Weekly Review and Outlook
Euro Tumbled after ECB LTRO; Focus Back on Greece and US Data
Price actions in the fx markets last week were quite complicated as several themes had impacts simultaneously. Firstly Euro was sold off steeply after ECB's three year LTRO result as the event provided no fuel to extend recent rebound. Focus was gradually turned back to Greece. Secondly, Bernanke refrained from giving any hints on QE3 in the semi annual testimony to congress and triggered sharp selloff in gold. However, dollar's strength was limited to against European majors and yen only. Aussie, Kiwi and Loonie were indeed very resilient. Thirdly, yen's selloff continues as comments from BoJ as well as weak inflation data suggests that we're still far from seeing the end of Japan's QE expansion.
Euro will likely remain weak in near term at least until Greece finally get the EUR 130b bailout fund on hand and settled it's March 20 bond payments. Yen will remain weak as expectation on BoJ expanding quantitative easing continues. The main question is which of dollar and commodity currencies would out-perform. The post Bernanke stock selloff and dollar rebound was a hint that markets are going back to the buy risk on bad US data for QE3 mode. However, that's far from being confirmed as while DOW struggled to stay above 13000 level after multiple attempt, there is no reversal yet. Commodity currencies' resilience could indeed be attributed to resilience in stocks globally. Hence, this week's Non-farm payroll report would be important in determining firstly, how investors now react to US data, and secondly, whether stock markets and commodity currencies would extend rally or reverse.
The ECB has allotted 529.5B euro of 3-year LTRO to 800 banks. Together with the first auction, the central bank has injected 1trillion of 3-year funds into the system. This amount equals to 131% total European bank bond maturities in 2012 and 72% for 2012 and 2013 combined. The average allotment is 0.66B euro, compared with 1B euro in December 2011 and 0.40B euro in June 2009. The total number of bidders is huge, suggesting participation of a lot of small banks. The ECB would probably view the result as positive as it's expected that the funds will be passed to the real economy. More in ECB Allotted over 500B Euro in LTRO.
Greece moved another step closer to getting the EUR 130b second bailout after parliament approved pension and health care spending cuts. The International Swaps and Derivatives Association said that their EMEA Determinations Committee unanimously ruled that there is no "credit event" in Greece so far in spite of the effort to restructure its debts. However, it's clear that Greece still needs to overcome an important hurdle of the PSI swap deal, which window closes on March 9 this Friday. Firstly Greece will need to complete the debt swap to secure the funding from EU and IMF. Secondly, there are still uncertainties on the participation rate and whether the collective action clause would be activated. And, thus, whether ISDA would declare a credit event finally is still uncertain. On Friday, Moody's downgraded Greece credit rating to C from Ca and said that the debt swap deal constitutes "a distressed exchange, and hence a default." Earlier in the week, S&P lowered Greece to "selective default" following Fitch's comment that it will further cut Greece's rating to "Restricted Default" once the bond swap is completed.
Other news saw the fiscal accord was finally signed by 25 member states at the EU summit today. Only UK and the Czech Republic opted out of the pact as we know. European Council President Herman Van Rompuy is optimistic that the fiscal agreement will have a "deep and long-lasting" impact on policies. Van Rompuy emphasized that "this stronger self-constraint by each and every one of you as regards debts and deficits is important in itself. It helps prevent a repetition of the sovereign debt crisis," and "the restoration of confidence in the future of the Eurozone will lead to economic growth and jobs. This is our ultimate objective." Next, the fiscal accord should be ratified by signatory countries' parliament. Spanish prim minister Rajoy said that the country will base its 2012 budget on a deficit target of 5.8% of GDP. That's clearly much less ambitious than the official EU agreed target of 4.4%.
In the testimony before the House Committee, Fed Chairman Ben Bernanke was less downbeat on the macroeconomic outlook. He stated that 'pace of the expansion has been uneven and modest by historical standard'. Yet, growth in the coming quarters is likely to be 'at a pace close to or somewhat above the pace that was registered during the second half of last year'. He also acknowledged positive developments in the job market including job gains that were 'relatively widespread across industries' and the 'more rapid than expected' decline in the unemployment rate over the past year. Investors were disappointed by the Chairman as he did not signaled further QE3. Instead, the acknowledgement of improvement in economic outlook might imply that the chance of such as quantitative easing has lowered. More in No Signals Of QE3 Disappointed Investors.
BoJ Governor Shirakawa pledged again today that the bank will "continue with monetary easing until consumer inflation of 1 percent is in sight". And he also emphasized that spike in energy prices alone is not enough to trigger policy reversal. Inflation data from Japan released saw national CPI core unchanged at -0.1% yoy in January. The Japanese yen was sold off since BoJ announced the inflation target of 1% last month and paved the way for further quantitative easing. It's believed that BoJ would finally be narrow that difference between size of QE program with Fed and other central banks.
First of all, we'd like to note that gold had the strongest reaction to Bernanke's comment. The sharp reversal from 1792.7, after failing 1800 level, indicates that rebound from 1523.8 has completed. Sustained trading below 55 days EMA (now at 1710) should pave the way to 1520/30 support level. At this point, it's unclear whether fall from 1792.7 is a leg of the consolidation pattern from 1535, or resuming the whole decline from 1923.7 record high and the structure of the fall from 1792.7 should determine. Nonetheless, break of 1600 is like. And such development would provide support to dollar.
Stocks' reaction to Bernanke was relatively much muted. S&P 500 edged higher last week and breached 1370.58 high but failed to sustain above this resistance. Similar situation was found in DOW which struggled to stay above 13000 psychological level. Upside momentum is clearly diminishing with daily MACD staying below signal line, trending lower. We'd still anticipate near term reversal soon and a break of last week's low of 1354.9 should at least bring pull back to 55 days EMA at 1317. Also, rebound from 1074.77 looks corrective so far and we'd possibly see another falling leg to extend the consolidation pattern from 1370.58.
Dollar index's strong rebound last week indicates that a short term bottom is at least formed at 78.09. It's possible that whole decline from 81.78 is finished too and focus is back on 80.11 resistance. Break there should at least pave the way to retest 81.78 high. However, we'd like to point out that upside momentum is very unconvincing with bearish divergence condition in daily MACD. Hence, even though another rally is possibly, strong resistance would likely be seen at 61.8% retracement of 88.70 to 72.69 at 82.58 to finish off the whole rebound from 72.69. Meanwhile, failure at 80.11, followed by break of 78.09 will revive the case that dollar index has indeed topped out at 81.78 already.
The Week Ahead
Five central banks will meet this week, including RBA, RBNZ, BoE, ECB and BoC but none of them is expected to change policy. Main focus would indeed be on firstly, reactions to US data. ISM services, ADP and NFP would be closely watched. As speculations on QE3 cooled, investors could indeed respond negatively to positive US data. We'll see if that's the developing pattern. Second, the window of Greek PSI debt swap deal would close on Friday and markets will pay close attention to news regarding this topic.
- Monday: Swiss retail sales; Eurozone Sentix investor confidence, retail sales; UK services PMI; US ISM services, factory orders
- Tuesday: RBA rate decision; Eurozone GDP revision; Canada Ivey PMI
- Wednesday: Australia GDP; Swiss unemployment, forex reserves; US ADP employment; Canada building permits
- Thursday: RBNZ rate decision; Japan GDP; Australia employment; Swiss CPI; BoE rate decision; ECB rate decision; BoC rate decision; Canada housing starts; US jobless claims
- Friday: Australia trade balance; China CPI; UK production, PPI; Canada employment; US NFP, trade balance
EUR/GBP Weekly Outlook
EUR/GBP's sharp decline last week indicates that corrective rebound from 0.8211 has completed with three waves up to 0.8505 already. Initial bias will remain on the downside this week for 0.8277 support first. Break will suggest that whole decline from 0.9083 is resuming for 61.8% projection of 0.8830 to 0.8221 from 0.8505 at 0.8129. On the upside, above 0.8383 minor resistance will delay the bearish case and turn bias neutral for some consolidations first.
In the bigger picture, price actions from 0.9799 are treated as a consolidation pattern in the long term up trend. Fall from 0.9083 is viewed as the third leg and could extend to 61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is close to 0.8 psychological level). We'd expect strong support inside 0.7693/8186 support zone, possibly near to 61.8% retracement of 0.6535 to 0.9799 at 0.7782 to contain downside to finish off the consolidation. On the upside, though, break of 0.9083 resistance is needed to indicate completion of the whole pattern from 0.9799. Otherwise, there will also be risk of another fall even in case of rebound.
In the long term picture, long term up trend from 2000 low of 0.5680 shouldn't be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We'd expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually.
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