BOE Minutes Produce More Hawkish Result; But No Real Policy Change
Currencies have managed to stabilize and regain their footing after getting obliterated in early Tuesday trade on the back of some elevated risk concerns and country specific setbacks. The biggest setback of all was the earthquake in New Zealand, with the New Zealand Dollar dropping by over 2% on the day against the buck and only managing to consolidate its losses when other markets began to recover in North American trade. RBNZ Governor Bollard was out on the wires on Wednesday reassuring locals that the central bank was monitoring financial markets to ensure stability and that the central bank was ready and able to meet any requirements for cash by the banks. Market chatter of an emergency meeting to lower rates in response to the earthquake proved unsubstantiated to this point.
Relative Performance Versus USD Wednesday (As of 12:30GMT)
Meanwhile, the Euro has put in a most impressive recovery rally after totally negating a near 200 point drop in a matter of hours to once again threaten a break of some key range resistance at 1.3745. The rally was initially brought on by some hawkish ECB Mersch comments, who warned that the ECB could be looking to shift to a more restrictive policy going forward. The Euro has also been able to shrug off lower global equities and ongoing geopolitical concerns with the violence in North Africa seemingly taking a backseat for now. Libya has most recently declared force majeure on oil exports of 1.5M barrels a day. However, markets have found comfort in the fact that OPEC would be willing to boost oil production if Libya’s oil exports were to actually stop.
Elsewhere, the Bank of England minutes released showed an overall 5-3-1 split among monetary policy members with Dale joining Sentance and Weale in calling for an immediate rate hike (on the proposition for rates alone the vote was 6-3 in favor of leaving rates on hold). The Minutes were definitely more on the hawkish side and Sentance even raised his call to a 50bp hike from 25bp previously. Adam Posen the ultra dove maintained his vote for a 50 billion pound extension to the central banks’ asset purchase plan. The shift that is taking place on the MPC reveals a desire by the Bank of England to gradually move towards a less accommodative stance on monetary policy, but at the end of the day, we have still seen no official shift in policy despite the change in vote. The pound caught an initial bid after the more hawkish minutes but was unable to make an assault on key range highs at 1.6300 in European trade. We have a sell order in place should Cable break above 1.6300 (see below).
Other data this morning failed to materially effect price action with French and Italian CPI data coming in slightly softer than forecast, Swiss producer & import prices meeting consensus forecasts and Euro-zone industrial new orders coming in much better than estimates. In the UK, Loans for House Purchase missed expectations, but a healthy upward revision to December’s numbers mitigated any negative reaction.
Looking ahead, US Existing Home Sales (-1.1% expected) at 15:00GMT is the only important release in the North American session. There are however two speeches to watch carefully, with Kanasas City Fed’s Hoenig and Fed’s Plosser speaking on the topic of the economy and the economic outlook at 17:30GMT and 18:30GMT respectively. US equities have recovered and are now pointing to a higher open after notching up the biggest one-day loss in 2011 on Tuesday. Both oil and gold are well bid going into the North American session extending hefty gains from the previous trading day.
EUR/USD:The sharp upside reversal on Tuesday certainly threatens short-term bearish prospects, with the market now looking to establish back above 1.3700. Key resistance comes in by 1.3745 and a break and close above this level will completely negate bearish outlook and open the door for a more significant rally over the coming sessions. However, inability to establish above 1.3700, will once again put the focus back on the downside and expose a retest of 1.3425 further down. In the interim, we remain sidelined and will wait for a clearer signal.
USD/JPY: The market continues to remain extremely well bid on dips, with the latest surge back above 83.00 really encouraging longer-term recovery prospects and opening the door for a potential break of key topside resistance by 84.50 over the coming days. Longer-term cyclical studies certainly suggest that the market could be poised for a major bullish reversal and we would look for a break and weekly close back above 84.50 to help confirm outlook. Any dips from here should be well supported above 82.00 on a close basis, while only a break and close back below 82.00 would concern.
USD/CHF: The market has been in the process of pulling back after stalling out ahead of key short-term resistance by 0.9785 in the previous week. Still we see any additional declines well propped above 0.9300 (record lows) on a close basis and look for the market to once again be well supported on the current dips into the 0.9300’s. Ultimately, only a close below 0.9300 would concern, while back above 0.9500 should confirm bias and accelerate gains.
TRADE OF THE DAY
GBP/USD: Currencies are looking pretty stretched intraday and this market is one of the most bid on the day following a more hawkish than expected Bank of England Minutes. However, at the end of the day, we don’t see any real change to policy despite the change in the vote, and we would expect to see any rallies from the news to eventually be offered should they continue into North American trade. We are well aware of the key topside resistance by 1.6300 and have therefore placed our entry above the figure in the event that we see some stop hunting above the figure. If the level is taken out and stops are cleared above 1.6300, we don’t at that point see rallies extending much further and will then look to get involved. At that point, hourly studies will be well overbought and the ATR will have been exceeded by a significant margin. STRATEGY: SELL @1.6330 FOR AN OPEN OBJECTIVE; STOP 1.6430. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY.
Written by Joel Kruger, Technical Currency Strategist
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