Global risk sentiment was buoyant at the start of the week, carrying the mood over from the end of last week after comments from European Central Bank president Mario Draghi sparked a sharp rally in equity markets and riskier currencies. On Thursday last week, Draghi made a strong commitment to preserving the single currency saying the bank “is ready to do whatever it takes to preserve the euro”. He added: “Believe me, it will be enough.” This sparked a sharp rally in risky assets across the board. Higher-yielding currencies, global equity markets and commodities soared and closed the week sharply higher.
Despite positive news flow for the single currency, it was not enough for it to extend its rally- Emman Xuereb
Draghi and the ECB will now be expected to deliver on their commitment when the Central Bank announces its monetary policy decision following the governing council meeting today.
Initial expectations are for the Central Bank to re-initiate its Securities Market Programme, but there is a general feeling that investors are expecting a far bolder move by Draghi and the ECB. European policy makers have so far struggled to hold down surging Spanish and Italian borrowing costs. Draghi’s comments last week came when Spain’s 10-year yields hit unsustainable levels, which had previously prompted bailouts for Greece, Portugal and Ireland. His comments bought some time, as costs on the benchmark 10-year have eased somewhat since then, but German opposition has heightened uncertainty.
President Draghi is scheduled to meet Bundesbank chief Jens Weidmann in the next few days. Weidmann is a critic of ECB bond purchases, and Draghi is reportedly trying to win over his support ahead of the ECB’s governing council meeting today.
However, despite equity markets and commodity-linked currencies continuing to rally at the start of the week on the back of Draghi’s comments, the euro did not extend its gains, and eased away from a three-week high against the dollar on Friday. The single currency was underpinned by skepticism over the long-term effectiveness of the central bank’s next moves. This, despite joint statements by German Chancellor Angela Merkel and French President Francois Hollande who reiterated their commitments to safe-guard the euro.
Also over the weekend, Eurogroup president Jean-Claude Juncker confirmed that the European Financial Stability Facility is working with the ECB on ways to lessen borrowing costs for highly indebted eurozone countries, including Spain and Italy. Furthermore, a French paper reported that eurozone governments and the ECB are preparing co-ordinated action to intervene in financial markets to purchase Spanish and Italian debt. Then on Monday, US Treasury Secretary Timothy Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area.
Despite all this positive news flow for the single currency, it was not enough for it to extend its rally. EUR/USD traded lower to 1.2225, off its three-week high by 1.2390 hit on Friday. Forex investors also cited the failure by the pair to close above a key technical level by 1.2325, which initiated a bearish signal.
Risk sentiment was also buoyed by expectations that the US Federal Reserve will move closer towards more stimulus in their two-day meeting which came to an end yesterday evening. The Fed and chairman Ben Bernanke have been under increasing pressure to support an ailing job market and stagnated growth.
The Fed, however, was not expected to go so far as announce QE3 at this meeting, but was however expected to go as far as to hint or change its language which would leave the door wide open for another bout of quantitative easing at its September meeting.
The Aussie hit a four-month high versus the greenback on Tuesday and an all-time peak against the euro as speculation of more easing by the ECB and the Fed have increased investor appetite towards higher-yielding currencies. AUD/USD hit 1.0538 and has been locked in a bullish uptrend since hitting its 2012 low by 0.9582 on June 1. EUR/AUD also extended its downward trajectory, hitting 1.1646.
USD/JPY has been confined close to a six-month low since calls for more easing from the Fed intensified. The pair is trading in the range from 77.95 to 78.68 since July 23. A move by the Fed towards more easing could pave the way for further declines in USD/JPY towards its post-war low, by 75.56 hit last October 31, Bank of Japan permitting.
Upcoming FX Key events
Today: EZ PPI, UK BoE Interest rate decision and asset purchases target, EZ interest rate decision and news conference.
Tomorrow: US change in non-farm payrolls, US unemployment rate and US change in private payrolls.
Technical key points
EUR/USD is bearish, target 1.2000, key reversal point 1.2600.
EUR/GBP is bearish, target 0.7650 key reversal point 0.81.
USD/JPY is bearish, target 77.00, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bullish, target 1.0700, key reversal point 1.0100.
NZD/USD is bullish, target 0.8500, key reversal point 0.7800.
trading@rtfx.com
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Mr Xuereb is a trader at RTFX Ltd.