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Risk-Appetite Supported as German Court Declines Injunction on ECB

Risk-Appetite Supported as German Court Declines Injunction on ECB

2012-09-11 11:05:00
Christopher Vecchio, CFA, Senior Strategist

By no means is the Euro leading this morning although it remains bolstered by a few key facts: despite chatter from both the Italian and Spanish prime ministers that suggest neither country will be agreeing to the European Central Bank’s bond-buying scheme due to the conditionality, bond yields on the shorter-end of the curve haven’t reacted violently, and instead have only leaked higher; and the German Constitutional Court has eased some concerns over the ECB’s scheme by denying an injunction filed against the ECB’s scheme yesterday.

Nevertheless, the German Constitutional Court will decide on the legality of the European Stability Mechanism (ESM) tomorrow, in what is expected to be a highly contentious decision. The Court is expected to ratify the decision, but not with a pure “YES” stamp of approval; instead, like all other measures with German involvement, a heavy helping of conditionality is to be expected. In turn, if the Court believes that the federal government (Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble) is overreaching its bounds (by abusing the Bundestag’s and Bundesrat’s legal right to control budget outlays), then it is likely that Germany will be forced to curb its charge forward as the head of Europe’s bailout fund (ultimately, saving Europe from a fiscal standpoint lays with Germany).

Taking a look at credit, peripheral European bond yields are edging up, continuing the move from yesterday after Italian Prime Minister Mario Draghi’s commentary about the country avoiding participation in the ECB bond-buying scheme. The Italian 2-year note yield has increased to 2.330% (+8.7-bps) while the Spanish 2-year note yield has increased to 2.800% (+6.5-bps). Similarly, the Italian 10-year note yield has increased to 5.128% (-3.3-bps) while the Spanish 10-year note yield has increased to 5.666% (+2.4-bps); higher yields imply lower prices.


NZD: +0.54%






GBP: +0.16%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.29% (-1.15% past 5-days)


Risk-Appetite_Support_as_German_Court_Declines_Injunction_on_ECB_body_x0000_i1029.png, Risk-Appetite Supported as German Court Declines Injunction on ECB

Another quiet day on the North American side of the economic docket, with only two releases due that could generate volatility ahead of the US cash equity open. At 08:15 EDT / 12:15 GMT, the CAD Housing Starts (AUG) will be released and the report is expected to show jobs growth above a monthly rate of +200.0K for the ninth consecutive month. At 08:30 EDT / 12:30 GMT, the USD Trade Balance (JUL) is due, and the stronger US Dollar during the first month of the third quarter, alongside declining consumption in Asian and Europe, are expected to have widened the deficit.


Risk-Appetite_Support_as_German_Court_Declines_Injunction_on_ECB_body_Picture_2.png, Risk-Appetite Supported as German Court Declines Injunction on ECB

BB represents Bollinger Bands ®

EURUSD: Little has changed over the past 24-hours: “The EURUSD made a huge technical breakthrough on Friday by shattering a yearlong descending trendline off of the August 2011 and October 2011 highs. This now marks the potential for a long-term bottom at the 1.2040/45 low. Additionally, while our bias for a move towards 1.1500 by November 1 is negated, a weekly close back within the channel – back below 1.2620/35 (former yearly low set in January) – would suggest a false breakout has occurred. Near-term resistance comes in at 1.2820/25 (late-May swing highs) and 1.2980/1.3000. Support comes in at 1.2740/50, 1.2620/35, 1.2500/10, and 1.2460/80.”

Risk-Appetite_Support_as_German_Court_Declines_Injunction_on_ECB_body_Picture_4.png, Risk-Appetite Supported as German Court Declines Injunction on ECB

USDJPY: The sell-off continues with price holding below the 78.10/20 level, with touches below 78.00 coming today. Nevertheless, 78.60 remains our line in the sand for bullish/bearish price action: a daily close above 78.60 suggests a move back towards 79.15/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs); a daily close below 78.60 keeps 78.10/20 and 77.90 in focus, while penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.

Risk-Appetite_Support_as_German_Court_Declines_Injunction_on_ECB_body_Picture_3.png, Risk-Appetite Supported as German Court Declines Injunction on ECB

GBPUSD: The GBPUSD has started trading higher, breaking last week’s high suggesting that the British Pound’s trajectory is very much upwards for September (based on opening ranges). As such, our opinion holds: “As long as price on the daily chart is supported by 1.5930/40, there’s reason to believe that a run up to 1.6120/40 is possible during September. Above 1.6120/40, the former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus; this would also represent a break of the descending trendline off of the April 2011 and August 2011 highs. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.”

Risk-Appetite_Support_as_German_Court_Declines_Injunction_on_ECB_body_Picture_1.png, Risk-Appetite Supported as German Court Declines Injunction on ECB

AUDUSD: The AUDUSD is back on the up and up, testing 1.0400, but falling short of the highs set on Friday. As such, interim resistance comes in at 1.0400 (September high), 1.0410/20 (mid-August swing lows), and 1.0435/45 (mid-July and early-August swings). The picture is clear: there’s a lot of significant confluence (based on former support/resistance levels) in the airspace overhead. A breakdown eyes 1.0275/1.0300, 1.0210/25, and 1.0160/75 (weekly low).

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail

Follow him on Twitter at @CVecchioFX

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