Aussie Rallies on Calm RBA; Euro Weakens on Growth Forecasts, LTRO News
ASIA/EUROPE FOREX NEWS WRAP
We now know where all of the major central banks stand: the Federal Reserve is looking to tighten policy; the Bank of Canada says a rate hike is “less imminent”; the Swiss National Bank is ready to raise the EURCHF floor to 1.2500 if necessary; a divided Bank of England will brush aside higher inflation to stoke growth; and the Reserve Bank of New Zealand is willing to intervene to ‘smooth the peaks’ in the Kiwi. Today, we learned both the European Central Banks and the Reserve Bank of Australia’s position: they will not exchange shots in the ‘currency war.’ Here’s why:
RBA Governor Glenn Stevens said that “there is a good deal of interest rate stimulus in the pipeline” to a parliamentary committee today, essentially undercutting rate cut hopes for the upcoming meeting in March. What would be the trigger for a move?- if the Australian Dollar became “seriously overvalued” – a condition that is not close to being met. If the inflation outlook is expected to improve, due to the “stimulus in the pipeline,” a high Aussie exchange rate could insult consumers from diminished purchasing power. So, the RBA is on the sidelines in the ‘currency war,’ and the Australian Dollar is the top performer on the day.
On the other hand, not only is the ECB refusing to weaken the Euro, the ECB continues to reign in its balance sheet. LTRO2 repayments came in today, at a clip of €61.1B as opposed to the €122.5B forecasted by Bloomberg News. While the disappointment has led to Euro weakness, it still represents a significant material drawdown in the ECB’s balance sheet, effectively a tightening of policy. Alongside the very weak European Union growth forecasts released earlier today, it’s evident that the ECB is stuck on the sidelines, if not by choice, but by necessity. A rate cut shouldn’t be ruled out in the 2Q’13 or 3Q’13, however.
Taking a look at European credit, peripheral yields have compressed despite the LTRO repayment data, yet the Euro remains lower on Friday. The Italian 2-year note yield has decreased to 1.676% (-1.8-bps) while the Spanish 2-year note yield has decreased to 2.510% (-0.3-bps). Likewise, the Italian 10-year note yield has decreased to 4.449% (-3.6-bps) while the Spanish 10-year note yield has decreased to 5.132% (-4.9-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:35 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.08% (+0.40% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “The move below 1.3280 has been swift, and while the initial thought was to look to buy weakness, it seems that there are two significant uptrends on the verge of breaking: the ascending trendline off of the December and January lows at 1.3240; and the ascending TL off of the July and November lows at 1.3190. Additionally, the weekly RSI uptrend since mid-July has broken lower. 1.3050/70 is support, followed by 1.3000 and 1.2870/90. Resistance is 1.3280/300.”
USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again.” Resistance comes in at 93.40/45 (monthly R1), 93.85 (weekly R1) and 94.00/10. Support comes in at 92.90/95 (weekly pivot), and 91.75/95 (weekly S1). Recent price action may be a top or a Bull Flag; waiting for confirmation above 95.00 or below 92.00.
GBPUSD: No change: “Selling persists on further bad data from the UK and dovish commentary from the BoE, setting up for a test of the significant June 1 low at 1.5265/70. With technical conditions extremely oversold on shorter-term timeframes (1H and 4H) and longer-term views moving to extremes as well, a rebound at such a significant level wouldn’t be surprising. Support comes in there and 1.5000. Resistance is 1.5425/50, 1.5560/80, and 1.5660/80. [A massive daily Hammer has formed] – it appears the rebound may be finding footing.”
AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension. Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.” Note: a potential Morning Star candlestick cluster – a bullish reversal pattern – may be forming on the daily chart.
S&P 500: No change: “The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality. The setback has started, with the S&P 500 reversing sharply off of 1530, and putting in a daily Bearish Key Reversal yesterday. Time to start looking lower. Support comes in at 1500 and 1475. Resistance is 1520 and 1530.”
GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”
--- Written by Christopher Vecchio, Currency Analyst
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