Contributed By: DailyFx
U.S. Session Key Developments
* Investors Optimistic About Ireland Bailout
* China Raises Reserve Requirement for Second Straight Week
Markets Close Higher Amid Optimism over Potential Bailout Package
U.S. Markets closed higher at the end of the week as investors became more optimistic about a bailout for Ireland. However, the markets were kept from surging after China’s move to curb inflation. Friday, China raised its banks’ reserve requirements for the second time in 2 weeks. When a country requires banks to hold more cash in their reserves, banks will have to lend less money in order to meet the new standards. The move is expected to help curb inflation at the cost of some economic growth. Overall, markets plunged this week amid concern that the policy in China could cut demand for US goods and commodities. The markets managed to close higher after statements from Irish Prime Minister Cowen, who announced the second day of talks on a possible aid package is going well.
DJIA 30 / 11,203.55 / +22.32 / +0.20%
The DJIA closed slightly higher at the end of the trading session on Friday. Walt Disney and Boeing were among the Dow’s worst performers and experienced 1.8 and 1.6 percent declines, respectively. Hewlett-Packard advanced 1.6 percent ahead of its fourth quarter earnings report Monday.
S&P 500 / 1,199.73 / +3.04 / +0.25%
The S&P 500 also closed flat as investors were uncertain how to balance improved European outlook with the contractionary Chinese monetary policy. Among stocks in focus, AnnTaylor Stores surged 8.5 percent. The women’s apparel retailer reported fiscal third quarter profits that substantially outpaced expectations. The company also boosted its sales target for the year. Foot Locker climbed 12 percent after announcing better-than-expected profit in the fiscal third quarter as its comparable sales climbed and gross margin imporved. General Motors gave back some of yesterday’s gain, as the stock fell 0.3 percent. GM surged yesterday after the auto company returned to the public market.
NASDAQ / 2,518.12 / +3.72 / +0.15%
7 out of 10 sectors closed in the black Friday for the NASDAQ. The US benchmark gauge experienced the smallest advance among the three major indexes. Oil & Gas and Basic Materials led the index with 1.10 and 0.63 percent gains, respectively.
Contributed By: DailyFx
* Dollar Ready to Respond to a Clear Sentiment Trend but Liquidity may be an Issue Next Week
* Euro Traders Prepare for a Resolution for Ireland and to Shift the Focus on Portugal, Spain
* British Pound Stumbles on Drop in Construction Expectations, Tucker Downplaying Inflation
* Canadian Dollar Sensitive to Investor Optimism but CPI and Retail Sales May Steal the Show
* Japanese Yen Slowly Deflating as Market Comes to Grips with Lasting Stimulus
* Australian and New Zealand Dollars Remain Highly Sensitive to Ripples in Global Risk Appetite
Dollar Ready to Respond to a Clear Sentiment Trend but Liquidity may be an Issue Next Week
The dollar retraced nearly all of the gains it had made in the first two days of this past week when all was said and done. Friday offered up the third consecutive decline for the benchmark currency; and the technical implications of this final performance could not be ignored. For the trade-weighted dollar index, the week-ending push made a notable test of the same level that held the currency down for nearly six weeks before Tuesday’s critical breakout. It is no coincidence that this former ceiling is now marking a tentative floor to impede trend development. From the majors, we can see the same measured correction. The most familiar setup comes from EURUSD which has moved back up to the frequented 1.37 level; though retracements for GBPUSD, USDCAD and AUDUSD are very similar in nature even if the technical figures are not as prominent. What truly grounds this shared path for the greenback in fundamentals though is the correlation it maintains with other asset classes. With the S&P 500 equities index gravitating back towards 1,200 and gold testing $1,365 (the breaking point of a bull trend that directed price action for over three months), it is clear that there is an underlying current to investor sentiment itself.
Through the final 24 hours of this past trading week, there were notable updates on two of the market’s most headline-worthy themes. Ireland has focused general concerns surrounding the convoluted situation the European Union faces in securing financial stability in the region. That said, a definitive move from capital flows and the dollar in response to this matter is now being reserved for the next consequential development – namely, the announcement of a bailout. Therefore, speculation that Ireland will have to abandon its favorable tax policies and news that Allied Irish is marching towards a liquidity crisis is merely building interest into what traders see as a meaningful climax (though Europe’s troubles hardly end with this single member). The same, tepid interest from investor confidence was paid to the announcement that China had raised the reserve ratio for its banks for a fifth time this year. Though a step clearly intended to cool growth and capital turnover in the economy, the market has grown accustomed to the PBoC’s measured efforts. Going forward, either or both of these particular catalysts can shape the appeal of the dollar as a safe haven currency; but a market weary of the pitfalls in speculative trends overshooting fundamentals may require a more explicit resolution to these bigger fundamental themes before committing to a lasting run.
When the financial headlines are dedicated to global developments, it is easy to miss the fundamental developments that direct the dollar’s bearing. The US docket may have been empty of scheduled indicators through the final session of this past week; but comments directed to the Fed’s stimulus program bear reflection. Board member Plosser remarked Friday that it was “premature” to assume the central bank would buy the entire $600 billion available over the coming 8 months. If indeed the Fed decided it was appropriate to discontinue its monthly purchases, a significant burden would be lifted for the greenback. Looking out over the next week, we have a concentrated docket for economic releases. A range of indicators including the second reading of 3Q GDP, existing and new home sales, personal income and spending, durable goods and a national activity index are squeezed into a period foreshortened by the Thanksgiving holiday. Falling on Thursday, this American holiday will sap speculative liquidity over the final two days of the week. As such, it could be exceptionally difficult to jump start a meaningful trend next week.
Euro Traders Prepare for a Resolution for Ireland and to Shift the Focus on Portugal, Spain
We seem to detect new symptoms of the Euro-region’s financial troubles every day. However, the market seems to be acclimatizing itself to these developments, waiting for evidence of the true fallout. However, as fundamental traders, we should take note of these developments to assess the likelihood of and full consequences to a true crisis. With EU, IMF and ECB officials currently scrutinizing Ireland’s financial books; news that Allied Irish lost 17 percent of its deposits this year and tripled its dependency on ECB loans suggests there is no natural solution to be found. In the meantime, Germany and the Netherlands are forging ahead with permanent bailout regulations to share losses with bond holders.
British Pound Stumbles on Drop in Construction Expectations, Tucker Downplaying Inflation
Bank of England Deputy Governor Paul Tucker could have balanced dovish rate expectations when he said the group shouldn’t dilute its price stability commitments; but a forecast for prices to drop below the 2 percent target did little to further interest rate calls. For macro data, a quarterly RICS construction activity survey dropped to its lowest level in a year-and-a-half as a supply glut and weak economy curb activity.
Canadian Dollar Sensitive to Investor Optimism but CPI and Retail Sales May Steal the Show
When it comes to USDCAD, the influential swings in risk appetite trends are significantly subdued. For a true trend to develop for this pair, the outlook for growth and interest rates between the two has to shift. We may see just such a meaningful change develop next week. On the loonie’s docket, we have both retail sales and CPI data. This could raise doubts about growth and feed criticism in the BoC’s early hikes.
Japanese Yen Slowly Deflating as Market Comes to Grips with Lasting Stimulus
It is worth noting that over the past three weeks we have seen both a strong rallies and slumps in risk appetite trends. And, through it all, USDJPY has maintained its steady appreciation. From this, we can start to see the yen’s position as a safe haven fade – a reality that has been ignored for too long. Next week, CPI data will help to remind investors that there is long-standing deflation and little hope for yield in Japan.
Australian and New Zealand Dollars Remain Highly Sensitive to Ripples in Global Risk Appetite
In monitoring underlying sentiment trends, the natural inclination is to keep track of those currencies that are directly responsible for the fundamental bustle. However, given the nature of capital flow, it is those currencies that are at the extremes of the risk spectrum that see the biggest moves. Both the Aussie and Kiwi dollars are tuned into Irish, Chinese and the US news wires, waiting for their net meaningful trend.
Contributed By: DailyFx
EUR/JPY:The market has done a very good job of holding above the daily Ichimoku cloud to suggest that we could be on the verge of a material shift in the structure in favor of significant upside over the medium and longer-term. Daily studies are however in the process of consolidating, so the preferred strategy is to look to buy into dips rather than on upside breaks. Ultimately, only a close back below 110.00 would put the pressure back on the downside.
Contributed By: DailyFx
EUR/CHF:Despite the latest setbacks, we retain a constructive outlook with the market in the process of carving out a major base. There is some very solid internal range support in the 1.3200’s and we would expect to see any additional declines very well supported ahead of 1.3200 on a close basis. Ultimately, only a close back below 1.3200 would give reason for concern. Look for a break back above 1.3500 to reaffirm outlook and open the next major upside extension beyond 1.3835.
Contributed By: DailyFx
AUD/USD:Clear signs of another short-term top emerging with the market stalling out by fresh post-float record highs at 1.0185 several days back, and then reversing course to end a sequence of consecutive daily higher lows. The latest break back below the 20-Day SMA further encourages bearish outlook from here, and we will look for a 2-day close below the 50-Day SMA (0.9750) for additional bearish confirmation. From here the risks are for declines towards critical support by 0.9650, below which will really accelerate. Any intraday rallies should be very well capped ahead of 1.0000.
Contributed By: DailyFx
North American Commodity Update
Commodities - Energy
Where Risk Trends Pull out of its Dive, Crude Maintains its Tumble
Crude Oil (LS Nymex) - $80.44 // -$1.90 // -2.31%
Though broader risk appetite trends were able to level off through US trading hours Wednesday, US oil maintained its tumble. This decline marked the fourth consecutive decline (fifth if Thursday’s unchanged performance is counted) and is thereby matches the worst performance the commodity has suffered since the series of declines through August 24th. The extension of this bearish phase is a combination of both fundamental and sentiment-based factors; but technical traders have no doubt taken note of the session’s low. Looking back at historical price action, the $80 figure besides representing an easily identifiable, even level is also a well-worn support/technical level and represents the mid-point of the September to December advance. So, while the technical trend channel of this period has indeed been breached, there is still meaningful support and the market has already retraced half of the previous two months’ advance.
For fundamental guidance on the day, we saw a shift away from risk appetite trends to the more tangible macroeconomic drivers. Looking at investor sentiment in fact, we see that the S&P 500 (a good, basic barometer for the level of optimism) was little moved through Wednesday’s session just a day after marking a critical shift in trend. This change in the backdrop reflect a market that is reluctant to unwind otherwise profitable positions and are therefore waiting to see the level of contagion financial problems in the US, China and especially Europe will have. In the meantime, the demand/supply balance behind oil’s fundamental value was tipped by a few big ticket developments. In Asia, China’s Premier followed up on his vow to fight inflation with a more refined effort to put temporary price controls on “important daily necessities.” This is a more elegant solution than simply vowing to put in inflation measures; but the effect on growth will likely be the same. What’s more, energy commodities can be grouped under necessities. Another indicator to note from China was the quarterly consumer confidence survey which dropped for the first time in six quarters. Moving forward to the US session, the lowest reading on core inflation on record warns of a slowing economy though does support stimulus efforts. Something to take note of for future concerns, October housing starts plunged 11.7 percent to its second lowest levelon record. Depressed activity, growing foreclosures and overleveraged real-estate derivatives could prove a new crisis.
From macro concerns to energy market-specific issues, we see that there was a big miss on the Department of Energy crude figures. Instead of the no change expected by economists, the API figures (which showed the biggest plunge since September 2008) were more reasonable forecasters with a 2 percent drop in inventories equivalent to 7.286 million barrels. On the futures market, the December contract is soon to expire; and we have seen activity roll out to the January contract – which reported a 52 percent jump in volume to its own record 341,921 contracts.
Crude Futures Chart (Daily)
Commodities - Metals
Gold Little Moved After Critical Break as Investors Wait for the Next Shoe to Drop
Spot Gold - $1,336.00 // -$3.70 // -0.28%
Though it would put in for a fourth consecutive loss, gold was still looking at a far more reserved decline through Wednesday’s close. This tempered pace fits both a fundamental pause from the speculative ranks and a meaningful technical backdrop. For guidance on the supply and demand course, the ‘alternative asset’ value for the metal was little changed as other gauges for sentiment trends were similarly little changed for the day. From price action, the break of the three-and-a-half month rising trend channel yesterday doesn’t mean the market is in free fall. The past month, the metal has developed a frequented level of support around 1,320 and there is still a range of short-term term rising trendlines to fall back on.
Yet, despite the technical levels that exist, fundamental and sentiment concerns can easily drive this market to resume its plunge or otherwise completely reverse the losses of the past week. There are many general financial and economic concerns that quickly puts the metal’s safe haven appeal and alternative asset value back to work. European developments are still at the forefront. However, with Ireland’s decision to not ask for financial aid at the monthly EU meeting, the region is floating in limbo. Nevertheless, EU, IMF and ECB members are scheduled to travel to Ireland and comb the nation’s finances to see if its banking system can stand up by itself. A passing or failing grade will be delivered soon. In the meantime, clearing housings for investors that are trading Ireland’s debt are boosting margin and there is concern that support for Greece’s bailout program is disintegrating. State-side, the US saw inflation trends cool to the lowest level on records going back half a century. This curbs the appeal of gold as an inflation hedge on the one hand but confirms the devaluing effects of Fed stimulus on the other hand. And, in Asia, investors are waiting to see what measures China will take towards cooling rampant inflation. This could curb speculative turnover globally and lower the risk of financial crisis from this particular region.
In addition to the big, intangible themes, we can see there is still a supply and demand influence on price. The World Gold Council released its 3Q market outlook with projections for demand growing through jewelry use, institutions, central banks and industrial. At the same time, the supply trend is also seen rising in the months ahead. One highlight for demand however shows India’s imports have through the first three quarters already overtook the total consumption of 2009 at 624 tons. Meanwhile, total ETF demand was little changed for the day.
Spot Silver - $26.17 // $0.53 // 2.07%
Wednesday’s performance for silver was essentially a mirror of the previous day. There was little progress made as volume on the active December contract dropped to its lowest level since November 2nd. Momentum has slowed on this metal’s decline for a number of days; yet it is still early to say whether this is simply a reduction in speculative interests after the increase in margin by the CME or a shift back towards optimism.
Spot Gold Chart (Daily)
Contributed By: DailyFx
Commodities – Energy
Crude Oil Wipes Out November Rally Despite Plunge in Inventories
Crude Oil (WTI) - $80.91 // $0.47 // 0.58%
Commentary: Crude oil fell for a fourth day in a row despite a steep drop in U.S. crude oil inventories. The move in crude was interesting considering that U.S. equity markets were virtually flat the entire day. Crude was down between $0.50 and $1.00 before the inventory report, proceeded to rally up to unchanged after the numbers, and then sold off for the rest of the day to end down $1.90, or 2.31%, to $80.44. Crude has virtually wiped out this month’s entire run.
We can only speculate as to why crude underperformed to such a degree on Wednesday. OPEC could be keeping a lid on prices by raising production, or the impact from the diesel-related spike in demand from China could be abating as imports make their way to the region. We have seen crude oil imports into the U.S. plunge in recent weeks, with distillate imports in particular virtually disappearing, which could be an indication that supply has simply been shifted from North America to Asia.
As we said in our latest report on petroleum inventories: “Imports remain extremely depressed and fell further last week to the lowest since 1997. Such a low level of imports is likely a function of weak demand rather than tight supply. U.S. inventories were and still remain extremely elevated—especially on the product side. Thus, we have seen refineries cut production to bring stocks to more normal levels. Imports fell as refineries demanded less crude. Furthermore, a spike in diesel demand in China has led to premium pricing in that part of the globe, which is another factor that has led to reduced volumes coming into the U.S. Indeed, we have seen U.S. distillate imports completely evaporate, but even so, stocks remain more than ample.”
Technical Outlook: Prices have continued to tumble, with the bears just a hair away from challenging the horizontal barrier at $79.49. A break below this boundary exposes a rising trend line set from May’s spike low, now at $77.04. Near-term resistance remains at $83.27.
Commodities – Metals
Gold Falls for a Fourth Day but Rebounds Overnight
Gold - $1348.20 // $12.20 // 0.91%
Commentary: It’s been awhile since gold fell four days in a row, but that was the case on Wednesday as the metal shed another $3.70, or 0.28%, to settle at $1336. It was a day of pause for the rally in the U.S. dollar as the currency fell just slightly versus most of its rivals. Tomorrow we will publish our weekly Gold – Forex Correlations report and all indications are that the numbers will show that this week was another in which gold and the dollar held true to their inverse relationship.
Now that gold prices are $90 below last week’s all-time highs, some may be anxious to dip their toes into the water. We would be extremely cautious here, however, for the potential downside remains significant. Consider that it was less than two months ago that gold first surpassed $1300. Meanwhile, gold ETF holdings have risen only slight over the last five months.
Technical Outlook: Prices have stalled above support at $1322.39, the 38.2% Fibonacci retracement for the 7/28-11/9 advance. Near-term resistance stands at a previously broken rising trend line set from late July, now at $1358.96. Alternatively, renewed selling pressure that takes prices through current support will target the 50% Fib at $1290.81.
Silver - $26.18 // $0.54 // 2.11%
Commentary: Silver again bucked the trend in gold prices to advance $0.16, or 0.62%, to settle at $25.63. From peak-to-trough silver had fallen from $29.36 to $24.99, or 15% in a little over one week. A bounce is to be expected, but given how frothy silver remains, it will likely be some time before prices make another significant run higher.
The gold/silver ratio fell to 51.5, but remains higher than levels earlier this month near 50. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance while a lower ratio indicates silver outperformance).
Technical Outlook: Prices are testing higher through resistance at 26.10, the 50% Fibonacci retracement of the 10/22-11/09 upswing. A daily close above this juncture exposes the 38.2% Fib at $26.87. Near-term support stands at $25.33, the 61.8% level, with a reversal lower through this boundary exposing the 76.4% Fib at $24.37.
Contributed By: DailyFx
* Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation
* Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue
* British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?
* Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review
* New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence
Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation
Most experienced traders are familiar with the concept that a significant breakout is often followed by a short-term correction whereby the market makes it ultimate decision to catalyze the new-found trend or reverse the move to draw price back into a comfortable trading range. Both the dollar and risk appetite trends are currently in this transition period. Looking for the logic behind this pause during a period that many would think is a clear signal to plow into a new trend, there is both a technical and fundamental motivation. From the technical side of things, former support is often treated as new resistance (and vice versa) as the initial breakout flashes through momentum by clearing nearby entry and stop orders. As this accelerant is burnt off, the many speculators used to the old trend will attempt to jump back in on what they think is a ‘cheap’ price. Yet, as it becomes evident that the market is struggling to overtake that former floor, reality begins to set in and the eager traders capitulate. That said, a false breakout is the scenario where there is enough participation to push beyond the technical boundary and put the market back on its original path. We can see that most market benchmarks are in the process of determining which scenario will prevail. The Dollar Index, is pulling back towards the five-month trend and 50-day moving average that it just recently overtook. Reflecting on a broader theme, the S&P 500 marked a very tentative and modest bounce after posting its biggest drop in months to break a preternaturally consistent, two-month bull trend.
The fundamental aspect of this trading phenomenon is unique to our current situation. There are still very serious reasons to doubt the outlook for economic activity, financial stability and the prospect for returns; but it is difficult for market participants to throw in the towel on the impressive trend of the past few months. Since the beginning of September, considerable leverage was dedicated to taking part of the steady climb ahead of the Fed’s second stimulus program. Eventually, investors in equities, corporate debt and other risky assets will submit to the troublesome forecast; but there is currently a lull that is allowing traders to ignore reality. The most prominent threat, European financial stability, has recently found a temporary period of calm after Ireland refused stimulus at Tuesday’s EU meeting. However, this doesn’t improve the situation in the country’s banking system. In fact, it merely postpones a solution while financing costs across the region continue to balloon and the lines of support start to breakdown. Another building threat to risk appetite trends exists in China’s threats to curb inflation. This may seem a prudent economic policy; but the side effect is curbed speculation in one of the market’s favorite trading destinations.
The US is providing its own contribution to the global risk scheme. Adding credence to the Fed’s decision to add a second round of stimulus this month, the core measure of annualized CPI growth slowed to its weakest pace on record at 0.6 percent. This doesn’t really diminish the dollar any further because the expansionary policy has been largely priced in at this point; but it does remind us that there are lasting economic and market troubles related to deflation or stubborn disinflation. The data that we should pay more attention to is the housing starts data. Construction on new developments plunged 11.1 percent to its second lowest level on record owing largely to multi-home dwellings. Yet, this data should be put into context of the larger US housing sector problems. Not only is construction activity anemic; the wealth in home prices is further curbing confidence, a backlog of reposed properties is threatening to keep this sector from contributing to a recovery and ongoing issues with foreclosures threaten to trigger the financial mess tied up in real estate-based mortgages. US housing may pose a second wave crisis.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDUSD and AUDCHF offer Short-Term Setups in Eerily Quit Markets
Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue
Have conditions improved in Europe? It would seem so with the euro slowly retracing its steps after its significant decline of the past week. However, this tentative recovery is more accurately attributed to a pause in more pervasive financial concerns. Ireland is still the most immediate threat to the future of the shared currency. Finance Minister Lenihan’s decision to snub financial support from the EU at the group’s monthly meeting late Tuesday has not improved the situation. In fact, the uncertainty increases the risk for instability for the broader region. However, as the market awaits the EU, ECB and IMF’s assessment of the country’s ability to stabilize its own banking sector, there is time for reflection.
Yet, the market may not simply wait for policymakers to give them the official assessment of the market’s health. It was reported Wednesday that LCH.Clearnet – one of the largest clearing houses for European fixed income – raised its margin on Irish government debt by 15 percent for the second time in a week. The steps to smother confidence are progressive in this way. In the meantime, Ireland isn’t our only concern. Following up on its threat to withhold its next tranche of support to bailout Greece, Austrian officials said the EU was pushing back its December payment to January. Elsewhere, Portugal struggled in its recent bond auction; and it was rumored that the ECB had to buy Portuguese and Greek bonds.
British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?
Even though risk appetite took a slow turn north, the British pound was still struggling to gain traction. This was particularly surprising given a surprise decline in jobless claims through October; though the noncommittal BoE minutes help offset that fundamental marker. Perhaps speculation of a future stimulus program will carry more weight as we look ahead to public borrowing figures.
Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review
The Canadian dollar has merely been following risk appetite and US dollar-based trends the past few days; but perhaps the currency’s own fundamental backdrop will carry more weight over the coming 24 hours. On the docket for Thursday are the Leading Indicators index and capital flows figures. For actual market influence though, the BoC’s quarterly review will likely carry the most weight for policy and growth forecasts.
New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence
It certainly helps that risk appetite trends were bullish; but the New Zealand dollar found an extra push through its own fundamental docket early Thursday morning. For interest rate hawks, the 1.2 percent reading on the 3Q producer price index output doesn’t necessarily promise future hikes; but it sets up the CPI numbers for the occasion. Also, consumer confidence would show relief in a bounce from a year low.
Contributed By: DailyFx
The dollar index suffered its first daily loss in the last five sessions on Wednesday as stabilizing equities lifted risk appetite and fears began to ease regarding Ireland’s obstinacy to accepting an aid package. The index started the day brightly enough as concerns regarding Ireland’s ability to manage its financing needs alone put the euro under pressure and lifted the buck. However, risk appetite was given a boost early in the North American session from solid consumer prices data and rising equities putting the greenback under the cosh. The index managed to pare its loss a tad into the NY close as US stocks gave back their gains as financials slipped dragging down the broader sentiment. But the dollar got a further knock late in the day as expectations started to rise that Ireland would in fact accept aid from the EU and IMF, lifting the euro once again. The easing of sovereign debt fears early in Asia helped Chinese and Japanese stocks to consolidate after the previous sessions weakness, keeping the pressure on the buck.
Looking ahead, as we approach the European open the index is under mild pressure, but at present this looks little more than consolidation after solid gains over the past couple days. We will only begin to be concerned about the door being opened to further losses in the index if we breach the 78.00 level, which is still some ways off. We therefore maintain our bullish slant in the index and favour this up-move to continue up above the psychologically important 80.00 level and encounter some resistance around 81.00.
Contributed By: DailyFx
The arrival of EU and IMF teams in Dublin to discuss the possibility for a bailout for Ireland, has undoubtedly helped to prop the Euro a bit, as market sentiment improves on the expectation for a resolution. However, we would suggest that the main reason for the latest rebound in the Euro, and currencies across the board has been more a function of the US economy.
The latest batch of data released on Wednesday has taken on more meaning in light of the Fed’s ultra-accommodative monetary policy, which has resulted in large injections of liquidity into the markets over the past several months. With the Fed already implementing a second round of quantitative easing, there are many who now fear that the central bank will need to be extremely careful going forward as there are serious risks of long-term inflation should this accommodation continue to be so aggressive.
The Fed is well aware of this danger, and as such, has made it very clear in its language that while they are more than comfortable with their quantitative easing approach, at this point, they would like to wait to see how economic data comes out before making additional decisions. Clearly, softer than expected CPI and weaker housing starts do not help the case for a reversal in monetary policy, and given the disappointing batch of data, this has only helped to reinforce the need for current quantitative easing measures.
We have therefore seen a sell-off in the US Dollar since the release of this data, as QE bulls have found comfort in the idea that the Fed is less likely to alter its policy. The US Dollar had benefited in recent days from better economic data and comments out from various Fed officials that had suggested the need to soon rein in current monetary policy. However, data like we saw yesterday threatens the USD recovery, and only helps to justify additional selling in the Greenback.
We are not comfortable with this reaction, and instead remain in the camp that believes the US economy is on a path to recovery and the Fed needs to start thinking about reversing its QE policy and worrying more about longer-term inflationary threats. Nevertheless, we can not ignore the will of the markets, and in light of these latest developments, we would expect to see more USD selling over the coming sessions. We will be on the lookout for opportunities to buy the buck into dips.
Looking ahead, the Swiss trade balance is due at 7:15GMT, followed by Eurozone current account at 9:00GMT. UK public finances and public sector net borrowings are then out at 9:30GMT, along with UK retail sales. Swiss ZEW is then out at 10:00GMT, along with the Eurozone OECD economic outlook. UK CBI trend total orders then caps things off for the European calendar at 11:00GMT. The improved risk appetite has helped to fuel a decent recovery in US equity futures and commodity prices.