Top Things to Know Today
Top-5 ECB Plays And The Euro's Reaction When the European Central Bank unveils a fresh round of stimulus on Thursday, the announcement will not be a surprise for most investors. Euro traders have had plenty of time to prepare for the move and based upon the 8% decline in the EUR/USD over the past 6 weeks, they sufficiently discounted fresh easing from the central bank. However many analysts believe that EUR/USD is headed for parity and we agree that the path of least resistance for the euro is lower. Euro is extremely oversold but with less than 24 hours to go before the monetary policy announcement, there's still significant uncertainty surrounding the actions that the ECB will take. ECB President Draghi pledged to "do what we must" to return inflation to 2% "as quickly as possible" and the desire to get ahead of the slowdown could mean more aggressive policy action.
The 5 Most Alluring ECB Options:
- Cut the deposit rate by 0.1% or 0.2%
- Extend the QE end date beyond September 2016
- Frontload bond purchases
- Broaden types of assets purchased
- Introduce a two-tired deposit system
We do not believe that investors have sufficiently discounted the potential aggressiveness of the central bank's actions. Draghi could choose one or a combination of these measures and the more actions they take the more weakness we expect in EUR/USD. Extending the end date of QE is almost certain since it was always a soft target. The same is true for front loading bond purchases -- they've done it before and will do it again. Lowering the deposit rate will automatically broaden the bonds they can purchase because the ECB prefers not to lose money but yields would adjust quickly. Broadening the types of assets purchased to include sub-sovereign bonds and nonperforming loans is the most controversial. In addition to these actions, the ECB's forward guidance will also have a significant impact on the euro -- if they maintain an easing bias and suggest that they are willing to increase stimulus further, then a 2 to 3 big-figure move in EUR/USD would not be a surprise. If the ECB shifts to wait-and-see mode after easing, the initial 1 to 2 big-figure decline (depending on the aggressiveness of the program) could find support quickly.
US NFP Preview: Tough Act to Follow If the Federal Reserve (Fed) indeed begins the monetary policy normalization process in two weeks, it will be the blowout October jobs report that will be remembered for tipping the scales.
With the biggest gain in non-farm payrolls this year, the report made up for the shortcomings in hiring in the previous two months, and confirmed that foreign headwinds had only a brief impact on the US economy. After the rebound in job creation - and several weeks of jawboning from Fed officials - financial markets are content with the idea of a December lift-off.
However, that does not mean that the November data - the final report of the year as well as the last jobs release before the Fed's December gathering - should be ignored.
On the contrary, the stakes will only grow with each subsequent release as the Fed reacts and adjusts the pace of the tightening process over the next couple of years to incoming data. As officials have stressed many times, it is the entire trajectory of short-term interest rates and their final level, not just the first hike, that will ultimately shape the economy's future.
"We will be looking carefully at tomorrow's jobs report," Janet Yellen, the leader of the US central bank, told lawmakers during a congressional testimony on Thursday.
The next time she addresses the public, during a quarterly post-meeting press conference on December 16, she will be eulogizing an unprecedented seven-year-long era of virtually zero short-term interest rates in US monetary policy.
USD: NFP Guarantees Fed Hike Many investors were confused by the dollar's lackluster reaction to Friday morning's nonfarm payrolls report. Job growth was very strong with payrolls rising 211k, the unemployment rate held steady, average hourly earnings rose 0.2% and the participation rate ticked higher. The dollar should have held on to its initial gains because the data guarantees that the Fed will raise interest rates this month. But crowded trades got killed this week. The ECB cut interest rates, extended its QE program and the EUR/USD rallied. Yellen warned that delaying a rate hike is a risk and NFPs were strong -- but still, the USD barely rallied. While it may be difficult to remain confident in our views that USD/JPY will break 124 and EUR/USD will drop back below 1.08, the fundamentals remain intact.
Let's take a step back and assess recent developments in the market -- the ECB eased and the Fed is poised to tighten. While many investors have discounted these moves, the recent recovery in EUR/USD leaves new traders on the sidelines ready to jump back in. There's still 8 trading days before FOMC and while we do not anticipate a large 2-to-3 big-figure move in the USD versus EUR or JPY pre-FOMC, we believe that it could rise another 100 to 150 pips from here. Taking an even larger step back, while the Fed will go to great lengths to downplay liftoff this month, it will still be raising interest rates by another 50 to 75bp next year. During this time, the ECB will keep buying bonds and maybe even increase asset purchases further.
ECB officials were not happy with the euro's reaction to Thursday's decision. ECB member Constacio was the first to say that the markets got the ECB's message wrong and later Friday morning, ECB President Mario Draghi said ECB would deploy further tools if necessary in order to reach the inflation goal without delay. He also said QE is there to stay and can be recalibrated if needed and there is no specific limit to the balance sheet. A rising euro diminishes the effectiveness of ECB stimulus. The amount of easing they provided this week may have been sufficient with EUR/USD at 1.05, but at 1.10 or higher -- equating to a 5% stronger exchange rate -- they may need to do more. 1.10 may not be a big concern, but if EUR/USD breaks 1.12 and has 1.15 in sight, then European policymakers are likely to come out in force to talk down the euro.
Top 5 Things to Know Today Here are the top five things you need to know today in financial markets:
1. Global shares start week on positive note
Global stock markets kicked off the week on a positive note on Monday, buoyed by big gains on Wall Street on Friday.
Asian stocks ended mixed, as market players looked ahead to a deluge of data this week which could provide more evidence of a slowdown in China. Trade figures are due on Tuesday, followed by inflation on Wednesday and industrial production and retail sales on Saturday.
In Europe, equities rallied sharply, boosted by optimism over the strength of the U.S. economy and dovish comments from European Central Bank President Mario Draghi.
Meanwhile, U.S. stock futures were up between 0.15% and 0.25%, suggesting a modestly higher open on Wall Street later in the day. U.S. shares surged 2% on Friday, following a strong November U.S. jobs report.
2. U.S. dollar recovers
The dollar climbed against the other major currencies on Monday, as Friday's strong U.S. jobs data fueled further expectations for a December rate hike by the Federal Reserve, boosting demand for the greenback.
The dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.55% at 98.81. The greenback lost almost 2% last week, as the euro surged after the latest easing measures announced by the European Central Bank on Thursday fell short of market expectations.
3. WTI oil falls towards $39
Oil futures fell again on Monday, with West Texas Intermediate prices approaching the $39-level after OPEC left its production levels unchanged despite a global supply glut.
U.S. crude was last down 55 cents, or 1.36%, at $39.42 a barrel, while Brent lost 27 cents, or 0.62%, to $42.72.
4. Gold little changed near 3-week high
Gold prices were little changed near the previous session's three-week high on Monday, as market players prepared for the first U.S. rate hike since 2006 later this month.
While investors widely expect U.S. interest rates to start rising later this month, they anticipate the pace of increases to be gradual. A gradual path to higher rates is seen as less of a threat to gold prices than a swift series of increases.
5. Fed's Bullard in focus
St. Louis Fed President James Bullard is the only Fed official on the calendar with a speech at 12:30PM ET Monday. Bullard’s speech is likely to be the last by a Fed official before the central bank goes into blackout mode ahead of its December 15-16 meeting.
US JOLTs at 5.4 million
A small disappointment in the JOLTs report: 5.383 million against 5.5 expected. The quits rate is steady at 1.9% and the number of quits at 2.8 million, in line with previous months.
This does not change the picture for the Fed, especially after the solid Non-Farm Payrolls report on Friday.
The US JOLTs job openings was expected to tick down to 5.50 million in October from 5.526 million in September. Despite being a lagging indicator, it is important because the Fed says so: it provides a wider measure of the job market. The quits measure is of importance as it reflects confidence.
The US dollar was showing strength against commodity currencies and against the pound but not against the euro nor against the yen.
the IBD/TIPP optimism index came out better than expected at 47.2 points.
The fall in oil prices is the main theme today in markets.
Top 5 Things to Know Today Here are the top five things you need to know today in financial markets:
1. China sets yuan at 4-year low
China cut the yuan's reference rate to the weakest level since August 2011 on Wednesday, amid heavy capital outflows, persistent worries over an economic slowdown and before an expected increase in U.S. interest rates later this month.
China's central bank reduced the yuan’s fixing by 0.1% to a four-year low of 6.4140 a dollar. The spot rate dropped 0.17% to close at 6.4280 (USD/CNY) in Shanghai.
2. Chinese inflation picks up in November
Chinese consumer price inflation rose last month, according to data released on Wednesday, indicating that Beijing’s effort to bolster growth in the world’s second-largest economy may be starting to take effect.
The National Bureau of Statistics reported that China’s consumer price index rose 1.5% in November from a year earlier, slightly better than economists’ forecast for an increase of 1.4% after a 1.3% rise in October.
China’s producer price index fell 5.9% on a year-over-year basis, matching October’s decline, the agency said. It was the 45th consecutive month of declining producer prices, amid weak demand and falling global commodity prices.
3. Oil rebounds but hold near 7-year lows
Oil prices rebounded on Wednesday, amid speculation weekly supply data due later in the session will show U.S. crude inventories fell for the first time in 11 weeks, but gains were limited as a global supply glut remained on investors' minds.
U.S. crude was last up 54 cents, or 1.43%, at $38.05 a barrel as of 6:10AM ET, while Brent tacked on 44 cents, or 1.09%, to $40.70.
4. Global shares weaker in risk-off trade
Global stock markets were in the red on Wednesday, as market sentiment remained subdued amid lingering concerns over the health of China's economy.
Asian stocks ended mostly lower, as market players monitored movements in oil and other battered commodities. The downbeat mood spilled over to Europe, where Germany's DAX was down around 0.6%.
Meanwhile, U.S. stock futures were down between 0.1% and 0.3%, suggesting a weaker open on Wall Street later in the day. U.S. markets fell in a choppy session on Tuesday, as lower oil prices pressured energy stocks for a fifth day and weak Chinese trade data reignited fears of a global slowdown.
5. Dow Chemical , DuPont in merger talks
Dow Chemical and DuPont are in advanced talks to merge, creating a chemicals giant with a market value of more than $120 billion that could then break up into different businesses, people familiar with the matter said on Tuesday.
The deal, which could be announced in the coming days, would be followed by a "three-way breakup of the combined company," DuPont CEO Edward Breen would be CEO of the post-merger company, and Dow CEO Andrew Liveris its executive chairman.
Setups For EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD - Barclays The following are the latest technical setups for EUR/USD, USD/JPY, GBP/USD, AUD/USD, and NZD/USD as provided by the technical strategy team at Barclays Capital.
EUR/USD: We are standing aside while the squeeze on USD longs pushed EURUSD higher towards 1.1085/1.1120 where, given stretched daily studies, we would look for signs of a top. A move below Monday’s 1.0795 low would signal lower towards 1.0700.
USD/JPY: The break below 122.20 on increased volumes triggered a small topping pattern and proved our short-term bullish view wrong. Scope is for a move lower towards targets near 120.65. Below that level would open support near 120.00, where we would look for signs of a base.
GBP/USD: The bounce off our initial downside targets in the 1.5000 area is seen as a healthy correction in the overall bearish trend. A move above 1.5200 would open better levels to sell towards 1.5275. We expect resistance near 1.5335 to keep the focus lower towards the 1.4895 lows and then our targets near 1.4855.
AUD/USD: Wednesday’s “doji” candle signals a breather from the recent downturn. We are overall bearish against resistance near 0.7440 and would look to sell towards the 0.7385 range highs. A move below our initial downside target near 0.7170 would open 0.7070 and then the 0.7015 November lows.
NZD/USD: We are overall bearish against the 0.6900 range highs and would use upticks as an opportunity to sell at better levels. Below 0.6575 would encourage our bearish view towards targets near 0.6430 and then the 0.6235 year-to-date low.
Trade Ideas For EUR/USD, USD/JPY, EUR/JPY, AUD/USD, USD/CAD - UBS
The following are UBS' latest short-term trading strategies (mostly intraday) for EUR/USD, USD/JPY, EUR/JPY, AUD/USD, and USD/CAD.
EUR/USD: should stay rangebound, with buyers showing up towards 1.0900 and sellers above 1.1040. Play the range between the first support at 1.0920 and the first resistance at 1.1045.
USD/JPY:Markets are a bit calmer but equities have not really rebounded, so as long as USDJPY is below 122.30 we prefer to play it from the short side.
EUR/JPY: Look to sell EURJPY at 133.60/80, with a stop against the downtrend going back to the 100-day moving average of 134.50.
AUD/USD:has traded 0.7235-0.7281 today and the overall tone remains soft on the back of price action in equities and commodities, despite the strong jobs data yesterday. Stick to selling rallies as long as the pair remains below 0.7400.
USD/CAD: price action remains very bid and the pair touched a fresh high of 1.3660 yesterday, with oil dropping 1.5%. We would trim longs in order to buy again towards 1.3550. We continue to prefer playing the pair from the long side as long as 1.3425 holds.
EUR/USD retreats ahead of Draghi, Fed There is still time towards the Fed decision on Wednesday but this theme already dominates markets. The dollar is recovering in the weak of the new week. Today’s big event is a speech from Draghi. Will the ECB president succeed with his damage control? Oil should be eyed as well as it has wide implications. Wrap up of the morning show:
5 Reasons To Sell USD Post Hike For the first time in 9 years the Federal Reserve is expected to raise interest rates and selling U.S. dollars could be the smartest trade. Most investors would normally look to buy a currency ahead of a rate hike but in the case of the Fed, its well-telegraphed decision could mean more losses for the greenback. We have already seen investors bail out of their long USD/JPY and short EUR/USD trades as EUR/USD peaked in mid November and USD/JPY bottomed in early December. And with only a few more days to go before the historic announcement there’s very little chance of a strong pre-FOMC dollar rally. Everyone who wants to be long dollars ahead of the rate decision is probably long already with more traders moving to the sidelines as the big day nears.
There are a number of reasons why the dollar could fall after the Fed hikes even though U.S. rates will move higher at a time when many other major central banks have taken steps to drive their rates lower.
5 Reasons To Sell USD After The Rate Decision
1. Not every Fed hike means a USD/JPY Rally
Here’s a chart that one of our readers helped us compile, overlaying the Fed Funds rate with USD/JPY. As you can see, not every Fed hike after a long period of pause coincides with a dollar rally. In many cases, USD/JPY rallied before the rate hike but failed to extend its move thereafter.
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Here are the top five things you need to know today in financial markets:
1. Yellen speech takes center stage
Federal Reserve Chair Janet Yellen is due to speak about the U.S. economic outlook at The Economic Club of Washington D.C. at 12:25PM ET Wednesday. The Fed chief could use her speech to signal that a December rate hike is likely while reiterating that the pace of increases will be gradual.
Recent comments by Yellen have bolstered expectations the U.S. central bank will raise interest rates for the first time in nine years when it meets in mid-December.
2. U.S. jobs data in focus
The U.S. is to release the ADP jobs report for November at 8:15AM ET, followed by revised data on third-quarter productivity and costs at 8:30AM and the Fed's Beige Book on the economy at 2:00PM.
Also looming large is Friday's nonfarm payrolls report, the last jobs report before the Fed decides on interest rates at its December 15-16 meeting. A strong payrolls report was likely to cement expectations for a Fed rate hike later this month.
3. Weak euro zone inflation puts pressure on ECB
Consumer price inflation in the euro zone rose by a smaller-than-expected 0.1% in November, adding to pressure on the European Central Bank to step up stimulus measures.
The euro was down 0.45% against the dollar to 1.0585, re-approaching Monday’s seven-month trough of 1.0552.
4. Oil back in the red; weekly EIA report, OPEC meeting eyed
The U.S. Energy Information Administration will release its weekly report on oil supplies at 10:30AM ET Wednesday. The data was expected to show that crude inventories fell by 471,000 barrels last week.
After markets closed Tuesday, the American Petroleum Institute, an industry group, said that U.S. oil inventories rose by 1.6 million barrels in the week ended November 27, disappointing expectations for a decline of 1.2 million barrels.
Meanwhile, OPEC will meet in Vienna on Friday to review their output strategy. While most market analysts expect the oil cartel to keep their production quota unchanged, pressure is building on Saudi Arabia to waver from its no-cut policy.
U.S. crude was last down 50 cents, or 1.15%, at $41.35 a barrel, while Brent lost 53 cents, or 1.2%, to $43.91.
5. Bank of Canada policy meeting
The Bank of Canada's latest interest rate decision is due at 10:00AM ET, on Wednesday. BOC Governor Stephen Poloz is widely expected to keep rates unchanged at 0.50%, but could signal that further easing was possible.
Data on Tuesday showed that Canada's economy shrank unexpectedly in September, fueling concerns over the economic outlook and boosting speculation policymakers will provide fresh stimulus to boost growth.
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