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Euro Can Reverse Course, Rally if ECB Comes Up Short

Euro Can Reverse Course, Rally if ECB Comes Up Short

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar Breaks Pace on the Same Day Risk Slumps
  • Euro Can Reverse Course, Rally if ECB Comes Up Short
  • Japanese Yen: USDJPY Biggest Drop in 6 Months a Signal?

Dollar Breaks Pace on the Same Day Risk Slumps

It is unusual that on a day where risk aversion is prominent enough that it drives global equities lower and leverages volatility across asset classes that the safe haven Dollar would end the day lower. Yet, the greenback has pushed its run so far that a breather is necessary. That is especially true when there is key event risk ahead. Taking stock of the situation, the currency has already pressed its position. Following its best quarter in six years, matching its longest series of daily gains (7) in the same period and still projecting its longest string of weekly gains (11) on record; the Dollar move is mature. Concerns over its persistence leads to indecision as major event risk approaches. The ECB’s rate decision calls a critical contrast to the Fed’s hawkish shift and Friday ‘s NFPs will further shape rate forecasts. In fact, through Wednesday, the USD was up against most counterparts as traders braced themselves for what lies ahead. Yet, the broader downshift in speculative positioning generated more heat for Yen crosses and thereby USDJPY. This outsized move overshadowed the indecision elsewhere.

Euro Can Reverse Course, Rally if ECB Comes Up Short

In the past 5 months, EURUSD has dropped over 1,400 pips from peak to trough. And, much of this move can be attributed to the ECB. As the exchange rate advanced towards 1.4000 and the market showed little sign of relenting under natural market conditions, the central bank moved in to curb the tide. At first President Mario Draghi’s interest in the exchange rate was obtuse with a few offhand comments about its high level. That concern, however, quickly progressed into action when the official linked monetary policy to the currency’s level. Since the link was made, the Euro has been in retreat. With an aim to ease the Euro’s influence on deflation and to help stimulus growth, the group further escalated its effort by lowering rates in June and August (pushing the deposit rate to negative), introducing targeted LTRO loans, halting sterilization of bonds they already held and a range of additional moves. However, on a playing field where other central banks are employing QE (quantitative easing), the market’s real interest was in the ECB’s vow to start an asset purchase program.

At last month’s meeting, Draghi finally confirmed what speculators had expected for months – that they would adopt a stimulus program. He stated that details for the effort would come ‘after the October meeting’. As such, the market is focused on today’s policy gathering in anticipation of a QE course that stands up to what the Fed and BoJ have themselves offered. And, expectations are high. With Draghi already setting out an objective to increase the balance sheet back up to the level it was at in early 2012 (an increase anywhere between €600 billion and €1 trillion), traders have projected a massive effort. Could their expectations be set too high? Given the hefty depreciation of the currency leading up to the event, it is far easier to ‘disappoint’ than it is to ‘impress’. That could turn the Euro and swamp capital markets.

Japanese Yen: USDJPY Biggest Drop in 6 Months a Signal?

Notable changes in key fundamental outlets for the Yen crosses are starting to catch up to the market. We have seen exchange rates long ago diverge from underlying yield expectations for these once-prominent carry trades and the Bank of Japan back away from an upgrade to its stimulus efforts. More recently, the government and business groups have started to up the ante by suggesting the currency’s rapid depreciation was causing economic imbalance. However, these are all ‘passive’ motivators. They remove impetus for further advance for USDJPY and its counterparts. The impetus for an actual change in direction comes from risk trends. With this past session’s Nikkei 225 drop leading global capital markets, the tide recedes and exposes these expensive carry trades. The question is whether risk aversion is here to stay.

British Pound Slips as Manufacturing Weakens, BoE Member Enters Currency Debate

As the focus for the British Pound shifts back to the outlook for interest rate policy, event risk has set an unfavorable tone. This past session, the September manufacturing PMI eased further to a 17-month low, significantly moderating the economic outlook which has been instrumental in bringing forward expectations for the BoE’s first rate hike. Another concern was BoE member Kristin Forbes suggestion that the currency’s level could be masking inflation. She was careful not to insinuate a fair value for the Pound, but a market hypersensitive to this read into it.

Australian Dollar: Not a Good Time to Mount a Recovery

Both the Australian and New Zealand Dollars have pushed for a rebound through early morning trade Thursday. After their respective declines these past weeks, it seems like a correction could be easily facilitated by speculative interests. However, sentiment bearings may be exactly why a rebound effort may be an exceptional risk. If risk aversion is at hand, these carry trades are not in good standing.

Emerging Markets Collapse Further on Heavy Volume

With a drop in global equities, it is not surprising to see riskier Emerging Markets suffering. The MSCI ETF dropped another 2.1 percent this past session to six-month lows on the heaviest volume (109 million shares) since April 15. Amongst the worst-hit currencies, the Ruble cooled its heels with only a 0.2 percent drop (despite capital control speculation). It was the Brazilian Real that was headlining a 1.4 percent drop.

Gold In a Breakout Pattern but Can Risk Trends, ECB Deliver?

We find gold once again wedged between tight technical congestion and heavy, impending event risk. That is the kind of combination that often ends in breaks. One of the metal’s key roles is a viable counterpart to traditional fiat that is distorted by monetary policy. A large stimulus program for the ECB could make gold look appealing. Then again, the dollar has been a ready siphon for outflows for other currencies.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Australia Trade Balance (A$) (AUG)

-800M

-1075M

A key measure of China impact

08:30

GBP

Markit/CIPS UK Construction PMI (SEP)

63.5

64

Housing / construction has been a key driver of growth and confidence

09:00

EUR

Euro-Zone Producer Price Index (MoM)

-0.1%

-0.1%

Upstream inflation figures may be overlooked due to ECB but key

09:00

EUR

Euro-Zone Producer Price Index (YoY)

-1.2

-1.1%

11:30

USD

Challenger Job Cuts (YoY)

-20.7%

Another lead in to Friday NFPs

11:30

USD

RBC Consumer Outlook Index (OCT)

52.4

Sep’s reading was a 7 year high

11:45

EUR

European Central Bank Rate Decision

0.05%

0.05%

No changes are expected to benchmark rates after last month’s easing, but asset purchase program details expected

11:45

EUR

ECB Marginal Lending Facility

0.30%

0.30%

11:45

EUR

ECB Deposit Facility Rate

-0.2%

-0.2%

12:30

USD

Initial Jobless Claims (Sep 27)

297K

293K

The ISM manufacturing survey generated considerable buzz in an active market, but labor data focus for Friday may curb excitement on these economic readings

12:30

USD

Continuing Claims (Sep 20)

2425K

2439K

13:45

USD

ISM New York (SEP)

57.1

14:00

USD

Factory Orders (AUG)

-9.5

1.05%

23:30

AUD

AiG Performance of Service Index (SEP)

49.4

Economic data has cooled sharply, these are critical areas

01:00

AUD

HIA New Home Sales (MoM) (AUG)

-5.7%

01:00

CNY

Non-manufacturing PMI (SEP)

54.4

Mfg disappointed, will services?

01:35

JPY

Markit Composite PMI (SEP)

50.8

Abe has grown more vocal about economic health concerns

01:35

JPY

Markit Services PMI (SEP)

49.9

GMT

Currency

Upcoming Events & Speeches

05:15

AUD

RBA Annual Report

08:30

GBP

BOE's Financial Policy Committee Publishes Statement

10:00

EUR

ECB Announces 3 year Repayment

12:30

EUR

ECB's Draghi Speaks at Rate Decision Press Conference

16:00

USD

Fed's Dudley Speaks in New York

17:00

USD

Fed's Lockhart Speaks on Employment Insurance in Atlanta

00:00

USD

Fed's Bullard to Speak On Economy in Tupelo, Mississippi

SUPPORT AND RESISTANCE LEVELS

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

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

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

14.0100

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.7400

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.5135

Spot

13.3930

2.2618

11.2060

7.7538

1.2697

Spot

7.2098

5.8372

6.3980

Support 1

13.0300

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

6.3145

Support 2

12.8350

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.2715

6.1300

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.2850

1.6421

109.56

0.9547

1.1181

0.8873

0.8008

139.63

1245.51

Res 2

1.2825

1.6394

109.33

0.9526

1.1159

0.8851

0.7987

139.35

1239.83

Res 1

1.2801

1.6367

109.10

0.9506

1.1137

0.8830

0.7966

139.08

1234.16

Spot

1.2752

1.6314

108.64

0.9466

1.1093

0.8786

0.7925

138.53

1222.81

Supp 1

1.2703

1.6261

108.18

0.9426

1.1049

0.8742

0.7884

137.98

1211.46

Supp 2

1.2679

1.6234

107.95

0.9406

1.1027

0.8721

0.7863

137.71

1205.79

Supp 3

1.2654

1.6207

107.72

0.9385

1.1005

0.8699

0.7842

137.43

1200.11

v

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

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

Sign up for John’s email distribution list, here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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