Last Friday at the Jackson Hole symposium, the much awaited intervention by Federal Reserve chairman Ben Bernanke managed to ignite a market rally. The major US equity indices closed in the positive territory on Friday and Asian equity markets followed suit, with gains registered Monday morning in the Nikkei and Shangai indices.
In his intervention Mr Bernanke said the Fed is committed to fighting deflation saying it “will strongly resist deviations from price stability”. He also said that for the time being the Fed is not ready to resume quantitative easing, and would only be ready to provide additional stimulus if the outlook was to weaken significantly.
Analysts are saying that for the time being, with the absence of renewed quantitative easing in the US, investors will likely focus on Europe’s structural concerns. Thus one should be cautious about rallies in the Euro. During his intervention at the mentioned symposium, ECB president Jean-Claude Trichet focused on the longer term economic prospects and offered little in terms of shorter term policy guidance.
He warned however on the need to adjust imbalances and the government debt levels – saying that the fiscal austerity was necessary if Europe wanted to avoid a “lost decade” of weak growth.
Last Tuesday the German unemployment figures revealed that the number of unemployed declined by 17,000 while the unemployment rate remains unchanged at 7.6 per cent - analysts were forecasting a slightly larger decline but so far the German labour market has proven to be more resilient than its weaker eurozone counterparts. This continued to highlight the imbalances within the eurozone, among others Greece and Ireland’s problems contrast with the German situation.
In today’s monthly monetary policy meeting the ECB is not expected to make any changes in its policy – but the emphasis placed on the need of austerity may suggest that Mr Trichet may push towards fast tracking fiscal consolidation, which might turn out to be a Euro-negative, at least in the short to medium term.
The EUR/USD opened the week at a level of 1.2765, trading in the range of 1.2625-1.2765 for the first part of the week. Throughout the week the pair is expected to test the resistance levels of 1.2812/1.2891, while supports lie in the region of 1.2622/1.2661.
Following an emergency meeting early this week the Bank of Japan said it would be expanding its current 20 trillion Yen QE programme from its 3-month time frame to six months, and it also decided to top up the funds available by another 10 trillion Yen. This easing however failed to curb the Yen’s strength.
The Japanese Yen was up 1.53 per cent for the week against its major counterparts up to the time of writing. The Yen was stronger against the AUD and NZD as the AUD/JPY and NZD/JPY were down by 3.90 per cent and 5.80 per cent respectively, for the week up to the time of writing. Despite other factors weighing on both AUD and NZD, the currencies are somewhat linked to the Yen as one can borrow funds in the low-yielding Yen to buy assets in New Zealand or Australia, which hold high yields – in what is termed as carry trades.
The USD/JPY pair, at the time of writing trading at around 84.41, has reached lows of 83.59 on August 24. The market’s apparent willingness to try to force the hand of Japanese officials to take additional measures in the short run could push the pair even lower towards the 79.75. RTFX TraderTip indicates that resistance for the week lies in the region of 86.17/86.98 while support lies in the region of 84.07/82.78.
Despite the Yen’s current strengthening, longer term views still point towards a weakening Yen, mostly due to the fact that Japan’s deflation could lead to further government stimulus measures, hence with the possibility of more strain on public finances.
Finally, in the light of all the concerns over the global economic growth that is overwhelming the markets – as per the paper presented by economist Carmen Reinhart at the Jackson Hole symposium, the US economy could possibly experience a painfully slow growth and high unemployment for a decade or longer as a result of the 2007 housing market collapse and all that came after. The paper examined 15 severe financial crises since World War II. In the decades following the crises, growth rates were lower while unemployment rates were higher; housing prices took years to recover and it took about seven years on average for households and companies to reduce debts and restore their balance sheets.
This week was quite a busy week in terms of economic data releases; tomorrow, markets are on the lookout for the US’s non-farm payrolls report.
Upcoming FX Key events:
Today: EZ ECB Interest Rate Decision and GDP, US Factory Orders and Pending Home Sales.
Tomorrow: Swiss CPI, EZ Retail Sales and US Non-Farm Payrolls
FX Technical Key points:
EUR/USD is bearish, target 1.1800, key reversal point 1.3400.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is bearish, target 1.4000, key reversal point 1.6500.
USD/CHF is Neutral.
AUD/USD is bullish, target 94.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
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Mr Muscat is senior trader at RTFX Ltd.