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Euro Prepares for ECB Rate Decision – The Options and Outcomes

Euro Prepares for ECB Rate Decision – The Options and Outcomes

2012-08-02 03:38:00
John Kicklighter, Chief Strategist
Share:
  • Euro Prepares for ECB Rate Decision – The Options and Outcomes
  • Dollar Rallies after Fed Holds, Still Falling Short of a Clear Trend
  • British Pound Exposed to both the BoE and ECB Rate Decisions
  • Swiss Franc: SNB’s EURCHF Fight Could Find More Pressure Thursday
  • Japanese Yen: Finance Minister Azumi Says Only He Can Intervene
  • Australian Dollar Slides as Stimulus Hopes Fade
  • Gold Drops after Fed Confirms QE3 Not on Tap

Euro Prepares for ECB Rate Decision – The Options and Outcomes

The Euro took a tumble Wednesday after the Fed disappointed and increased the pressure on the ECB. If expectations for an expansion on US stimulus efforts (on dubious evidence) left the markets empty handed, will its European counterpart follow a similar path? And, if the ECB doesn’t offer its support; what do we have to reassure on financial stability and risk appetite? Looking back to the commentary and conjecture that lead to the Euro and risk appetite surge at the end of last week, we should note that ECB President Draghi’s vows to do whatever necessary to protect the currency isn’t any more remarkable than what any other official has said. Furthermore, the proposals that the market has attributed to the policy maker (reactive the SMP, LTRO 3, rate cut and support a bank license) aren’t structural fixes so much as short-term band aids.

In terms of the probable policy moves for the central bank to make, a rate cut would be easiest for the group to fulfill. However, this would not materially support financial health nor growth (we have seen this to be the case with countless others), and they just cut the benchmark last week. If this is all that is pursued, it would have lower the euro’s yield, fall short of market support and remind the market of limited options for the policy authority. Even the more speculative-friendly programs that expand the balance sheet could face trouble if the market holds its skeptical tone. If the masses realize that nearly all of the viable options for the central bank don’t answer the underlying problem, the ‘buy time’ bounce may be simply forgone. All of this taken into account, we should be cautious about expecting a big euro drop. This past session, Greece voted on €11.5 billion in budget cuts and Spain has delayed its stress test announcements. Perhaps the fear drive itself can be delayed.

Dollar Rallies after Fed Holds, Still Falling Short of a Clear Trend

The dollar posted its biggest rally in nearly six weeks Wednesday after the Federal Reserve announced that it wouldn’t offer additional support to the US economy and financial markets via fresh stimulus. Easing fears that the central bank would further devalue its currency by inflating the money supply wasn’t the most influential aspect of this event however. The negative impact on pumped up investor confidence in more support carried the greatest weight. Looking at the dollar’s performance, the Dow Jones FXCM Dollar Index (ticker =USDollar) posted a 0.57 percent advance as the currency rose individually against all of its major counterparts (including the yen, which has tended to outperform in regular risk aversion moves). For risk trends, the impact was less than remarkable. While the S&P 500 technically retreated for a third consecutive day, it was the most reserved three-day decline (10.83 points) since January 10, 2011. Something is keeping sentiment propped up: ECB hopes.

Heading into the FOMC rate decision this past session, both the risk gains and dollar losses through the end of last week were still holding fast. For market participants there was a clear possibility that the world’s largest central bank could add to its ongoing effort to stabilize financial markets and further bolster economic activity. That said, there was some disarming of the high level speculation for a massive QE3-like program before the actual release as calmer heads started processing more realistic outcomes. As such, when the Fed made it clear that they were not introducing another massive rescue program (they didn’t even extend their guidance for holding rates at their exceptionally low levels beyond the ‘late-2014’ projection), the subsequent disappointment wasn’t as severe as it could have been. Looking at the fundamentals behind the market, a hold was arguably the most reasonable outcome: growth cooled in data last week, but it wasn’t showing recession; financial markets and volatility are stable; and they have voiced concern about diminishing returns from successive rescue efforts. The market may have been better prepared for this outcome, but it is still a disappointment to risk. There is an opportunity for backtracking in late August at the Jackson Hole Economic Symposium or early September rate decision (with forecasts), but that is a ways off. Near term, if the ECB doesn’t deliver

British Pound Exposed to both the BoE and ECB Rate Decisions

According to BoE Governor King, Chancellor of the Exchequer Osborne and Prime Minister Cameron, the greatest threat to the UK is the Eurozone crisis. No reason to doubt their fears. That makes the ECB rate decision an important event for the sterling. The BoE decision, however, will also carry weight. The MPC reportedly heard some arguments for rate cuts last go around. Will the catch traction now?

Swiss Franc: SNB’s EURCHF Fight Could Find More Pressure Thursday

We learned just a day ago that the SNB’s effort to keep its currency from appreciating beyond the 1.2000 line (in the EURCHF pair) has led the central bank to increase its reserves to 62 percent of GDP with Euro holdings accounting for an astounding 60 percent of that pool. In other words, their fight is getting expensive and they are struggling to diversify. That said, the SNB no doubt is concerned about the ECB’s next move.

Japanese Yen: Finance Minister Azumi Says Only He Can Intervene

Japanese Finance Minister Azumi made it clear that he believed (contradictory to one of the new BoJ members) that the BoJ should not and cannot buy foreign government bonds in testimony to Parliament. He noted that efforts to act on the yen exchange rate rested with the Finance Ministry alone. That may be the case, but Azumi has clearly struggled to win reprieve on the currency. This just further reduces the options.

Australian Dollar Slides as Stimulus Hopes Fade

Stimulus is important when yields are low and fading. In the elemental balance between risk and reward, the latter is fading for the Australian dollar. If we can ensure that risk can remain extremely low, though, carry traders may be willing to overlook this concern and keep with the high-yield currency. Yet, with the Fed’s refusal to offer more support, confidence is chipping away. Will the ECB offer more?

Gold Drops after Fed Confirms QE3 Not on Tap

Why is gold falling at the same time that traditional risk measures are sliding? Isn’t the precious metal a safe haven? It is indeed a source of safety, but not in the traditional sense. Gold is more appropriately a source of safety when looking to avoid the devaluation of assets via financial manipulation by policymakers. That said, no QE3 from the Fed, means no need to diversify into an expensive commodity.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Monetary Base (YoY)

-

5.9%

The aggregate of circulating Banknotes, coins, and Current Acct Bal.

23:50

JPY

Japan Buying Foreign Bonds (Yen)

-

¥164.2B

Japanese buying foreign stock peaked on the June 1st reading.

23:50

JPY

Japan Buying Foreign Stocks (Yen)

-

-¥22.4B

23:50

JPY

Foreign Buying Japan Bonds (Yen)

-

-¥18.8B

23:50

JPY

Foreign Buying Japan Stocks (Yen)

-

-¥42.1B

01:30

AUD

Trade Balance (Australian dollar)

-375M

-285M

RBA July minutes noted weaker global demand.

01:30

AUD

Retail Sales s.a. (MoM)

0.7%

0.5%

Retail sales have grown for five consecutive months.

01:30

AUD

Retail Sales Ex Inflation(QoQ)

0.9%

1.8%

07:15

CHF

Retail Sales (Real) (YoY)

-

6.2%

Retail sales continue to hold up throughout the Euro-Zone Crisis.

07:30

CHF

SVME-Purchasing Managers Index

47.0

48.1

Recent trend of lower trade in EU countries.

08:30

GBP

Purchasing Manager Index Construction

48.7

48.2

July release sited sharp declines in construction output.

09:00

EUR

Euro-Zone Producer Price Index (MoM)

-0.4%

-0.5%

Trend of lower inflationary pressure.

09:00

EUR

Euro-Zone Producer Price Index (YoY)

1.9%

2.3%

11:00

GBP

BOE Asset Purchase Target

375B

375B

Overnight rate swaps have priced in a 20% chance of a 25bp rate cut.

11:00

GBP

Bank of England Rate Decision

0.5%

0.5%

11:30

USD

Challenger Job Cuts (YoY)

-

-9.4%

Job Cuts rose 67% in May.

11:45

EUR

European Central Bank Rate Decision

0.75%

0.75%

82.5% Implied chance of a 25bp rate cut.

12:00

USD

RBC Consumer Outlook Index

-

47

43% of respondents are less comfortable with making a major purchase than then they were 6 mths ago.

12:30

USD

Initial Jobless Claims

370K

353K

Non-Farm Payroll data comes out on Friday Aug.

12:30

USD

Continuing Claims

3285K

3287K

13:45

USD

ISM New York

-

49.7

Second month of contraction in manf.

14:00

USD

Factory Orders

0.4%

0.7%

Indicator of business confidence.

GMT

Currency

Upcoming Events & Speeches

01:30

JPY

BOJ Board Member Morimoto Speech and Press Conference

12:30

EUR

ECB President Mario Draghi Holds Press Conference

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USDMXN

USDTRY

USDZAR

USDHKD

USDSGD

Currency

USDSEK

USDDKK

USDNOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

15.0000

1.9000

8.5800

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

13.3856

1.8074

8.3425

7.7550

1.2468

Spot

6.7931

6.0833

6.0348

Support 1

12.5000

1.6500

6.5575

7.7490

1.2000

Support 1

6.0800

5.1050

5.3040

Support 2

11.5200

1.5725

6.4295

7.7450

1.1800

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.2376

1.5667

79.15

0.9935

1.0128

1.0591

0.8182

97.34

123.35

Resist. 2

1.2341

1.5633

78.99

0.9906

1.0109

1.0561

0.8157

97.01

122.99

Resist. 1

1.2305

1.5599

78.82

0.9877

1.0089

1.0531

0.8133

96.69

122.63

Spot

1.2235

1.5531

78.49

0.9819

1.0049

1.0471

0.8084

96.03

121.90

Support 1

1.2165

1.5463

78.16

0.9761

1.0009

1.0411

0.8035

95.37

121.17

Support 2

1.2129

1.5429

77.99

0.9732

0.9989

1.0381

0.8011

95.05

120.81

Support 3

1.2094

1.5395

77.83

0.9703

0.9970

1.0351

0.7986

94.72

120.45

v

--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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