After a nervous start to the week on global financial markets, global shares and riskier assets edged higher on Tuesday, but gains were subdued as investors awaited the outcome from the Federal Reserve’s end-of-year meeting.
The Fed is likely to continue pumping cash into the economy- Emman Xuereb
The euro snapped a three-day slide against the dollar and the yen on Monday, and managed to survive a day of wobbly equity markets and wider periphery spreads.
Markets opened the week in a very nervous mood as political turmoil in Italy resurfaced, following Prime Minister Mario Monti’s announcement that he will resign from his post as soon as the 2013 Budget is approved. This came after former Prime Minister Silvio Berlusconi withdrew his support for Monti’s technocrat government last week, and claimed that reforms and austerity measures taken by Monti’s government were dragging Italy “to the brink of a precipice”.
Questions on who will take the helms of the euro area’s third largest economy rattled markets, and prospects of a comeback by Berlusconi sent Italian bonds and shares lower.
The common currency however edged higher on Tuesday and extended its recovery from last Friday’s two-week lows against the USD, as comments by Monti calmed some nerves. Prospects of more stimulus by the Fed pinned down the greenback and also helped the euro’s comeback. Monti played down fears over his decision to step down, saying there was no danger of a vacuum ahead of an election in the spring.
EUR/USD rose to a session high by 1.2995 as Italy’s political turmoil subsided. The pair broke above technical resistance at 1.2973 and looks now set to test recent highs at 1.3126 and 1.3139. A break above these levels would pave the way for a test of its seven-month high by 1.3172 and higher to 1.3250. EUR/JPY also jumped higher to 107.21 on Tuesday, after dropping to 105.98 on Monday.
The single currency was also lifted by better than expected German investor sentiment numbers and a strongly subscribed Spanish bond sale.
The German ZEW Economic Sentiment Index swung into positive territory at 6.9 in December from -15.7 the previous month and Spain’s Tesoro sold more than its maximum target at a sale of 12- and 18-month bills on Tuesday, at lower borrowing costs.
Also keeping the euro afloat was the reluctance by traders to buy the dollar aggressively ahead of the Fed’s FOMC two-day meeting. Expectations were building that the Fed will replace its expiring Operation Twist programme with another monetary easing plan. Many economists were even speculating that the Central Bank will announce additional monthly bond purchases of $45 billion and some are even thinking it could be more.
The Fed is likely to continue pumping cash into the economy during 2013 in a bid to curb unemployment especially in light of growing uncertainty over the ‘fiscal cliff’.
Prospects of fresh stimulus from the Fed and ongoing speculation the Bank of Japan may expand its asset-buying and lending programme at its next policy meeting, next week, kept high-yielding currencies well bid. The Aussie held within sight of an 11-week high against the dollar, and hovered close to an eight-month peak against the yen. The New Zealand dollar was also supported edging close to a three-month peak.
AUD/USD traded at 1.0498 on Tuesday, close to its December 6 high of 1.0516. The pair looks set to test a major resistance line off the highs of July 2011, February and September this year around 1.0530.
Expectations of more Fed easing have also benefitted the Canadian dollar. USD/CAD traded at a two-month low at 0.9861 and looked set to test support around the 0.9840 area.
Last Friday, a US labour market report showed employers hired more than expected in November. The change in non-farm payroll print showed that employers hired 147,000 more workers versus expectations for 85,000, while the jobless rate fell to 7.7 per cent from 7.9 per cent. The unexpected positive prints came despite disruptions caused by super storm Sandy, and showed that the non-standard measures adopted by the Fed were beginning to reap the desired results and may serve as leeway for the central bank to amplify its record accommodation.
Upcoming FX key events
Today: Swiss National Bank rate decision, US Advance retail sales and US PPI.
Tomorrow: EZ CPI, EZ Employment index and US CPI.
Technical key points
EUR/USD is bullish, target 1.3280, key reversal point 1.2600.
EUR/GBP is bullish target 0.8220, key reversal point 0.7950.
USD/JPY is bullish, target 0.83, key reversal point 79.25.
GBP/USD is bullish, target 1.6300, key reversal point 1.5800.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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 subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. 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.
Emman Xuereb is a trader at RTFX Ltd.