Euro's Post ECB Strength Continues

After much anticipation, ECB president didn't disappoint and revealed his new bond buying plan, the so called Outright Monetary Transactions last week. Responses from markets were overwhelmingly positive. The euro surged across the board after ECB press conference and was up 1.89% against dollar, 1.76% against yen and 1.29% against the aussie over the week. These three were indeed the largest moving pairs.

European equities were broadly higher, in particular with DAX closing at 7214, breaking through this year's high of 7194 made back in March. Spanish 10-year yield closed at 5.63%, way below last week's close of 6.86% and also sharply lower than then 7.62% made back on July 25. The Italian 10-year yield closed at 5.058%, comparing to last week's close of 5.850% and 6.60% made on July 24. There were additional support to euro on rumors that SNB would raise the EUR/CHF floor to from 1.20 to 1.22.

Technically, last week's development in EUR/USD indicates that medium term down trend form 1.4939 is likely completed at 1.2042 and we'd now looking at further rally through 1.3 psychological level in near-term. EUR/JPY managed to close above 100 psychological level and is targeting 101.62 resistance to confirm reversal. EUR/GBP also broke through 0.8 psychological level as well as an important channel resistance, which suggests further upside at least to 0.8152 resistance.

EUR/AUD's near-term up trend continued last week and even though some setback was see after hitting 1.2391, current development does favor more rally in near term. So broadly speaking, euro should remain bullish in near-term, and there is the possibility of medium-term reversal in most pairs.

To recap, the ECB left the main refinancing rate unchanged at 0.75%, compared with our expectation of a rate cut of -25 bps. Policymakers believed that this is not an appropriate time to lower interests as economic weakness had been anticipated. Meanwhile, President Draghi stated at the press conference that officials have basically agreed on unlimited bond purchase program.

Despite objections by a member, the program is expected to be able to help "address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro." According to Draghi, purchases would be fully sterilized, suggesting that the program would not trigger inflation pressure. The ECB also affirmed that purchases would not have seniority.

In US, equities followed global optimism with S&P 500 jumped to new 2012 high of 1437.92. However, the picture was somewhat clouded after disappointing nonfarm payroll report. The Dow has indeed struggled to gain ahead of 2012 high of 13338.66.

NFP merely grew 96k in August, comparing to expectation of 127k. Prior month's figure was also revised down from 163k to 141K. Unemployment rate, though, improved to 8.1%, thanks to the fact that 368k of Americans left the labor market. Did the NFP data raise possibility of QE3? Certainly yes, but the data seemed to be not weak enough to warrant anything soon.

The relatively limited strength in stocks post NFP was a reflection. The 10-year yield struggled to find a direction after a volatile day on Friday, which range at 1.589% to 1.733% and closed in the middle at 1.661%. Though, gold's strong rally to close at 1740.5 seemed to be a sign that markets are buying into QE3.

The BOC left the policy rate unchanged at 1% in September. Moreover, policymakers indicated for the 4th time that some sort of stimulus may be withdrawn if "the economic expansion continues and the current excess supply in the economy is gradually absorbed." Few surprises were delivered in the accompanying statement despite some disappointments in the central bank's assessment on the domestic economic developments.

Policymakers described inflation as "softer than expected in recent months" while growth is "decelerating somewhat more quickly than expected". Canadian dollar was also supported by solid employment report, which showed 34.3k growth in August while unemployment rate was unchanged at 7.3%.

As widely expected by the market, the RBA decided to leave the cash rate unchanged at 3.5% in September. While acknowledging that risks to global economic outlook skewed to the downside, there were no hints on when another rate cut would be adopted. The meeting statement was largely the same as the previous one, but it delivered slightly more hawkish comments about domestic economic developments.

BoE left rates unchanged at 0.5% and maintained the size of the asset purchase program at GBP 375b. A brief statement was released with no details. Focus will turn to minutes to be released on September 19.

Looking ahead, FOMC meeting will be a major focus this week. Chance of additional easing is low at this meeting but markets will look for hints on Fed's view on recent developments and the timing of additional stimulus. Also, Fed will release latest economic projections. SNB meeting will be another focus as the sleeping EUR/CH finally made some real development last week, largely due to ECB's bond plan and also due to rumor of floor raise. Would SNB be so tactical to raise the floor at such good timing when safe haven demand drastically reduced after ECB's OMT announcement? We'll see this week. RBNZ will also meet this week and is expected to keep rates unchanged at 2.50%.