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ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

2011-12-21 12:26:00
Joel Kruger, Technical Strategist
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  • ECB three-year LTRO larger than expected at Eur489B
  • Currencies subjected to wild intraday price action
  • EUR/AUD drops to fresh +20 year lows
  • More volatility expected in thin end of year trade; staying sidelined

A very wild European session of trade with volatility picking up substantially and reminding many just how dangerous end-of-year price action can be. Initially, the Euro and risk correlated currencies were well bid against the US Dollar, gradually pushing higher into the European open. The announcement of the larger than expected LTRO then accelerated these gains dramatically, with the Euro racing about 100 points higher on the news to trade just shy of 1.3200 barriers. However, what ensued was a classic case of “buy the rumor sell the fact”, with the Euro and currencies reversing sharply back to pre-LTRO levels and below on the realization that this expectation had now been met and the fact remained that there is still a great deal of stress and uncertainty priced in to the markets. While the upping of the ECB’s three-year loan auction to Eur489B was well above what many had been looking for, the message also only helped to reaffirm just how severe the current debt crisis really is.

Relative performance versus the USD on Wednesday (as of 12:00GMT)

  1. AUD +0.52%
  2. NZD +0.51%
  3. CAD +0.39%
  4. GBP +0.11%
  5. JPY +0.08%
  6. EUR +0.07%
  7. CHF -0.09%

Still, technically, from a short-term perspective, there is still potential in our opinion for additional gains in currencies into year end, with the US Dollar seen under mild pressure. As far as the Euro is concerned, we would not rule out the possibility for additional gains into the 1.3300 area, where the year began, before seeing renewed selling pressure into 2012. Most of the bigger players have left for holiday and what is left is a much lighter market that is full of temperamental, commitment phobic, disloyal short-term traders. This makes things all the more difficult on the strategy front and we recommend that the best trade is to stay put on the sidelines until the dust settles. Until then, we can continue to expect to see wild intraday price swings.

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_audichi.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

Moving on, one currency cross which stands out has been EUR/AUD, with this market breaking down into the 1.2900 area to trade to fresh +20 year lows. But this market has been very well supported on dips in recent months below 1.3000 and we will expect to see the same type of price action once again, with longer-term technical studies looking exhausted following an 80 big figure drop off since 2008. For the time being however, it is best to take to the sidelines and wait to see how things play out over the coming sessions. A clear drop below 1.2900 could very well expose record lows down in the 1.2500 area from 1.1989. Still, we continue to look for the establishment of some form of a longer-term bottom down below 1.3000 given the technical picture and fundamentals which warn of an intensification of the global crisis in China which should negatively influence the higher yielding Australian Dollar.

ECONOMIC CALENDAR

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_Picture_6.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

TECHNICAL OUTLOOK

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_eur.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

EUR/USD: The market has finally taken out the key October lows at 1.3145 to confirm a lower top by 1.3550 and open the next downside extension towards the 2011 lows from January at 1.2870. Daily studies are however looking a little stretched and at this point we could see some corrective action before the market resumes its downward trajectory. Look for any rallies to be well capped in the 1.3300 area from where the next lower top will be sought out.

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_jpy2.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_gbp2.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5400 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

ECB_LTRO_Larger_Than_Expected_Traders_Buy_Rumor_Sell_Fact_body_swiss1.png, ECB LTRO Larger Than Expected; Traders Buy Rumor, Sell Fact

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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