2.5%||-0.8%||-3.2%|
|08:45||EUR||French Consumer Spending||m/m||0.7%||-0.3%||-0.8%|
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||-|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|