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USD: history repeats itself?
Many analysts believe these anxious days the Fed is closer than ever to launch the third round of quantitative easing (QE3), a monetary measure where the government buys bonds for newly created money. The Fed Chairman Ben Bernanke has recently hinted the regulator could take further action if needed.
We propose you to have a look at the Wall Street Journal Dollar index in order to draw a parallel between summer 2010 and summer 2012. The point is that in June 2010 the greenback hit a 15-month high as the euro zone’s crisis was arising. In August the index declined steadily after Bernanke said the Fed is considering a second round of bond purchases among other options to support the US economy. QE2 was formally announced only in November, but the greenback has already hit the bottom: the easing was already priced in by the markets.
As for 2012, the index hit a 22-month high on July 24. It is plain that the situation in Europe has worsened in comparison to 2010. Bernanke has recently said that there are several options the Fed could consider taking if things get worse. One can expect the greenback the greenback to be sold off in anticipation of the program. However, if and when the program will be officially launched, the move will be priced in and the dollar will likely start a new uptrend.
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USD: Fed refrains from stimulus
The long-awaited decision of US central bank is finally out. The Federal Reserve didn’t announce additional stimulus. The Fed said in a statement it will provide additional accommodation as needed amid a slowing economy.
The policymakers kept the benchmark interest rate in the 0-0.25% range. As for other policies, Operation Twist remains in place till the year-end – the Fed is swapping $667 billion in short-term debt in its holdings for longer-term securities to cap borrowing costs.
EUR/USD fell to the minimum in almost a week. USD/JPY jumped by about 40 pips. AUD/USD lost almost 70 pips dropping from 4-month maximum.
BMO: “Anybody looking for even a mild outcome of monetary policy easing was disappointed. It continues to be like an absurdist play where we’re all waiting for the Fed to act on QE3 and it never arrives. Given the current state of the economy, there shouldn’t be an expectation the Fed is going to act on quantitative easing.”
Still many players continue expecting more action from the Fed.
RBS: “There’s more data coming that could give the Fed reason to act. This doesn’t necessarily take away from potential action in the future.”
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August 2: economy and currencies
The greenback soared against its major counterparts after the FOMC meeting results were released on Wednesday (the Fed refrained from easing, but said it is ready to undertake measures if needed). However, after the first shock the market took its course.
EUR/USD rose from American and Asian sessions’ minimum at $1.2217 where it fell due to the FOMC statement to the levels around $1.2255. The main events today are, with no doubts, the results of the ECB’s meeting at 11:45 GMT and Mario Draghi’s speech 45 minutes later which will either confirm or deny the pledge to “do whatever needed to save euro” which the central banker gave last week. While bracing yourself for the meeting, watch EU PPI at 09:00 GMT and Spanish 10-year bond auction in the afternoon. The nation’s 10-year yields were at 6.72% yesterday, down from the record maximum of 7.74% hit so far. Italian Prime Minister Mario Monti will meet Spanish PM Mariano Rajoy in Madrid – surely the leaders of the 2 troubled economies have much to discuss.
AUD/USD strengthens after positive Australian retail sales data (+1.0% in June vs. previous +0.8% and a consensus + 0.6%) and trade balance (0.01B trade surplus vs. forecasted and previous deficit). Yesterday the pair slid below $1.0475. NZD/USD trades on the upside, consolidating around the $0.8080 area after yesterday’s drop. However, gains in the Aussie and kiwi are tempered ahead of the ECB: market players fear that any ECB measures announced on today’s meeting to be enough to resolve the region’s debt crisis.
GBP/USD gains after yesterday’s sharp fall. On today’s meeting the BoE is not expected to do any monetary easing steps as the regulator waits to see if their stimulus expansion and new bank-funding plan will boost credit and help pull the UK out of a double-dip recession. The yen weakened against many of its counterparts after the IMF said it’s “moderately overvalued,” easing the way for Japan to try to weaken the currency to aid exporters.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2150, $1.2200, $1.2220, $1.2250, $1.2260, $1.2300
USD/JPY: 77.50, 78.10, 78.45, 78.50, 79.00
GBP/USD: $1.5600, $1.5610, $1.5650, $1.5680
EUR/GBP: 0.7795
EUR/CHF: 1.2025
AUD/USD: $1.0525, $1.0585
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AUD/USD: technical comments
AUD/USD gains after yesterday’s drop on FOMC results. The pair slid from a four-month high at $1.5051 (August 1 maximum) below the important support at $1.0475 (April 27 maximum, beginning of a sharp May decline), but now is moving on the upside. The pair still trades close to the upper boundary of the upward channel existing since mid-June. On the daily and H4 chart the pair trades above the up-directed 200-, 100- and 50-period MAs. On Tuesday a shooting star candlestick formed on a daily chart.
In our view, a medium-term uptrend looks rather resilient. The next strong resistance lies only at $1.0750/60 (Sep. and Oct. 2011 maximums) and at $1.0855 (2012 maximum), though there will probably be some hurdles around $1.0625 (March 20 maximum, February 14 minimum). Bulls have a clear advantage above $1.0475 (April 27 maximum, beginning of a sharp May decline).
We concede a correction to $1.0400 (middle of the channel) and to $1.0280 (200-day MA). If you want to sell on corrective more, wait for a decline below $1.0435 and target $1.0300.
Exit from the upward channel will pave the ground for a further decline to $1.0176 (July 25 minimum) and to $1.0100 (July 12 minimum).
Chart. H4 AUD/USD
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RBC: sell USD/JPY on rallies
USD/JPY continues trading in its habitual patterns in the H1 chart: consolidation – move on the news – leveling up etc. Yesterday’s lack of easing on the Fed’s part brought the pair above 78.35, to the new higher range.
Analysts at Societe Generale note that USD/JPY rallied on each central bank meeting day this year except on January 12 when the ECB and the BOE left their policies unchanged.
RBC recommends selling US dollar on rallies as this is, in their view, exactly what domestic investors in Japan will do. The specialists remind that yen tends to appreciate in August due to by Japanese investors’ coupon receipts on US Treasuries holdings and unusually low liquidity in forex markets in the month.
Support: 78.30/25 (recent resistance of the narrow sideways range, 50-period MA on H4 chart, MAs at H1 chart), 78.00, 77.90.
Resistance: 78.55 (today’s maximum), 78.65, 78.80, 79.00, 79.20.
Chart. H4 USD/JPY
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Analysts: comments ahead of the BoE
BARCLAYS: No policy easing is expected until November's MPC meeting. Today's ECB meeting is potentially likely to be a bigger driver of the pound, than the BoE meeting.
MORGAN STANLEY: Recent weak economic data means markets might be looking for the BOE to take action but this is unlikely to happen yet. Ahead of the meeting, sterling could come under pressure although the currency could enjoy a rebound as the BOE disappoints investors hoping for a dovish outcome.
CAPITAL ECONOMICS: We expect more asset purchases and a 25 b.p. rate cut, but not until November.
IHS GLOBAL INSIGHT: A rate cut is off the cards for now as it would hit banks' profit margins and constrain their ability to lend. An additional 25 billion pounds of asset purchases is likely to happen in Q4.
ROYAL BANK OF CANADA: We don’t expect any measures this week. However, the combination of last week's dismal growth data and a sharp fall in inflation means next week's inflation report could signal another 50 billion pounds increase in the bond-buying stimulus program in November.
GOLDMAN SACHS: No change is expected in the BOE's stance this week. However, we think further 25 billion pounds easing is likely to be necessary in November, when the existing QE program runs out
CITIGROUP: No change is expected as the BOE won’t react so quickly to last week's disappointing growth data.
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BarCap: play on SNB’s selling euro
This week the Swiss National Bank reported that the share of its euro holdings increased from 51% in Q1 to 60% in Q2.
Analysts at Barclays Capital are sure that the SNB will have no choice, but to sell the single currency reducing its exposure to its depreciation. In their view, the central bank’s move will have the biggest impact on EUR/CAD and EUR/GBP, some of which has likely already happened in July. Aussie will be also supported by the SNB’s diversification flows.
Idyllic Swiss countryside. Photo by alex_zbruew
USD/CHF: strong resistance ahead
USD/CHF keeps moving up within a gently sloping gently sloping uptrend which started in May. On July 24 the greenback reached the maximal level since November 2010 around 0.9970.
The pair’s currently trading around 0.9790. Note that this is only 250 pips below the 200-week MA at 1.0040. This level represents an extremely strong resistance as US dollar hasn’t been able to consolidate its position above this line since 2002. This is why we expect USD/CHF to stall below the parity.
For now, it’s difficult to come up with a fundamental driver which could help US dollar overcome an immense resistance of the 200-week MA and bring it above this level on the sustainable basis. The Fed refrained from easing and may keep doing so until the Operation Twist is over late in December, while the US economic performance remains far from encouraging. Moreover, no need to explain what burden is US so-called fiscal cliff for US currency and these problems will be also at full sight as the year-end approaches.
On H4 chart we see what may become a “head and shoulders” formation. If the pattern is completed and the neckline around 0.9750 breached, we will be looking forward to a decline to the 0.9570/50 area (January maximums).
Chart. H4 USD/CHF
Resistance: 0.9970 (July 24 maximum), 1.0000 (psychological level), 1.0040 (200-week MA).
Support: 0.9750 (July 17 minimum), 0.9660 (June 8 and 29 maximums), 0.9580/70 (January maximums).
Chart. Daily USD/CHF
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Commerzbank: comments on EUR/GBP
EUR/GBP strengthens for a third consecutive day on Thursday. Today the pair reached a 3-week high at $0.7905, but then slid below a psychological $0.7900 level.
Analysts at Commerzbank expect the pair to push higher to $0.7905/50 in a near term (38.2% Fib. retracement from a May-June decline and the May minimum). After a short-term correction the pair is likely to resume a longer term downtrend.
Chart. Daily EUR/GBP
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