Forex News and Events
What is priced in?
Market participants were expecting a more aggressive move from the ECB than what was actually delivered by Mario Draghi last Wednesday; resulting in a sharp correction in both EUR crosses and equity markets across the globe. The ECB decided to keep unchanged the amount of monthly asset purchase but extended the programme by six months to March 2017 and cut the deposit rate by 10bps to -0.3% - besides other cosmetic changes. Even several years after the financial crisis and the unprecedented measures undertook by central banks around the world - and more specifically by the Federal Reserve - to stimulate their local economy, it appears that traders forgot that a central bank's role is not to support the economy against all odds. The ECB send a little refresher last week as it showed that it was not ready to expand its balance sheet indefinitely. We have the feeling that central bankers also started to realise that quantitative easing programme did not work as expected and that the marginal effect of an increase of the QE is decreasing. This could be a reason why the ECB preferred to stay side-lined by not expanding its stimulus.
Now that everyone is waiting on the Fed’s decision, the question is to determine whether the Federal Reserve will deliver a 25 bps? What if the Fed delivered a smaller rate hike than anticipated by investors? After months of deliberation, market participants are confident and the last jobs report just strengthen that confidence: the Fed will likely hike rates in December. When you have a look at the market’s reaction after the release of the NFP, it appears that a 25bps raise is already fully priced in as the strong jobs report didn’t trigger a dollar rally. Thus if the Fed hikes rate by less than 25bps (as we expect), we are likely see a correction to the downside in US dollar. This morning, EUR/USD is moving lower and is about to test the support standing at 1.08.
Sell Commodities Currencies
The OPEC press conference indicated that expectations for downward production adjustments were misplaced. The meeting held last Thursday and Friday was a non-event with OPEC maintaining its policy and reiterating that it would “retain production” near current levels. Experts have pointed to the lack of guidance on a production quote (30 mb/d), as indications are that members are divided. When questioned about Iran adding 500- 100 kb/day the OPEC president stated, “perhaps there will be further contractions (in non-OPEC supply).” Elsewhere, the EIA released its semi-annual storage capacity report indicating that crude oil stockpiles continue to inch closer to record levels. The fall in oil prices was partially due to rumours that OPEC has increase quotas; however failure for Brent to meaningfully recover off $42.43 lows indicated that the market is convinced oversupply will persist. With overcrowded long USD/CAD trades nearing 1.3457 highs, traders are questioning the trade’s bullish sustainably. This week BOC Governor Poloz will speak on the subject of “Unconventional Monetary Policy,” which could provide some clarity on the BoC decision to keep policy rates changed last week. With renewed bearish pressure on oil it is likely that a more dovish tone will emanate from the BoC (starting this week). A clear signal that policy is skewed to further easing and persistent softness in energy prices should give USD/CAD the ability to break recent highs. In broader terms we remain bearish on crude-linked commodity currencies specifically CAD and NOK and see short-term recoveries as an opportunity to reload short positions.
Swiss sight deposits slightly declined
The new data that came in this morning showed sight deposits – corresponding to the cash that commercial banks hold with the central bank – showed us that the Swiss National Bank is clearly not intervening to maintain a stronger EUR/CHF. The amount declined slightly from last week even if the amount of deposit trend remains positive since the floor was abandoned last January.
The Swiss economy mainly depends on the health of its main partner, Europe. Last week’s ECB meeting took markets by surprise as Mario Draghi appeared largely less dovish than expected. Draghi has refused to increase the amount of stimulus, which had already been priced in by financial markets. Accordingly, monthly purchases will remain at €60 million. As a result the EUR pumped higher against the greenback on a quasi-hawkish ECB. In addition, the EUR kept on trading around 1.0850 against the Swiss Franc. Indeed, the Helvetic currency is still suffering, in other words appreciating, from its safe haven status and global uncertainties - lingering low commodity prices and high geopolitical risks.
However in the near future, we remain bearish on EUR/CHF and think that the single currency is heading downwards due to growing unemployment, lack of growth and above all the political uncertainties amongst European countries. For the time being, the SNB still has some room to act against a strengthening CHF. We think that the sooner the better as the ECB QE results are likely not to have the desired effect and will send the EUR/CHF lower.
The Risk Today
EUR/USD has declined below towards 1.0800. Hourly support lies at 1.0566 (intraday low). Hourly resistance can be found at 1.1096 (28/10/2015 high). Expected to show further consolidation. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).
GBP/USD's downside momentum remain lively. Hourly resistance is given at 1.5336 (19/11/2015 high). Strong resistance can be found at 1.5529 (22/09/2015 high). Expected to show further weakness. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY remains between hourly resistance at 123.76 (18/11/2015 high) and hourly support at 122.23 (16/11/2015 low). Expected to bounce back at resistance at 122.23. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF is now consolidating after last week's sharp decline. Hourly support is now given at 0.9876 (27/10/2015 low) while hourly resistance is given at 1.0328 (27/11/2015 high). Expected to show further consolidation. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.
