The European Central Bank news conference last Thursday disappointed many because ECB president Jean Claude Trichet failed to specify the much awaited details or amounts for the intensification of the present bond buying programme. The euro initially started to lose steam on what investors perceived to be lack of action from the ECB. However media reports that the ECB was heavily buying sovereign bonds soon after the conference helped the euro stage a rebound and attempted the 1.3250 level against the USD.
As mentioned in previous articles once the key support at the 1.3000 region managed to hold, the EUR/USD pair managed to bounce off higher. Even though the pair hit lows of 1.2969 on the last day of November by and large the 1.3000 area was still supporting price trading.
Disappointing non-farm payrolls from the US issued last Friday weakened the US dollar and gave the euro a breather.
November US non Farm Payrolls only rose 39k (vs. an expected 140K ) and private payrolls were up by 50k (vs. an expected 150K ) and this pressured the US dollar and helped the euro retest the 1.34 region on Friday evening. Comments from Fed chairman Ben Bernanke, suggesting that if the US economy does not show signs of response the Fed could go beyond the $600 billion originally allocated for QE2, also weighed on the USD. The EUR/USD managed highs of 1.3417 last Friday.
The euro remained buoyed throughout the earlier part of this week managing to find support around the 1.3250 region. This was mostly thanks to Friday’s US data and Mr Bernanke’s comments on the Fed’s buying programme but also due to optimism over Ireland passing an austerity budget throughout Tuesday.
In their monthly meeting last Monday eurozone finance ministers did not take any new decisions even though markets were expecting them to increase the €750 billion safety net for the troubled eurozone nations. Euro group chairman Jean Claude Juncker said that Spain and Portugal highlighted their active and planned austerity measures. He also said the capacity of the EFSF (the eurozone safety funds) was deemed to be adequate for the time being.
Writing in The Financial Times, Mr Juncker and Italian Finance Minister Giulio Tremonti coined the idea that a new European debt agency should be set up with the intention of issuing European sovereign bonds – something on the lines of the US Treasury. So far, however, the Germans seem to have dismissed the idea.
Eurozone debt concerns seem to have eased, at least for the time being – while the ECB seems to have become more active in its bond buying programme and so far seems to have succeeded in narrowing the bond spreads for the most troubled eurozone nations. Yet one should note that even though the bond buying programme seems to have sealed a leaking hole, it is no new resolution really because the ECB has had this option available since last May. A price move upwards for the EUR/USD pair seems limited given the divisions between European policymakers on how to best resolve the region’s debt crisis, and investors should be cautious for any possible shift in sentiment.
With eurozone debt concerns switching from on to off and vice versa, and the resurfacing US economy concerns (brought back to the limelight after Friday’s payrolls) gold resumed its surge. The weakening US dollar also helps demand for gold. Gold trading managed to go past early November highs just below the $1,425 price and at the time of writing the metal had reached highs of $1,431.28.
The RBA kept rates on hold at 4.75 per cent early Tuesday morning, while adopting a more neutral policy, saying that the board sees “this setting of monetary policy as appropriate”. Worth noting are comments on the Chinese and Indian economies indicating that the RBA seems more positive about these two countries. The Australian dollar dipped to 0.9885 immediately after the announcement but recovered soon after and trading reached highs of 0.9965 against the greenback, up to the time of writing.
The yen found renewed support earlier this week, reaching highs of 82.82 against the USD, due to comments on possible further bond purchases by the Fed. Japanese Finance Minister Yoshihiko Noda warned against further yen gains while reiterated that while he is not in a position to comment on other country’s monetary policy, he will continue to pay close attention to the markets.
Upcoming FX Key events:
Today: German CPI & UK BoE Interest Rate Decision.
Tomorrow: UK PPI & Canadian Trade Balance.
FX Technical Key points:
EUR/USD is bearish, target 1.2400, key reversal point 1.3700.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.