QE2 Expectations in Flux

October 27 2010 by Spencer McKay in Forex Release |No Comments

During this morning’s Asian session, the RBNZ held rates at 3.00% as was generally expected. The accompanying statement was slightly dovish but not enough to really move NZD. The Central Bank seems to feel comfortable with the current level stating “while it is appropriate to keep the OCR on hold today, it remains likely that further removal of monetary policy support will be required at some stage.” The AUDNZD’s recent pullback looks to have run into a horizontal support and without a surprise interest rate story, watch for a bounce off the 1.3000 level.

In Japan, the BoJ outlined further easing measures stating it would purchase lower-rated corporate bonds than it announced in the compensative package release in September. Regarding FX intervention, the BoJ sounded unhurried to move ahead of next week’s Fed meeting. We suspect that the USDJPY will break the 80.00 level before officials step back – this is more of a gut feeling than based on any supporting data.

For the Euro, recent events in the EU have once again captured our and hopefully the market’s attention. The announcement by Greek PM Papandreou of a snap election in an environment ripe with political support anti-austerity should rattle the market. Greek 5yr credit-default swaps rates have risen nearly 110 bps in the last 3 days – illustrating the market’s growing unease over the situation.

With the collapse of the Portuguese 2011 budget discussion, the EU is starting to fragment at its weakest points. Austerity measures are not popular and are being met with public outrage across the Eurozone. Irish Finance Minister Lenihan revealed that Ireland’s fiscal position remains severe and that “unilateral devaluation” was not a option. These types of situations will continue to weigh on the EUR and baring an economic miracle (Germany is not a miracle), sovereign debt will eventually have to be restructured. These issues will affect the Euro long-term, but in the mean time, traders will be still looking to short-term drivers.

As we near the November 3rd FOMC meeting, the market is closing in on an equilibrium point which has trapped Forex prices into consolidating ranges. Earlier in October, roughly $1 trillion in stimulus was priced in due to zealous Fed members and proclamations from well-respected US investment banks and newspapers.

However given the recent shift in language, stabilization of US economic data and the pressure from nations damaged by USD weakness – it seems that expectations are now fixated around the $600- $700 billon level. The Wall Street Journal suggested that the Fed will take a small, measured step next week by initiating “a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months.” This is quite a difference that a one-shot, trillion dollar shot.

In an interesting leak, Bloomberg reported that the Fed is asking major dealers & investors to estimate the size of the FOMC asset purchased and what they think the impact will be on yield and the wider economy. While we would like to close this chapter on the wonderfully entertaining (sarcasm) QE2 “guesstimation” game and begin positioning for the aftermath, we still have lots of US economic data to review before the decision is made. Given the fact that Fed members still seem flexible on their strategy and highly influenced by incoming data; markets will be scrutinizing every release.

At ACM, and if the data doesn’t surprise to the upside or downside, we’re anticipating a number greater than $600- $700 bn. If the figures come in above that level, it will be pro-risk, USD negative. If the announcement is below $600 bn, it should be a dollar positive.

07:00 EUR ECB/Buba Weber speech in Eltville, Germany.
07:15 SEK Oct consumer confidence index; prior 28.4.
07:30 EUR ECB Stark, ECB/Buba Weber speeches at Frankfurt conference.
07:30 SEK Sep retail sales; prior unch m/m, +4.4% y/y.
08:00 EUR GER Oct unemployment rate, 7.4% sa exp; prior 7.5%.
08:00 EUR GER Oct unemployment, 2.93 mln nsa exp; prior 3.031 mln nsa, 3.146 mln sa.
08:00 EUR GER Oct unemployment change, -3k sa exp; prior -40.0k.
09:00 EUR Oct business climate index, 0.78 exp; prior 0.77.
09:00 EUR Oct consumer sentiment index, -11.0 exp; prior -11.0.
09:00 EUR Oct economic sentiment index, 103.0 exp; prior 103.2.
09:00 EUR Oct industrial sentiment index, -2.0 exp; prior -2.0.
09:00 EUR Oct services sentiment index, 7.0 exp; prior 8.0.
10:00 GBP Oct CBI distributive trades sales balance, 33.0 exp; prior 49.0.
10:00 EUR ECB Gonzalez-Paramo speech in Madrid.
12:30 USD Initial jobless claims, thous (4wma)
13:00 EUR ECB/Ireland CB Honohan speech in Dublin.
23:01 GBP GfK consumer confidence, index

The Risk Today: EurUsd Still at home on the ranges in EURUSD; the overnight dip below 1.3750 allowed us to load up on longs (as proposed in yesterday’s report), and since then the buying interest has returned to drive us back towards 1.3850. Our stops which were originally set 30 pips through the range floor of 1.3700 (20 Oct low) are now being moved up to 1.3800 to lock in guaranteed profits, and at the other end we’ve set take-profit orders for half the position at 1.3870 (very weak intra-range resistance is eyed at 1.3880) and an order for the remainder at 1.3950 (next possible pocket of supply is 1.3985). This strategy is still relatively conservative given that the range easily extends until 1.4080 (25 Oct high), and could arguably be the higher level 1.4158 (15 Oct high). Should the bulls get the momentum to break higher (not our view at present), then next important level is 1.4195 (25 Jan high), followed by 1.4414 (19 Jan high). On the downside, the nearest support of note is yesterday’s low 1.3735, before we once again aim for the range floor1.3700, 1.3635 (5 Oct low) and 1.3560 (30 Sep low).

GbpUsd The potential bullish flag pattern we highlighted in yesterday’s report failed to activate (the sole challenge to the upper edge of the flag failed to print the hourly close required), and since then the pair has slumped to lows of 1.5730 –effectively negating the pattern entirely. But at least for the bulls it’s a case of nothing ventured, nothing lost. For those who stuck to the alternative range-trading strategy, there have actually been some very tasty rewards; our preferred short entry level was around 1.5830 (as per yesterday’s report), and we have since seen around 100 pips of downside off that level. From here, the key downside level to watch will be the 20 & 22 Oct high 1.5650 (which is also protected by the 50-day moving average 1.5668), then 1.5600 (22 Sep low), with the lower edge of the 3-week downtrend coming in around 1.5520. On the topside, the near-term cap is 1.5896 (26 Oct high), 1.5925 (upper edge of current 3-week downtrend), 1.5945 (18 & 19 Oct high), and 1.6000 psychological resistance.

UsdJpy Our bearish conviction in USDJPY has been bolstered over the past 24 hours; in spite of the recent short squeeze, 82.00 resistance held staunchly in place yesterday and the subsequent paring back of gains has resulted in a collapse back within the 3-week downtrend channel. As you may recall from this week’s reports, we are already short (averaging approximately 81.15), and are now re-focused on a move back towards 80.00. Above us, that 82.00-35 zone should still represent a major hurdle for any rallies (82.00 has been unconquerable since mid October despite a number of attacks), so we have consolidated our stop orders to just above 82.35 (12 Oct high). On the downside, there are likely to be pockets of bids around 80.90 (former pivot), 80.41 (25 Oct low), 80.00 major psychological support and then 79.76 –the major 1995 low.

UsdChf The upper edge of a 2-week uptrend channel is the only thing that managed to slow down USDCHF’s corrective rally yesterday, and that trendline is now floating up around 0.9935 whilst the spot price has pared back towards 0.9860. As you may recall from yesterday’s report, we started scaling into shorts from 0.9880 (managed to sell our last clip at 0.9920 but not filled on the final order at 0.9930), and have set stops just above 0.9940 (just above the uptrend ceiling and 50-day moving average). Ultimately, this strategy is driven by the conviction that the bulls will be unlikely to challenge the all-important parity level successfully, and indeed we feel the medium-term destination for USDCHF is going to be back around 0.9500. On the downside, expect former resistance levels at 0.9845 and 0.9800 to now represent support, and below there 0.9725 (lower edge of 2-week uptrend channel), 0.9665 (25 Oct low), 0.9570 (20 Oct low) and 0.9540 (18 Oct low).

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