The last couple of weeks have been characterised by global Central Banks’ actions to take on new stimulus measures, mainly the European Central Bank’s new bond-buying plan called Outright Monetary Transactions, the Federal Reserve’s quantitative easing programme, QE3 and the Bank of Japan’s decision to increase its asset purchases target to 80 trillion yen.
After an initial rally to fresh four-month highs against the dollar, the single currency has failed to capitalise on the ECB’s new bond-buying programne and Bernanke’s announcement of another round of asset purchases.
Initially, EUR/USD hit its four-month peak by 1.3172 just days after Bernanke announced that the Fed will buy $40 billion per month in mortgage-backed securities, in an effort to bolster economic growth while also changing its low rates language saying “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015”.
The pair failed to extend its gains beyond this point since then, despite the Fed’s unprecedented move to tie this new round of bond-buying directly to the improvement in economic conditions. Many analysts have dubbed this new round of stimulus by the Fed as “QEI” or “QE Infinity” rather than QE3.
Over the back end of last week and at the start of this week, risk appetite softened somewhat as concerns over Greece and Spain placed doubts over the resolution of the debt crisis back on the spot light, with riskier assets such as shares, higher-yielding currencies and commodities coming under pressure. Safe haven currencies such as the US dollar and the Japanese yen were favoured and pared back some of their recent losses to the euro, Aussie and kiwi among others.
Spain has been the main reason for increased uncertainty in global markets as it continues to drag its feet over requesting financial aid. A full financial bailout, together with the strict reform measures imposed as conditionality for EFSF/ESM aid, is a prerequisite in order for the ECB to begin buying its bonds under the OMT programme to bring down borrowing costs. An EFSF/ESM bailout seems inevitable, however Spain and Germany want the request to be delayed as much as possible.
German Finance Minister Wolfgang Schaeuble noted on Friday that Spain is “on the right path and does not need an assistance programme”. On the other hand, the European Central Bank would prefer if Spain requests aid sooner rather than later as to avoid higher costs in implementing its OMT programme.
Greece also contributed to increase concern after Der Spiegel reported that Greece’s deficit now stood at €20 billion, nearly double the initial estimates. A Greek Finance Ministry official refuted this report, noting that the gap was currently at €13.5 billion.
Der Spiegel also reported over the weekend that there are plans to leverage up the ESM to give it an effective lending capacity of €2 trillion, although this had no immediate impact on the single currency. These reports were quickly quashed by German officials, describing the idea as “not realistic”.
The euro fell to a fresh one-week low against the US dollar on Tuesday, while other riskier currencies like the Aussie and kiwi dropped on profit taking as risk sentiment faded. The single currency was weighed in late Asian trading on Tuesday by a media report that Bundesbank lawyers were checking the legality of the ECB bond-buying plan.
EUR/USD fell to 1.2886 as forex investors digested the report by German tabloid Bild, which highlighted the absence of unity among eurozone policymakers. The pair recovered by the time of writing as ECB President Mario Draghi and German Chancellor Angela Merkel met in Berlin. Risk aversion abated and the pair ran into significant support by the 1.2900 area. However, upside gains are likely to be limited until doubts over Spain’s next moves to tackle its funding problems remain.
Meanwhile, despite last week’s decision by the Bank of Japan to ease further, the Japanese yen resumed its upside momentum igniting talks of an intervention by Japanese policymakers in the forex market. USD/JPY fell to 77.66 Tuesday, on growing concerns over global growth and uncertainty in Europe. The pair hit a one-month high by 79.22 on September 19 after the BOJ announced more monetary easing, but has trimmed these gains since then, and approaches its seven-month trough hit on September 13 by 77.13.
Japan’s Finance Minister Azumi warned that he was ready to take firm measures to deal with speculative FX moves while he is in office.
Upcoming FX key events
Today: German unemployment change, UK GDP, US GDP and US Personal Consumption.
Tomorrow: EZ Flash inflation, Canadian GDP, US PCE and US Michigan sentiment.
Technical key points
EUR/USD is bullish, target 1.3350, key reversal point 1.2550.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6400, key reversal point 1.5750.
USD/CHF is bullish, target 1.00, key reversal point 0.91.
AUD/USD is bullish 1.08, key reversal point 1.02.
NZD/USD is bullish target 0.83, key reversal point 0.7850.
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Mr Xuereb is a trader at RTFX Ltd.